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CESC 3QFY2012 performance highlights and results update

Contributed by Angel Broking

For 3QFY2012, CESC posted a 32.7% yoy decline in its net profit on account of customers being billed under the existing tariff, as WBERC’s new tariff approval for FY2012 is still pending (generally awarded in the second quarter). Although the current tariff provisions allow the hike in fuel costs to be passed on automatically, CESC has to obtain WBERC’s orders for passing on the additional fixed costs. The company expects to receive the new tariff order in 4QFY2012, post which it can charge higher tariff in 4QFY2012 with retrospective effect. On the retail business front, per sq. ft. sales of Spencer’s increased to Rs.1,087/month in 9MFY2012 (12.7% higher on a yoy basis). Store level EBITDA per sq. ft. stood at Rs.35 for 9HFY2012. We maintain our Accumulate view on the stock.

OPM down by 589bp yoy to 19.6%: CESC registered 10.6% yoy growth in its standalone top line to Rs.1,019cr, aided by 3.3% growth in sales volume and 7.1% higher realization (due to higher fuel costs). The company’s OPM fell by 589bp yoy to 19.6% despite strong operational performance due to delay in grant of tariff approval. The company had also made provision for ~35cr due to delay in the awarding of new tariff orders, which further dented its operating profit. However, these provisions would be reversed if the new tariff order is obtained.

Valuation: We expect CESC’s standalone top line and bottom line to post a CAGR of 9% and 2.6%, respectively, over FY2011–13E. At the CMP, the stock is trading at 6.9x FY2013E EPS and 0.7x FY2013E P/BV of its power business. We have assigned 0.7x FY2013E P/BV multiple to CESC’s power business, considering its low RoE, and have arrived at a value of Rs.280/share. We have valued the retail business and real estate business at Rs.11/share each to arrive at an SOTP-based target price of Rs.302. We maintain our Accumulate view on the stock.