CESC Demerger prudent; prospects brighten

Transcription

1 India Midcaps RESULT UPDATE CESC Demerger prudent; prospects brighten India Equity Research Power CESC has demerged operations into 4 different business segments, namely generation, distribution, retail and IT & Mall. While shareholding of the new entities would be similar to CESC s, the demerger is a relatively logical split and one that seems fair to investors. It maintains intrinsic value and potentially offers shareholders a more specific investment/play and some value/multiple enhancement. To that extent, the -15% stock reaction was a surprise, and likely reaction to expectations/recent strong performance (+50%, 3m) rather than the transaction per se. Q4FY17 itself was little ahead of expectations. While we expect some leveling off given recent performance, maintain BUY. New entities shareholding reflects CESC s mirror image CESC has demerged generation undertaking to Haldia Energy (HEL), retail undertaking to RP-SG Retail (RP-SG) and IT undertaking to RP-SG Business Process Services (RP-SG BPS). Equity shares of HEL, RP-SG and RP-SG BPS are proposed to be listed on the exchanges. For every 10 shares of CESC currently, 5 shares of generation of INR10 each, 5 shares of distribution of INR10 each, 6 shares of retail of INR5 each and 2 shares of Venture business of INR10 each will be allotted to shareholders. Q4FY17 PAT above estimate, EBITDA drags Though total sales of Q4FY17 fell 1% (generation declined 6.6% YoY), revenue at INR15.7bn grew 6.7% YoY, indicating better realisations YoY. In spite of better revenue, EBIDTA fell 57% YoY owing to the 52% surge in fuel and power purchase costs. CESC reported PAT of INR2.95bn (INR2.93bn last year), driven by INR3.4bn of regulated income. FY17 witnessed sub-optimal PLFs (Budge Budge 82.4% versus 87.9%, Southern 34.6% versus 44.8%, Titagarh 11.1% versus 31.5% YoY). Spencer saw improvement in sales as average sales increased from INR1452/sq ft per month to INR1576/sq ft per month in FY17. EDELWEISS RATINGS Absolute Rating Investment Characteristics BUY Growth MARKET DATA (R: CESC.BO, B: CESC IN) CMP : INR 884 Target Price : INR week range (INR) : 1,002 / 531 Share in issue (mn) : M cap (INR bn/usd mn) : 117 / 1,815 Avg. Daily Vol. BSE/NSE ( 000) : SHARE HOLDING PATTERN (%) Current Q2FY17 Q1FY17 Promoters * MF's, FI's & BKs FII's Others * Promoters pledged shares (% of share in issue) PRICE PERFORMANCE (%) BSE Midcap Index Stock : 5.7 Stock over Index 1 month 3.2 (3.4) (6.6) 3 months 9.9 (3.4) (13.3) 12 months Outlook and valuations: Better focused; maintain BUY We believe restructuring of business segments (demerger of generation, distribution and retail) will reposition CESC in a manner where it will enhance focus on each business segment. Further, an interesting strategy that CESC seems to be pursuing is higher exposure to low capital intensive distribution businesses, which could enable it to meet its capex and FCF generation requirements over next few years. We maintain BUY with a revised TP of INR910. Financials (Standalone) Edelweiss Research is also available on Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. (INR mn) Year to March Q4FY17 Q4FY16 % Change Q3FY17 % Change FY17 FY18E FY19E Revenues 15,720 14, ,200 (3.0) 72,200 75,582 81,080 EBITDA 2,040 4,740 (57.0) 3,150 (35.2) 16,210 16,977 18,494 Adj. profit 2,950 2, , ,730 6,838 7,842 Diluted P/E (x) Price/BV(x) ROAE (%) Swarnim Maheshwari swarnim.maheshwari@edelweissfin.com Viren Dargar viren.dargar@edelweissfin.com May 22, 2017 Edelweiss Securities Limited

2 Power Table 1: SOTP valuations Value (INR Multiple Stake Target value Value/ share Segment mn) times Method (%) (INR mn) (INR) Comments Regulated equity 40, (RoE-g)/(CoE-g) , Multiple to FY18E regulated book RoE:15%, CoE:13% and g:5% Net Cash & Liquid Investments 1, At book value , FY16 cash balance net of regulated debt, SPV debt, coal levy borrowing Dhariwal 4, NPV , NPV of FCFE Haldia 10, RoE/CoE , Regulated multiple to the project equity RoE:16% Firstsource 25, CMP , In line with market cap Mall 2, P/B , RoE in forecast period is less than 5% Spencers 20, EV/sales , In line Total 910 Con-call highlights Management has decided to split the company into 4 verticals: Generation business this entity will house all generation assets CESC Ventures will consist of First Source and Quest Mall Distribution business which will be CESC Spencer will be listed Source: Edelweiss research For every 10 shares of CESC, 18 shares will be allotted ( 5 shares of Generation at INR10 each, 5 shares of Distribution at INR10 each, 6 shares of Retail at INR5 each and 2 shares of Ventures at INR10 each). Noida Power, pre demerger was 40% owned by CESC, but post demerger CESC Generation will hold 49.5%, family will hold 24% and Uttar Pradesh discom will continue to hold 26%. Consolidated debt break-up will be as follows: Distribution - NR50bn Generation - INR78bn Spencer - Nil CESC Ventures - Nil Spencer currently has no debt, which typically means that advances lent to it by CESC would be taken back by it. CESC will own 68% of Cresent Power. 2 Edelweiss Securities Limited

