Stock Market Result Update on CESC for 2QFY2012

Stock Market Result Update on CESC for 2QFY2012 with a Buy recommendation and a Target Price of `379 (12 months).

For 2QFY2012, CESC posted a 26.5% yoy decline in its net profit on account of customers being billed under existing tariff, as WBERC’s tariff approval for FY2012 has been delayed. 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. However, the company would be recovering higher tariff (adjusting for additional fixed costs incurred) in the subsequent quarters with retrospective effect for 1HFY2012 after obtaining new orders. On the retail business front, per sq. ft. sales of Spencer’s increased to `1,066/month in 1HFY2012 (13% higher on a yoy basis). Store level EBITDA per sq. ft. stood at `31 for 1HFY2012. We maintain our Buy view on the stock.

OPM down by 801bp yoy to 19.8%: CESC registered 12.2% yoy growth in its standalone top line to `1,223cr, aided by 5% growth in sales volume and higher fuel cost, which is a pass-on. The company’s OPM fell by 801bp yoy to 19.8% because of lower realization due to delay in grant of tariff approval. The company had cost adjustment of `67cr included in other expenses during the quarter as against negative `217cr in 2QFY2011, resulting in operating profit declining by 20.1% to `242cr.

Valuation:  We expect CESC’s standalone top line and bottom line to grow at a CAGR of 10.3% and 4.0%, respectively, over FY2011–13E. At the CMP, the stock is trading at 6.3x FY2013E EPS and 0.6x FY2013E P/BV. We have assigned 0.85x FY2013E P/BV multiple to the company’s power business, considering its low RoE, and have arrived at a value of `357/share. We have valued the retail business and real estate business at `11/share each. We maintain our Buy view on the stock with an SOTP-based target price of `379.