CESC Limited - Dhariwal TPS - Surfing options to be viable? - Antique

The acquisition of 600MW Dhariwal project at Chandrapur in FY10 was to provide inorganic growth to CESC's power expansion plans. However, it was caught in the vicious circle of signing PPA and FSA which resulted in signing none yet while the plant is ready for commissioning (CoD) in Sept. 2013. We believe the company is making serious efforts to sign PPAs for its capacities which can help them procure long term coal from Coal India under FSA. CESC is currently a bidder to supply 120MW over FY15-16 to Tata Power Distribution and under discussion with a SEB to supply 100MW for 15 years. This can auger well for the company to secure FSA based coal supply. We however, maintain HOLD rating on the stock as we await further clarity on the short term market rates at which it may have to sell 80MW. Hence, CESC may incur losses in FY14 if it is unable to sell its open capacity at a minimum rate of INR4/kWh (prevailing rates in Western region is less than INR3.5/kWh). Any development in the signing of the PPAs will be positive for the stock.

Update on the project:

- Revised cost of the project is INR34bn, of which INR32bn has been spent. Unit 1 is in the synchronization phase and we expect it to be CoD by Sept'13 and Unit 2 by March'14. We believe CoD of Unit 2 can be delayed if no clarity emerges on the PPA and FSA.

- Power evacuation for Unit 1 is expected to be through MSETCL (state transmission utility) and Unit 2 through Power Grid. The evacuation line of the Unit 1 is expected to be charged by Aug'13 and Unit 2 is still six months away from commissioning.

PPA update:

- CESC has participated in a bid to supply to Tata Power for 3 years. Tata Power's requirement is for 300MW, 300MW and 250MW for FY14, FY15 and FY16 respectively for 14 hours in a day (9AM to 11PM). We believe CESC will be able to sign PPAs for power ranging between 70-120MW over FY14-16 as its cost of generation (even at e-auction coal) will be lower than INR4.25/kwh which is competitive to the rates at which Tata Power Distribution sources its short term power.

- Our channel check suggests that CESC is in talks with a SEB to sign a 15 year 100MW PPA at a rate ranging from INR 4.8-5/kWh.

- We believe if CESC is able to secure both the PPA's, only 80MW of 300MW (unit 1) needed to be sold on merchant basis. Still lack of clarity persists regarding PPA of Unit 2.

Coal procurement

- If CESC successfully signs the Tata Power PPA, they would source coal from local traders and E-auction markets where the landed cost of coal would be INR3000/mt.

- In the absence of FSA based coal supply from Coal India, CESC is expected to import 25% of its total coal requirement for which the landed will be INR5000/mt (from Kakinada Port which is 600kms away) resulting in variable cost of power of INR2.7/kWh.

Valuation and outlook

At INR360, the stock is trading at 7x and 0.8x FY15e P/E and P/B respectively. We value CESC on an SOTP arriving at a target price of INR365. Maintain HOLD.

Source : Equity Bulls

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