CESC - A holding company? - Elara Capital

Well-integrated and stable distribution business

Four power plants with combined capacities of 1,225MW with secured fuel linkages feeding the distribution business, CESC boasts of a regulated equity base of INR 2.6bn as of FY12. The base is expected to grow at 6.5% CAGR over FY12-FY15E. With blended ROEs of 20% and more on this equity, visibility of steady cash flow remains.

Significant jump in ROE expected by FY15- FY16

Given the ongoing FSA issue of Coal India and delay in announcement of fresh case-1 bids, we expect commercialization of Chandrapur project of CESC to get delayed to Q4 FY14. We expect Haldia to be commissioned by Q4FY15. Any significant jump in ROEs is expected by FY15-FY16

Spencers - Doing the right things but PAT breakeven only by FY16

Cost optimization measures have shored up the store level EBITDA. The recent EBITDA/sq ft/month stands at INR45. The sales/sq.ft/month have improved to INR1,150 from INR700 in FY09. However, assuming a food heavy product mix going ahead, we expect the PAT breakeven at corporate level only by FY16.

CESC Properties: Smart utilization of barren land

Located at a prime location at Kolkata, CESC has managed to turn a barren land into Spencers Galleria – A full-fledged mall which is already 90% booked. It is expected to generate an EBITDA of INR600mn annually from FY14E onwards. With an equity commitment of near INR1bn, it turns out to be a 25% ROE generating asset.

First Source Solutions (FSL) acquisition – Neat deal

Though unrelated to the core power business, the deal seems to be value accretive for CESC as FSL's performance has been seeing a steady improvement and we expect the same to continue.

Valuation

We have employed a SOTP method to value the consolidated business of CESC. We expect the consolidated ROEs and ROCEs to move up progressively over the next 3 years. This mainly could be attributed to steadily improving financial performance at both SRL and FSL. We have employed a DCF based valuation approach to ascribe value to the standalone distribution business, The Chandrapur plant and the Haldia plant. We have assigned a 0.8x EV/sales multiple on SRL's FY14 revenues and an 8x EV/EBITDA multiple to FSL's FY14 operating profits.

Source : Equity Bulls

Keywords