CESC: Tariff Hike Looks Good; Import duty May Trigger Further Downside

Kolkata-based CESC has been given the nod to hike power tariffs from Rs 5.19 per unit to Rs 5.88 per unit. The quantum of the hike, however, is lower than as expected by CESC which was Rs 6.30 per unit. For the March quarter we believe that the company would add about Rs 150 crore in topline due to the tariff hike. This tariff hike order also provides a retrospective effect from April 2011. This will allow CESC to collect Rs 450 crore as arrears for the period of the last nine months of this fiscal. With the tariff hike we expect good topline growth in the next fiscal as well. This amount could have been over Rs 900 crore had the tariff hike of Rs 6.30 per unit been accepted.

CESC’s current fiscal performance so far has not been very impressive. The company, despite 10 per cent growth in topline, reported a decline of 20 per cent in the bottomline. This was mainly due to the lower operating performance led by higher fuel costs. On the back of this we believe that the current tariff hike will prove to be good for the company.

For the investors there is a cautionary note as the company has placed a BTG (boiler, turbine and generator) order worth Rs 1,000 crore for its Haldia project plant in West Bengal (600 MW project expected to be commissioned in 2013-14) to a China-based company called Shanghai Electric. The same company is also supplying a BTG package for its Chandrapur power project in Maharashtra (600 MW project under construction).

With the Indian power equipment manufacturers asking for a level playing field we believe that an import duty hike of between 14-19 per cent is expected in the 2012 budget. Besides, those who have already placed orders will also be covered under the proposed import duty hike and hence CESC may require making a provision for the same or paying the required tax in the next fiscal. An import duty of 14 per cent on Rs 2,000 crore turns out to be Rs 280 crore which will be more than half of its annual profit in the last fiscal.

The stock on an YTD basis has increased by 27 per cent to date but is down by 8 per cent from its yearly high of Rs 294, indicating that the announcement of the import duty may be seen very negatively by the markets. At this time we advise our readers wait until the budget which will give more clarity to the power sector.