CESC IPL s Pune franchise: A googly
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- Leona Shaw
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1 India Midcaps EVENT UPDATE CESC IPL s Pune franchise: A googly India Equity Research Power CESC has bagged the Indian Premier League s (IPL) Pune franchise for 2 years by quoting INR(160)mn in reverse bidding. Besides this, there will be player acquisition and other admin expenses. It s pertinent to note that in past seasons, high costs have been the undoing of a few IPL franchises. We estimate worst case impact of INR1.2bn on CESC s cash flows for 2 years. Management, however, maintains promoters will eventually acquire the franchise in personal capacity and the company will have no liability whatsoever. Given this being CESC s third unrelated diversification attempt and pending regulatory clarity on coal bidding/levy, we cut our P/BV multiple of core regulated business to 1.3x (1.7x earlier) to arrive at revised SoTP based TP of INR654 (INR766 earlier). Maintain BUY. Negative bid to curtail revenue stream CESC, through its 51% step-down subsidiary, New Rising Promoters, has emerged the successful bidder for IPL s Pune franchise for the next 2 seasons. In the reverse bidding process, CESC quoted INR(160)mn versus INR400mn base price. Apart from paying this amount to BCCI, the company will have to incur additional costs for acquiring players (yearly cap of INR660mn) and team maintenance. With the negative bid, CESC has foregone revenues from BCCI s pool and will have to depend on other revenue streams like team sponsorship, gate receipts, merchandise sale and prize money. Other IPL franchises have not been profitable Given high franchise cost and expenses related to acquiring players/team, most franchises (barring a couple in select years) have not been profitable. Sun TV, the owner of Deccan Chargers, reported a loss of INR600mn in FY15. However, companies associated with the franchises look upon IPL as a branding and marketing platform and not necessarily as profit center. EDELWEISS RATINGS Absolute Rating Investment Characteristics BUY None MARKET DATA (R: CESC.BO, B: CESC IN) CMP : INR 517 Target Price : INR week range (INR) : 752 / 452 Share in issue (mn) : M cap (INR bn/usd mn) : 68 / 1,084 Avg. Daily Vol. BSE/NSE ( 000) : SHARE HOLDING PATTERN (%) Current Q1FY16 Q4FY15 Promoters * MF's, FI's & BKs FII's Others * Promoters pledged shares (% of share in issue) PRICE PERFORMANCE (%) BSE Midcap Index Stock : Nil Stock over Index 1 month (0.3) months months 6.5 (18.0) (24.5) Outlook and valuations: Unrelated diversification risk; maintain BUY This is the third unrelated diversification by CESC in the past 6-8 years, although management maintains promoters will eventually acquire the franchise in personal capacity. Considering other costs involved, we factor in worst case impact on CESC s cash flow at ~INR1.2bn over the next 2 years. Additionally, to factor in risks to cash flows of regulated business, we have cut our multiple of core regulated business to 1.3x (1.7x earlier) to arrive at revised SoTP based TP of INR654 (INR766 earlier).maintain BUY Financials (Consolidated) Revenues (INR mn) 101, , , ,640 EBITDA (INR mn) 16,230 18,940 27,533 30,603 Adjusted Profit (INR mn) 4,920 1,990 3,352 6,535 Adjusted Diluted EPS (INR) Diluted P/E (x) P/B(x) ROAE (%) Edelweiss Research is also available on Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Shankar.K shankar.k@edelweissfin.com Santosh Hiredesai santosh.hiredesai@edelweissfin.com December 9, 2015 Edelweiss Securities Limited
2 Power IPL bidding process BCCI has a central revenue pool made up of the television rights income and other sponsorship earnings connected to the IPL tournament. From this central kitty, BCCI in the current round of bidding has agreed to pass on INR400mn to each IPL franchise (known as annual management fee). The bidder quoting the least management fee wins the team. Besides, there is also an option of negative bid, whereby a bidder not just forgoes the entire management fee, but also pays an additional amount to BCCI. In case of Pune bid, CESC has forgone the entire management fee and agreed to pay an additional amount or INR160mn to BCCI for the franchise rights. Rationale for CESC bidding for the franchise According to the management the IPL guidelines required the bidding entity to furnish certain bank guarantees and