CESC - Disappointing results; maintain Add - BRICS

CESC's Q3 results were very disappointing and below our as well as consensus expectations, with PAT up 36.5% yoy to Rs1.01bn, vs. estimate of Rs1.64bn, due to lower than anticipated tariff rates and poor demand, owing to severe winter. Revenue grew 5.4% yoy to Rs10.2bn, driven by a yoy increase in tariff realisation, partly offset by lower generation, while EBITDA grew 24.0% yoy to Rs2.5bn. On retail front, cash losses amounted to Rs60mn/month and Spencer has targeted break-even by Q4. While power business remains relatively risk averse, CESC's decision to acquire Firstsource (FSL) is likely to dampen sentiments until tangible results are seen. Maintain Add.

Poor demand growth in Kolkata: Extreme winter led to poor electricity demand, with both generation and offtake down 5.9% and 2.2%. Consequently, PLF at base load stations declined to 81.1% vs. 86.5% in Q3. Tariffs, however, were up 10.2% yoy, due to pass through of fixed charge post WBERC approval, but was below our estimate. Consequently, overall revenue was up 5.4% yoy to Rs10.2bn vs. estimate of Rs11.8bn.

EBITDA margin improves: Lower generation and falling international coal prices led to a decline in fuel cost (-9.1% yoy). Power purchase cost also declined 3.6% yoy due to weak demand. Accordingly, EBITDA rose 24% yoy, aided by higher tariff and lower Q3FY12 base, as the increase in fixed costs was allowed as pass through only in Q4FY12. With interest expenses up 30.3% yoy, CESC reported a PAT of Rs1.01bn, marking a growth of 36% yoy, as against our estimate of Rs1.64 bn.

Outlook: CESC's annual performance review has been postponed to Q4 and hence, we expect the company to post better numbers for the quarter. Haldia project is running on schedule and Chandrapur should be commissioned in June 2013, with the company set to shortly sign FSA with CIL. However, PPA remains a concern. Monthly losses of Spencer's Retail were down to Rs60mn and it is likely to break-even by March FY14. Total outflow for acquiring a 57% stake in FSL stands atRs4.5bn till date.

Valuation: CESC's power business will continue to generate stable cash flows, though its recent decision to acquire FSL is likely to increase its debt burden. Moreover, CESC will be foraying into a new business in which it lacks prior experience. We maintain ADD on CESC with a TP of Rs311.

Source : Equity Bulls

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