3 CESC Regulated equity: Franchisee business is not regulated. In Kolkatta, the regulated equity business is INR6bn (INR4.5bn for distribution and INR1.5bn for generation) and Haldia is INR1.5bn. Dhariwal project: 100MW is tied up with Tamil Nadu, 170MW with Greater Noida and another unit was idle. Though no long-term PPA has been signed with the Maharashtra government for another 270MW unit, CESC is trying to convert it into long term PPA. It is hopeful of breaking even at cash sales in FY18. It has been selling 270MW on short term basis over and above the variable cost currently. INR10bn levy (reflected in receivables): Around INR9bn was recoverable and has been set off against reserves & surplus. Entire benefits would come to the discom. Preference shares of 5 lakhs would be given to CESC by the retail undertaking. Spencer is making EBITDA profit. CESC doesn t plan to incur significant capital expenditure on Spencer. CESC s distribution company would be in MAT. The generation company will also be in MAT. Spencer would also be in MAT due to accumulated losses. Rest of the entities will attract normal tax rates. Management mentioned that the INR132bn market capitalisation will increase to INR198bn. Break-up of INR 198bn of capex is as follows: Distribution business - INR66bn Generation business - INR 66bn Spencer - INR 40bn CESC Ventures - INR26bn Interest rates on loans of Dhariwal: Management mentioned it is ~9.7%-9.8%. Haldia, which currently has interest rate at 10%, will see it decline to 9% after sometime. There shall be no increase in operating expenditure at group level as the same team shall get split into different entities 3 Edelweiss Securities Limited

4 Power Financial snapshot (INR mn) Year to March Q4FY17 Q4FY16 % change Q3FY17 % change FY17 FY18E FY19E Total operating Income 15,720 14, ,200 (3.0) 72,200 75,582 81,080 Cost of goods sold 8,690 5, ,150 (5.0) 39,730 41,897 45,206 Gross profit 7,030 9,040 (22.2) 7,050 (0.3) 32,470 33,685 35,874 Salaries and other exp. 1,940 1, , ,800 8,148 8,392 Other expenses 3,050 2, , ,460 8,560 8,988 Total expenditure 13,680 9, , ,990 58,604 62,586 EBITDA 2,040 4,740 (57.0) 3,150 (35.2) 16,210 16,977 18,494 Depreciation 1,160 1, ,090 4,765 4,908 EBIT 880 3,740 (76.5) 2,170 (59.4) 12,120 12,212 13,586 Other income ,470 1,487 1,850 Interest 1,090 1, , ,480 4,702 4,839 Add: Exceptional items 3, Profit before tax 3,790 3, , ,110 8,997 10,598 Provision for taxes ,380 2,159 2,755 Reported net profit 2,950 2, , ,730 6,838 7,842 Adjustments Adjusted Profit 2,950 2, , ,730 6,838 7,842 Diluted shares (mn) Adjusted Diluted EPS Diluted P/E (x) As % of net revenues COGS Gross profit Other expenditure Total expenses EBITDA Reported net profit Tax rate Edelweiss Securities Limited

5 Company Description CESC CESC is an RP-Sanjiv Goenka Group company. It started operations in 1899 and since then the company has been offering power to consumers in its Kolkata licence area which has expanded from 5.64 sq miles to 567 sq km over the years. The number of consumers has grown from 6,000 to 2.5mn over time. CESC has total installed capacity of 2,425MW from 6 generating units at Budge Budge (750 MW), Southern (135 MW), Titagarh (240 MW), New Cossipore (100 MW), Haldia (600MW) and Chandrapur (600MW). Investment Theme The company has an existing regulated book of ~ INR35bn with steady ROE s of 20%. IN its generation business, the only chink in its armour is the Dhariwal project which is currently incurring a loss of more than ~INR6bn annually due to PPA issues which is funded by the patent company which however, is now getting resolved. We believe this plant can potentially improve the cash flow generations of the company over the next 2-3 years and incrementally provide cash flow comfort and reinvestment opportunity. Though early to say but if successful, the company s renewed focus on the distribution business (low capex) can add significant amount of profitability in coming years. Key Risks Regulated returns Our earnings estimates assume incentives on account of PLF and other normative parameters under regulatory norm; if the company fails to earn the same, then RoE would be lower and, hence, impact valuations. Delay in projects/ppas Escalation in project costs, delay in commissioning of generation projects, and long gestation periods could impact profitability, if delays are not compensated through tariffs. Unrelated diversification The company in the past has made investments into unrelated businesses (outside of core business of power GTD) with no synergetic benefits which might dilute management bandwidth and hence poses a key risk. 5 Edelweiss Securities Limited