hence CESC has been roped in to furnish the same. Now that the bidding has been done management maintains promoters will eventually acquire the franchise in personal capacity. However, we would like to highlight that in the case of transfer of franchise rights of Chennai Super Kings (CSKCL) into a separate company BCCI has insisted on a guarantee by the erstwhile owners of the franchise (India Cements) for the purpose of guaranteeing performance / compliance by CSKCL of the obligations of the franchise under the Franchise Agreement. Additionally, even if the ownership changes to the promoter, CESC could incur higher branding / sponsorship costs which could impact earnings. Table 1: Sun TV IPL franchise (Sunrisers Hyderabad) profitability (INR mn) FY14 FY15 FY16E Revenues 1, Payment to BCCI Other expenses Total expenses 1,421 1,585 1,561 PAT (365) (598) (581) Source: Company, Edelweiss research 2 Edelweiss Securities Limited
3 CESC Table 2: History of IPL biddings (INR mn) IPL Team Owner Amount for 10 years Amount per year 2008 Mumbai Indians Reliance Industries 4, Royal Challengers Bangalore UB Group 4, Deccan Chargers DCH Ltd 4, Chennai Super Kings India Cements 3, Delhi Daredevils GMR Group 3, Kings XI Punjab Preity Zinta, Ness Wadia, Dabur 3, Kolkata Knight Riders Red Chillies Entertainment 2, Rajasthan Royals Emerging Media Group 2, Pune warriors Sahara Group 17,020 1,702 Kochi Tuskers Kerala Rendezvous Sports 15,330 1, Sunrisers Hyderabad Sun TV Network 4, Table 3: SOTP Value (INR Multiple Stake Target value Value/ share Segment mn) times Method (%) (INR mn) (INR) Comments Regulated equity 36, (RoE-g)/(CoE-g) , FY17E regulated book Net Cash & Liquid Investments Source: Edelweiss research 1, At book value , FY16E cash balance net of non-regulated debt & Dhariwal/IPL loss funding Dhariwal NPV NPV of FCFE Haldia 10, RoE/Ke , Regulated multiple to the project Firstsource 25, CMP , % Hold Co discount Mall 2, P/B , x FY14 investments Spencers 14, EV/sales 100 9, Target Mcap = 1x EV/FY14 sales; as per our retail analyst less INR 4.6bn of debt Total 654 Source: Edelweiss research 3 Edelweiss Securities Limited
4 Power Company Description 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 license 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 2.5 mn over time. CESC has total installed capacity of 1,225 MW from four generating units at Budge Budge (750 MW), Southern (135 MW), Titagarh (240 MW) and New Cossipore (100 MW). Investment Theme CESC under expansion plan increased its capacity to 1,825MW, in its licence area by adding 600MW Haldia project. The steady earnings along with efficiency gains on annually rising regulated equity of INR2bn provide cash flow comfort and reinvestment opportunity. The company also commissioned another 600MW coal fired plant at Chandrapur, Maharashtra which is awaiting PPA/FSA. CESC is also seeking growth opportunities in other parts of India in the power space by looking to develop ~3,000MW in Bihar, Jharkhand and Orissa. The company has plans to unlock value from Spencers retail at appropriate time. The company in 2012 had diversified further by acquiring a majority stake in a BPO company, Firstsource solutions which has also done well over the past few quarters. 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. Further cash outflow in Spencers We have factored INR 1.5 bn of cash outflow in Spencer s over FY15 and FY16. However, equity infusion at a greater than anticipated level, due to higher losses, or due to delay in divestment, pose risk to our estimates. 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. Higher losses in power projects due fuel / SEB issues We expect the recent government policy initiatives to help arrest losses of the operational Dhariwal power project 600MW in the coming years. Any deviations from these could impact valuations. 4 Edelweiss Securities Limited
