JM Financial
CESC (Buy)
Target: ₹792
CMP: ₹ 629.35
CESC is a fully integrated power utility with operations spanning the entire value chain: from coal mining to generation and distribution of power. CESC earned nearly 95 per cent of its FY20 profits from steady/low-risk regulated businesses in Kolkata and Haldia.
Except 300MW U-1 of the Dhariwal plant, CESC has LT PPAs for the rest of its 2.2GW generation capacity backed by an FSA with CIL. Its FY20 regulated profits were offset by losses in Dhariwal U-1 (FC under-recovery on lack of PPAs) and the Rajasthan distribution franchises (high T&D losses in Kota).
We find CESC inexpensive at c.5x FY22E P/E with potentially steady earnings growth on a) declining losses in Dhariwal led by ST PPA and merchant sales, b) steady growth in regulated profitability with limited earnings risk about 95 per cent of FY20 PAT) and c) moderating losses at franchises.
Our Base case TP is INR 792, while even in our Bear case, we find the implied P/E at 6.8x FY22E P/E which assumes no off-take from Dhariwal U-1, continued losses at franchisees and a regulatory hit in Kolkata operations.
Key risks to our call: a) A delay in signing PPAs and b) a greater regulatory hit in Kolkata vs. our bear case.