PINC Quick Bite – CESC – Higher RoE to boost future earnings; Maintain 'BUY'; TP Rs350

Higher RoE to boost future earnings

CESC on 6th March 2012 was finally awarded the tariff order for FY12 by WBERC. The commission not only allowed CESC to raise tariffs by 13.3% for the current fiscal but also raised blended RoE to 16% for the tariff period. We understand that the company has already started to bill its clients as per the new order from the current billing cycle. The arrears of FY12, along with interest, will be collected over a period of 48 months. In the retail business, we assume a further delay in its breakeven owing to a slower growth in the overall economy. However, we believe the stock continues to offer value even after assuming increased cash infusion into the loss making retail business. Maintain BUY on the stock with a target price of Rs350/share.

- 13.3% tariff hike approved
- Blended rate of return increased to 16%
- Tariff order hints at consuming lower grade coal

Outlook and recommendation

CESC is one of the most efficient power generators and distributors in the country with its stations being available for over 90%. Despite this, we believe the company will continue to trade at discounted valuation given the cash infusion from its generation business into its loss making retail venture. However, we believe the parent shall be able to generate sufficient cash to fund Spencer's losses and other capex. We upgrade our earnings estimates to reflect higher RoE and interest on arrears for FY12. We estimate standalone earnings to be at Rs5.0bn and Rs5.4bn during FY12 and FY13 respectively. Maintain BUY on the stock with a target price of Rs350/share, implying 20% upside.

Source : Equity Bulls

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