Stock Pick From The Power Sector

Choice Scrip is a Blue Chip stock pick that is expected to give returns within a 6 months-1 year horizon. The recommendation is based on a fundamental analysis of the company.

The company recommended as Choice Scrip for this issue is a power company with strong performance even in the current dismal scenario for this sector. It also has a competitive presence in the retail segment.

In a scenario where most power companies are facing trouble in terms of coal linkages and delays in project implementation, readers would be surprised to see a power company being recommended in our Choice Scrip section. However, there are very good reasons why we are recommending CESC.

The first factor is that while the operational performance of the existing plants is good, two of its under-construction projects are also expected to start contributing from FY14 and FY15. Secondly, the losses of its retail business (Spencer’s Retail), which was a drag on the consolidated performance, are declining and the management expects a breakeven in FY14. The company earns a good return on equity (RoE) from its distribution business. Further, CESC owns a 69-acre land parcel at a prime location in Kolkata. It is already in the process of constructing a luxurious mall, which is expected to start revenue generation by FY14.

On the valuations front too, the scrip seems to be placed comfortably with its CMP discounting its standalone FY12 earnings by just 6x, which is very low as compared to that of 13x of NTPC, 18x of Tata Power and 8x of Torrent Power. The stock is quoting at a price to book value of less than 1, which is lower as compared to the industry average of 1.50x. Even the EV/MW of 5.10 crore is on the lower side as compared to that of 5.25 crore of NTPC. However, NTPC is only into generation while CESC is also into distribution, which helps the latter generate a better RoE.

CESC generates and distributes electricity in Kolkata and Howrah. With its four power plants, it has a capacity of generating 1225 MW. Going ahead, it plans to set up 7000 MW of fresh greenfield capacity in the next six years, which will take its total capacity to 8225 MW. Of this, a 600 MW project at Chandrapur is expected to be commissioned by May 2013. The 600 MW Haldia plant is also expected to be commissioned by September 2014. Coal linkages have been assured for both these projects. This provides increased revenue visibility going ahead. Further, any progress on the Retail FDI front will propel the scrip into other orbit altogether.

In retail (Spencer’s), it currently has 26 hyper stores, 15 super stores and 141 dailies, with 1.09 million square feet of space. The management seems confident about bringing down its losses and breaking even in FY14. An improvement in performance is evident from the fact that in FY12, the sales/square feet have increased to Rs 1060 from Rs 962 in FY11. The same store growth has also been good, and in FY12, the sales/square feet stood at Rs 1147/square feet against Rs 1000 in FY11. The store-level EBITDA stands at Rs 32/square feet per month, which is quite decent. Going ahead, it will increase its focus on private labels, which provide higher margins. In FY13, it plans to expand the retail space to 1.20 million square feet. We feel that the company may break even in FY14. CESC is constructing a mall at Park Street in Kolkata on about 3 acres of land, with a retail area of 0.4 million square feet and a parking area of 0.3 million square feet. Of course, it is too early to comment on the contribution from this segment on the bottomline front.

On a standalone basis, with an increased per unit charge of Rs 5.88/unit (Rs 4.73 in FY11), it posted a topline of Rs 4669 crore and a bottomline of Rs 565 crore as against Rs 4018 crore and Rs 488 crore respectively in FY11. It is this good revenue earning visibility that lends strength to our conviction in the stock. We recommend that you buy the CESC scrip at the current levels.