CESC - Improvement in Retail Biz, Rerating for Power Biz; Maintain BUY - Karvy

CESC has outperformed Power Index ~45% since Jan'12 owing to tariff approval and permitting FDI in multi-brand retail. Still, we believe that the stock is trading at attractive levels and trading below its book value. We believe that CESC's earnings from power business would decline further, as its retail business has started showing positive EBITDA at the store levels.

Regulated Biz with Assured RoE: CESC operates under regulated business model, which provides the Company with strong and steady income flow. Currently, it caters to Kolkata region with a capacity of 1,225MW having assured RoE at 15.5% & RoE of 15% on generation & distribution respectively. The equity base of regulated business is likely to grow to Rs. 34 bn by FY14E from Rs. 26 bn in FY11. We continue to expect capacity at 2,450MW by FY14E.

Progress on Chandrapur & Haldia to Trigger Growth: Signing of FSAs with Coal India for power projects will benefit CESC's under-construction projects mainly 600MW Chandrapur project (COD is likely in May'13) & 600MW Haldia project (COD is likely in Jun'14). Currently, CESC has LoA of 5.6 MTPA with Coal India. In case the FSA materializes, CESC would likely to be one of the key beneficiaries.

Retail Biz Likely to turnaround by FY15E: Spencer's Retail's average sales grew 14.25% to Rs. 1,218/sq ft in H1FY13 from Rs. 1066/sq ft in H1FY12. Same stores sales grew 16.62% to Rs. 1,270/sq ft in H1FY13 from Rs. 1,089/sq ft in H1FY12. Spencer's has made a store level EBITDA of Rs. 57/sq ft per month in Q2FY13 from a store level EBITDA of Rs. 43/sq ft pm in Q1FY13 & Rs. 35/sq ft pm in Q2FY12. We expect CESC to earn PAT by FY15E - with the rerating of its power business.

Foray into BPO Space - No Major Negative Impact: Acquisition cost for Firstsource at Rs. 4 bn - that works out to be at 10% of CESC total market cap of Rs. 42.3 bn - limits the negative impact due to change in focus to IT services, as Rs. 13.43 bn cash in balance sheet and Rs. 9.1 bn annual cash-flow give comfort. At 0.8x EV/sales, 0.7x P/B and 8.4x P/E of its FY12 earnings, the acquisition value does not seem to be expensive compared to its peers.

Outlook & Valuation

At the CMP, the stock is trading at 0.7xFY14 Adj.BV, which in our view does not reflect the true strength in its core assured RoE power business, progress on expansion and likely turnaround of retail business. At CMP of Rs 309, the stock is trading at FY13E & FY14E P/E multiples of 6.6x & 6.2x, respectively & P/BV multiples of 0.6x for FY14E. We reiterate our "BUY" recommendation on the stock with revised SOTP-based target price of Rs. 351 per share.

Source : Equity Bulls

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