6 Power Financial Statements Key Assumptions Macro GDP(Y-o-Y %) Inflation (Avg) Repo rate (exit rate) USD/INR (Avg) Sector Merchant prices(inr/kwh) NewCastle FoB(USD/t) Melawan FoB(USD/t) Company Closing Reg. Eqty(INRmn) 34,792 36,742 38,692 40,642 RoE on Reg. Eqty (%) Invt. in Spencers(INRmn) PLF (%) Net sale energy(mn kwh) 10,017 10,518 11,149 11,818 Tariff (INR/kwh) Fuel cost (INR/kwh) Employee Exp. Growth(%) (5.0) 3.0 SG&A As %age of T Exp Power pur. cost (INRmn) 19,041 22,201 25,838 29,693 Invt. into sub. (INR mn) 3, Avg. Interest rate (%) Depreciation rate (%) Net borrowings (INR mn) 131, , , ,932 Capex (INR mn) 38,623 7,374 7,374 6,834 Debtor days Inventory days Payable days Cash conversion cycle Income statement (INR mn) Income from operations 64,930 72,200 75,582 81,080 Direct costs 33,860 39,730 41,897 45,206 Employee costs 7,490 7,800 8,148 8,392 Other Expenses 7,600 8,460 8,560 8,988 Total operating expenses 48,950 55,990 58,604 62,586 EBITDA 15,980 16,210 16,977 18,494 Depreciation 3,690 4,090 4,765 4,908 EBIT 12,290 12,120 12,212 13,586 Add: Other income 1, , , , Less: Interest Expense 4,530 4,480 4,702 4,839 Add: Exceptional items - 1, Profit Before Tax 8,990 11,010 8,997 10,598 Less: Provision for Tax 1,920 2,380 2,159 2,755 Reported Profit 7,070 8,630 6,838 7,842 Exceptional Items - (1,900) - - Adjusted Profit 7,070 6,730 6,838 7,842 Shares o /s (mn) Adjusted Basic EPS Diluted shares o/s (mn) Adjusted Diluted EPS Adjusted Cash EPS Dividend per share (DPS) Dividend Payout Ratio(%) Common size metrics Operating expenses Depreciation Interest Expense EBITDA margins Net Profit margins Growth ratios (%) Revenues EBITDA PBT (18.3) 17.8 Adjusted Profit 1.3 (4.8) EPS 1.5 (4.8) Edelweiss Securities Limited

