| Summary of Content STOCK IDEA CESC
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs413
Current market price: Rs282 Integrated business at a discount Key points -
Integrated business model with strong cash generation from distribution business: CESC's presence in both generation and distribution business is an advantage given the emergence of erratic purchase of power by the state electricity boards (SEBs) due to their deteriorating financial health. The power distribution business in Kolkata is growing at a healthy rate and generates substantial free cash to fund CESC's expansion plans. CESC is doubling its generation capacity by FY2015 through addition of 600MW in Chandrapur and 600MW in Haldia. Further, 1,920MW of capacities are at an early development stage. Moreover, led by the deteriorating financials of the SEBs, the potential privatisation of the distribution business could open up opportunity for CESC. -
Secured fuel supplies an added advantage: Besides coal linkage from Coal India, CESC has a secured supply of coal from two coal assets held by the promoters through ICML. Around 50% of the coal would be sourced from these mines and 30-40% of the requirement would come from the Coal India linkage; the balance 10% would be imported. CESC has a higher level of fuel security compared to most of its domestic peers which is a strong positive. -
Retail turns profitable at store level; current price ignores the turnaround possibility: The retail business of CESC is currently burning significant cash at the operation level; however, we believe it is close to the end of the tunnel. The silver lining is that there are initial indications of a recovery as the business reported profits at the store level in all four quarters of FY2011. Further, backed by the current strategy of the management, we believe it could break even at the corporate level in the next three years against the management's ambitious time line of five to six quarters. Moreover, the cash generation from the monetisation of its spare land through the development of a 400,000-square-feet shopping mall in a prime area of Kolkata would partially negate the losses in the retail business. -
Significant discount to peers, Buy: CESC is one of the cheapest utility stocks available in the Indian market. It trades at a discount to its book value and at a 60-70% discount to the average multiple of the comparable companies. One of the key reasons for the discounted valuations is the concerns related to the losses in the retail business that depress the return ratios at the consolidated level. However, we believe that the improving financial health of the retail business and the growing scale of the power generation and distribution business would positively affect the return ratios in future. We value per share of CESC at Rs536 (Kolkata utility business at Rs472 + the upcoming power generation assets at Rs48 + the property at Rs17 share). Further, we deduct Rs123 per share for the retail business to account for the latter's accumulated losses of Rs1,231 crore (over FY2008-11) and the estimated cumulative losses of around Rs316 crore to be incurred during FY2012-14 (before it turns profitable in FY2015) to arrive at a fair value of Rs413 for CESC. Hence, we recommend a Buy on CESC with a price target of Rs413.
SECTOR UPDATE Insurance Hit by revised rules, product launch delays
The annual premium equivalent (APE) for the life insurance industry declined in May 2011 by 15.6% year on year (YoY) but increased by 32.5% month on month (MoM) due to increased premium collection mainly in the single premium segment. Retail Retail channel check exercise reveals volume downtrend -
In line with our expectation, all the retailers we spoke to confirmed on the fact that volume slowdown in the apparel category was evident in Q1FY2012. We believe that the abrupt price increase of 15-18% across all apparel brands coupled with inflation pressure restricted demand. We continue to be of the opinion that just within a couple of months, the consumer psyche would adjust towards the higher price points, resulting in a rebound in volume offtake. -
Looking at the mid- to long-term trend, optimism and increasing aspiration levels across consumption categories, we believe that all consumption plays are at an inflexion point, with the long term demand drivers intact. Thus, we maintain our long term bullish stance on the sector. From the point of view of large-cap stocks and in terms of valuations, we like Pantaloon. However, in the mid-cap retail space we continue to have a Buy rating on Provogue (a proxy to the retail real estate play) and KKCL (a player with a scalable business model and management) with a pedigree and a robust balance sheet. | |
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