5 CESC 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) 29,912 32,842 34,792 36,742 RoE on Reg. Eqty (%) Invt. in Spencers(INRmn) , PLF (%) Net sale energy(mn kwh) 8,591 9,106 10,017 10,518 Tariff (INR/kwh) Fuel cost (INR/kwh) Employee Exp. Growth(%) SG&A As %age of T Exp Power pur. cost (INRmn) 8,910 10,390 19,041 22,201 Invt. into sub. (INR mn) 10,132 10,583 6,167 - Avg. Interest rate (%) Depreciation rate (%) Net borrowings (INR mn) 106, , , ,090 Capex (INR mn) 40,410 24,278 7,350 7,354 Debtor days Inventory days Payable days Cash conversion cycle Income statement (INR mn) Income from operations 101, , , ,640 Direct costs 39,930 46,890 60,676 68,947 Employee costs 29,600 28,890 29,692 30,755 Other Expenses 15,350 15,950 18,921 20,336 Total operating expenses 84,880 91, , ,037 EBITDA 16,230 18,940 27,533 30,603 Depreciation 4,710 5,890 7,895 8,113 EBIT 11,520 13,050 19,637 22,490 Add: Other income 1,730 1, Less: Interest Expense 5,660 9,560 13,541 12,983 Profit Before Tax 7,590 4,980 6,733 10,133 Less: Provision for Tax 1,860 1,990 2,342 2,457 Less: Minority Interest 810 1,000 1,039 1,141 Reported Profit 4,920 1,990 3,352 6,535 Adjusted Profit 4,920 1,990 3,352 6,535 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 15.5 (34.4) Adjusted Profit 15.0 (59.6) EPS 15.0 (61.8) Edelweiss Securities Limited
6 Power Balance sheet (INR mn) As on 31st March FY14 FY15 FY16E FY17E Share capital 1,256 1,330 1,330 1,330 Reserves & Surplus 55,094 58,960 60,895 66,118 Shareholders' funds 56,350 60,290 62,225 67,448 Minority Interest 9,079 10,000 11,039 12,180 Short term borrowings 10,531 19,350 19,350 19,350 Long term borrowings 108, , , ,370 Total Borrowings 119, , , ,720 Long Term Liabilities 19,442 20,600 20,600 20,600 Def. Tax Liability (net) (2,774) (2,270) (2,270) (2,270) Deferred revenue 20,564 22,680 22,680 22,680 Sources of funds 221, , , ,359 Gross Block 183, , , ,017 Net Block 119, , , ,133 Capital work in progress 53,117 4,103 45,117 38,217 Intangible Assets 25,283 22,136 22,136 22,136 Total Fixed Assets 198, , , ,486 Non current investments Cash and Equivalents 12,422 16,450 8,793 11,630 Inventories 5,383 6,630 8,915 8,749 Sundry Debtors 15,302 17,070 22,951 21,112 Loans & Advances 7,815 7,310 7,310 7,310 Other Current Assets 6,771 15,290 15,290 15,290 Current Assets (ex cash) 35,271 46,300 54,466 52,461 Trade payable 5,318 6,010 8,648 8,008 Other Current Liab 19,515 16,950 16,950 16,950 Total Current Liab 24,832 22,960 25,598 24,958 Net Curr Assets-ex cash 10,439 23,340 28,868 27,503 Uses of funds 221, , , ,359 BVPS (INR) Contingent Liability 1, Free cash flow (INR mn) Reported Profit 4,920 1,990 3,352 6,535 Add: Depreciation 4,710 5,890 7,895 8,113 Interest (Net of Tax) 4,258 5,740 8,832 9,835 Deferred tax Others 10,016 7,672 5,748 4,289 Less: Changes in WC (1,440) (12,901) (5,528) 1,365 Operating cash flow 22,511 8,895 20,300 30,137 Less: Capex 40,410 24,278 7,350 7,354 Free Cash Flow (17,899) (15,384) 12,950 22,783 Cash flow metrics Operating cash flow 22,511 8,895 20,300 30,137 Investing cash flow (31,803) (24,405) (7,350) (7,354) Financing cash flow 8,225 13,309 (20,608) (19,946) Net cash Flow (1,067) (2,202) (7,657) 2,837 Capex (40,410) (24,278) (7,350) (7,354) Dividend paid (1,021) (1,168) (1,418) (1,312) 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 (%) 15.0 (61.8) 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) FY16E FY17E FY16E FY17E FY16E FY17E CESC 1, NTPC 16, Power Grid Corp of India 10, Tata Power Co 2, Source: Edelweiss research 6 Edelweiss Securities Limited
7 CESC 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 8.45 Capital Research Global Investor 3.75 BnK Capital Markets Ltd 2.27 Massachusetts Financial Services 1.83 M & G Asian Fund 1.35 SBI Funds Management 1.21 Merrill Lynch Capital Markets Es 1.02 Dimensional Fund Advisors Lp 0.76 Prudential ICICI Asset Mgmt Co 0.71 Vanguard Group Inc 0.71 *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 17 Apr 2015 Saregama India Ltd Sell Apr 2015 Saregama India Ltd Sell *as per last available data 7 Edelweiss Securities Limited
8 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 (INR) Power Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai Board: (91-22) , Nirav Sheth Head Research ` Coverage group(s) of stocks by primary analyst(s): Adani Power, CESC, JSW Energy, Lanco Infratech, NTPC, PTC India, Power Grid Corp of India, Tata Power Co Recent Research Date Company Title Price (INR) Recos 24-Nov-15 Lanco Infratech EPC turns around; power getting back on track; Result Update 16-Nov-15 CESC Strong performance; Result Update 10-Nov-15 Tata Power Sedate quarter; Result Update 6 Buy 558 Buy 68 Buy Distribution of Ratings / Market Cap Edelweiss Research Coverage Universe Rating Interpretation Buy Hold Reduce Total Rating Distribution* * stocks 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 CESC 8 Edelweiss Securities Limited
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