Result Update on CESC for 4QFY2011

For 4QFY2011, CESC recorded healthy 12% yoy growth in standalone net profit, aided by 14.7% higher yoy realisation. However, power generation declined by 6.3% yoy on account of lower PLF in the Budge-Budge plant. The monthly per sq. ft. sales of Spencer’s, CESC’s 94% retail subsidiary, grew by 15.7% yoy to `987 in March 2011. EBITDA/sq. ft. for Spencer’s has turned positive since June 2010. We maintain our Buy recommendation on the stock.

OPM up 214bp yoy aided by higher realisation: CESC registered 13.6% yoy growth in its standalone top line to `875cr, aided by a 14.7% increase in realisations to `4.98 per unit.  However, power generation was lower by 6.3%  yoy to 1,826MU on account of lower PLF in the Budge-Budge plant.
The Budge-Budge plant reported PLF of 82.8% during the quarter as against 85.2% recorded in 3QFY2011. Low power generation resulted in a 50% increase in power purchase to 305MU during the quarter.  Higher power purchase and an increase in fuel costs resulted in margin pressures. Despite higher power purchase and fuel costs, the company posted a 214bp yoy expansion in OPM to 28.1%, primarily on account of better realisations and lower operating expenses.

Valuation:  We expect CESC’s standalone top line and bottom line to grow at a CAGR of 9.6% and 7.2%, respectively, over FY2011–13E. At the CMP, the stock is trading at 6.9x FY2013E EPS and 0.7x FY2013E P/BV. We have assigned 0.85x FY2013E P/BV multiple to the company’s power business, considering its lower RoE and higher cash component and have arrived at a value of `354/share. We have valued the retail business and real estate business at `15 and `11 per share, respectively. We maintain our Buy recommendation on the stock with an SOTP-based target price of `380.