Neutral on CESC - Motilal Oswal

CESC (CESC IN; Mkt Cap USD1.1b, CMP Rs399, Neutral)

- 1QFY11 PAT in-line: CESC reported net profit of Rs1.1b (up 5% YoY) for 1QFY11, in line with our estimate. Revenue was higher than we had estimated on account of higher power purchase cost and fuel charges (which are pass-through). Power purchase cost for 1QFY11 was Rs1.8b (v/s Rs1.82b in 1QFY10) despite commissioning of 250MW Budge Budge expansion. While units imported declined to 447MUs (down 29% YoY), power purchase cost increased to Rs4.1/unit (v/s Rs2.9/unit in 1QFY10).

- Visibility on 1.2GW of projects, ~4GW of projects under development: (1) Haldia project (600MW) has received debt sanctions and financial closure is expected shortly. PPA for 450MW will be signed with CESC and 150MW is on merchant basis. (2) Chandrapur project (600MW) plans to sell 50% of capacity on regulated terms to the State of Maharashtra and remaining capacity on mix of merchant and case-1 bids. CoD is expected by March 2013. (3) CESC is working on 4GW of projects, comprising of 1GW in Jharkhand (coal block allotted with 110MT reserve, 50% stake), 1GW in Orissa (large part of land acquired, project has secured 70 points out of 100 in coal linkage propitiation process, and has a high possibility of securing coal linkages), and 2GW in Bihar (MoU signed with state government).

- Spencer EBITDA breakeven at store level, FY11 cash losses target at Rs1.5b: In 1QFY11, Spencer has achieved EBITDA breakeven at the store level, the first step towards achieving EBITDA breakeven at company level (likely by FY13). Area under operations has declined by 13% YoY to 0.9msf in June 2010 (204 stores). Sales have improved to Rs906/sf in June 2010 v/s Rs736/sf in June 2009 and Rs811/sf in March 2010. For FY11, the management expects cash losses to decline to Rs1.5b v/s Rs2.5b in FY10 (actual cash losses stood at Rs120m in June 2010 v/s average of Rs130m-135m/month for April-May 2010).

- Valuation and view: We currently expect CESC to report standalone net profit of Rs4.8b in FY11 (up 11%) and Rs5b in FY12 (up 12%). The stock quotes at 11x FY11E and 10x FY12E standalone EPS. Neutral.

Source : Equity Bulls

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