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Emkay Global
CESC (Buy)
Target: ₹980
CMP: ₹851.50
CESC will likely continue to see stable earnings growth from its Kolkata license/Haldia and Noida Power, all of which are under the regulated regime. Dhariwal has turned positive on the back of incremental short-term sales and a lower debt profile.
CESC is focusing on creating a portfolio of distribution franchises (DF) over the next few years, which will act as the key growth driver for the company. Its vast experience in management of the distribution business in Kolkata and Noida will ensure good profitability.
The company has consistently increased its dividend from ₹10 in FY17 to ₹45 in FY21, clearly signalling management’s commitment to pay back to stakeholders during periods of low capital expenditure. At CMP, the dividend yield stands at 5.5 per cent.
Improvement/expansion of the DF business and a further improvement in Dhariwal’s performance remain key growth drivers. CESC offers a nice blend of a 5.5 per cent dividend yield and a 4 per cent EPS CAGR (FY21-FY24). Key risks include delay in DFs turning positive and significantly lower normative T&D for Kolkata license area.
We assume coverage on CESC with a ‘Buy’ rating and SoTP-based FY23 target price of ₹980. The Kolkata distribution and generation unit (standalone business) is valued at ₹648/share.
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