Stock Market Update on CESC for 1QFY2012

Stock Market Update on CESC for 1QFY2012 with an Accumulate recommendation and a Target Price of `383 (12 months).

For 1QFY2012, CESC delivered a flat performance on the bottom-line front. Lower-than-estimated net profit was on account of increased fixed costs. However, the company would be recovering the additional fixed costs in the ensuing quarters after obtaining the WBERC order containing tariff adjustments. On the retail front, the per sq. ft. sales of Spencer’s increased to `1,042 in June 2011 (5.5% higher than `987 in March 2011). More importantly, the store level EBITDA/sq. ft. stood higher at `37 during the quarter. We maintain our Accumulate recommendation on the stock.

OPM down by 79bp yoy to 22.6%: CESC registered 7.9% yoy growth in its standalone top line to `1,183cr, primarily due to higher fuel cost, which is a

pass-on. However, power sale volume declined by 2% to 2.232 MU. The company’s OPM stood at 22.6%, down 79bp yoy, on account of higher fuel costs. The company uses a mix of domestic (40%) and imported coal (60%). The cost of imported coal was higher by ~20% during the quarter. The company’s net profit was impacted by higher interest and depreciation costs.

Valuation:  We expect CESC’s standalone top line and bottom line to grow at a CAGR of 9.6% and 7.3%, respectively, over FY2011–13E. At the CMP, the stock is trading at 7.5x FY2013E EPS and 0.8x 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 `361/share. We have valued the retail business and real estate business at `11 and `11 per share, respectively. The stock has appreciated considerably in the last fortnight after the in-principle approval by the committee of secretaries raised hopes of legislation for 51% FDI in multi-brand retail. We maintain our Accumulate view on the stock with an SOTP-based target price of `383.