7 CESC Balance sheet (INR mn) As on 31st March FY16 FY17 FY18E FY19E Share capital 1,330 1,330 1,330 1,330 Reserves & Surplus 85, , , ,196 Shareholders' funds 86, , , ,526 Short term borrowings 14,590 14,350 3,000 - Long term borrowings 36,470 37,880 51,160 55,710 Total Borrowings 51,060 52,230 54,160 55,710 Long Term Liabilities 17,690 27,130 27,130 27,130 Def. Tax Liability (net) - 35,550 35,550 35,550 Deferred revenue 25,850 16,780 16,780 16,780 Sources of funds 180, , , ,696 Gross Block 158, , , ,203 Net Block 95, , , ,287 Capital work in progress 2,617 1,880 2,617 2,617 Intangible Assets 1,095 2,170 2,170 2,170 Total Fixed Assets 98, , , ,074 Non current investments 41,460 41,420 41,420 41,420 Cash and Equivalents 13,370 14,310 18,591 23,128 Inventories 3,160 3,790 3,786 4,636 Sundry Debtors 9,680 9,680 10,613 11,601 Loans & Advances 15,530 25,860 25,860 25,860 Other Current Assets 11,130 39,400 39,400 39,400 Current Assets (ex cash) 39,500 78,730 79,659 81,497 Trade payable 3,640 3,770 4,265 4,652 Other Current Liab 8,670 15,770 15,770 15,770 Total Current Liab 12,310 19,540 20,035 20,422 Net Curr Assets-ex cash 27,190 59,190 59,624 61,074 Uses of funds 180, , , ,696 BVPS (INR) Free cash flow (INR mn) Reported Profit 7,070 8,630 6,838 7,842 Add: Depreciation 3,690 4,090 4,765 4,908 Interest (Net of Tax) 3,563 3,310 3,574 3,581 Others (297) 870 1,129 1,258 Less: Changes in WC 3,864 (32,000) (434) (1,450) Operating cash flow 17,890 20,450 15,871 16,139 Less: Capex 7,601 6,500 7,237 6,500 Free Cash Flow 10,288 13,950 8,634 9,639 Cash flow metrics Operating cash flow 17,890 20,450 15,871 16,139 Investing cash flow (11,413) (6,520) (7,237) (6,500) Financing cash flow (5,488) (3,876) (4,353) (5,102) Net cash Flow ,054 4,281 4,537 Capex (7,601) (6,500) (7,237) (6,500) Dividend paid (3,009) (1,596) (1,581) (1,813) Profitability and efficiency ratios ROAE (%) ROACE (%) Inventory Days Debtors Days Payable Days Cash Conversion Cycle Current Ratio Gross Debt/EBITDA Gross Debt/Equity Adjusted Debt/Equity Interest Coverage Ratio Operating ratios Total Asset Turnover Fixed Asset Turnover Equity Turnover Valuation parameters Adj. Diluted EPS (INR) Y-o-Y growth (%) 1.5 (4.8) Adjusted Cash EPS (INR) Diluted P/E (x) P/B (x) EV / Sales (x) EV / EBITDA (x) Dividend Yield (%) Peer comparison valuation Market cap EV / EBITDA (X) P/B (X) ROAE (%) Name (USD mn) FY18E FY19E FY18E FY19E FY18E FY19E CESC 1, NTPC 20, Power Grid Corp of India 16, Tata Power Co 3, Median AVERAGE Source: Edelweiss research 7 Edelweiss Securities Limited

8 Power Additional Data Directors Data Mr S Goenka Chairman, Promoter Non Executive Mr P K Khaitan Independent Mr B M Khaitan Independent Mr Sethi Independent Mr Aniruddha Basu Managing Director, Executive Mr. C. K. Dhanuka Independent Mr K Jairaj Independent Mr P Chaudhri Independent Auditors - Lovelock & Lewes *as per last available data Holding Top 10 Perc. Holding Perc. Holding Hdfc Asset Management Co Ltd 9.00 Prudential Plc 4.22 M&G Investment Management Ltd 4.22 Sun Life Financial Inc 2.21 Massachusetts Financial Services 2.21 Bnk Capital Markets Ltd 1.89 Stel Holdings Ltd 1.88 Icici Prudential Asset Mgmt Co 1.74 Life Insurance Corp Of India 1.67 Vanguard Group 1.57 *as per last available data Bulk Deals Data Acquired / Seller B/S Qty Traded Price No Data Available *as per last available data Insider Trades Reporting Data Acquired / Seller B/S Qty Traded 27 Mar 2017 CASTOR INVESTMENTS LIMITEDCASTOR INVESTMENTS LIMITED Buy Mar 2017 SPENCER AND COMPANY LIMITED Sell Mar 2017 SPENCER AND COMPANY LIMITED Sell Mar 2017 CASTOR INVESTMENTS LIMITEDCASTOR INVESTMENTS LIMITED Buy Mar 2017 SPENCER AND COMPANY LIMITED Sell *as per last available data 8 Edelweiss Securities Limited

9 May-16 Jun-16 Jul-16 Jul-16 Aug-16 Sep-16 Sep-16 Oct-16 Nov-16 Nov-16 Dec-16 Jan-17 Jan-17 Feb-17 Mar-17 Apr-17 Apr-17 May-17 (INR) CESC Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai Board: (91-22) , Aditya Narain Head of Research ` Coverage group(s) of stocks by primary analyst(s): Power Adani Power, CESC, JSW Energy, NTPC, PTC India, Power Grid Corp of India, Tata Power Co Recent Research Date Company Title Price (INR) Recos 02-May-17 JSW Energy Low generation mars performance; Result Update 11-Apr-`7 Power Supreme Court disallows compensation for imported coal; Sector Update 23-Feb-17 PTC India Subdued overall volumes dent profit; Result Update 62 Hold 90 Buy Distribution of Ratings / Market Cap Edelweiss Research Coverage Universe Rating Interpretation Buy Hold Reduce Total Rating Distribution* * 1stocks under review > 50bn Between 10bn and 50 bn < 10bn Market Cap (INR) Rating Buy Hold Reduce Expected to appreciate more than 15% over a 12-month period appreciate up to 15% over a 12-month period depreciate more than 5% over a 12-month period One year price chart 1, CESC 9 Edelweiss Securities Limited

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