CESC - Tariff increase remains a challenge in Kolkata; Chandrapur outperforms - ICICI Securities

CESC has reported better-than-expected earnings for its consolidated business in Q2FY21. Standalone/consolidated PAT came in at Rs2.3bn/Rs3.7bn (-17.1% / 1.6% YoY) mainly due to: 1) Kolkata distribution business being affected by lower volumes and inability to take a tariff increase, 2) combined loss of Rs80mn at DFs (including Malegaon) and 3) good performance of Haldia (PAT up 21% YoY) and Chandrapur (PAT of Rs230mn vs loss of Rs250mn in Q2FY20). There was fixed cost under recovery in Kolkata due to volume decline, likely to be partially addressed in coming quarters. Receivables have increased but CESC has not taken any provision till now, as collections have improved and the company is confident of recovering dues. Maintain BUY rating and target price of Rs851/share on CESC.

- Consolidated PAT higher but lower volumes affect Kolkata distribution: Standalone PAT came in at Rs2.3bn, down 17.1% YoY but consolidated PAT improved 1.6% YoY to Rs3.7bn. Standalone revenue/EBITDA was down 9.8%/18% YoY at Rs20.7bn/Rs4.2bn, while for consolidated business, it was up 0.6%/ down 3.3% at Rs31.1bn/Rs8.9bn. Kolkata distribution business was affected due to 10.9% decline in volumes, which resulted in increase in fixed cost/unit, but inability to take a tariff increase resulted in under recovery (CESC will request in APR but this is estimated to be lost income). During Q2FY21, standalone generation was down 10.1% YoY to 1,540MU. CESC's receivables increased to Rs32.7bn at H1FY21-end vs Rs18.8bn at FY20-end but it is slowly recovering. The company has provided its customers with an option to pay dues through installments without any interest on delays.

- Chandrapur and Haldia performed well: Haldia operated at a PLF of 91.3% (down 286bps YoY), still, its profit increased by 20.9% YoY to Rs1,100mn. Chandrapur operated at a PLF of 78% vs 42% YoY with 940MU sold in Q2FY21 and continued to be profitable with PAT of Rs230mn vs loss of Rs250mn in Q2FY20. Chandrapur's unit-2 is fully tied-up and continues to sell power under long-term PPAs at high PLFs, and repayment of debt is underway. PPA with Maharashtra for the supply of 185MW is extended up to 31st Jan'21. The plant's unit-2 also received favourable orders towards claims made in relation to change in law and other items.

- Distribution businesses performance affected, still better than expected: In Q2FY21, profit of Noida Power declined 54% YoY to Rs300mn due to reduction of RoE from 16% to 15% by the regulator from FY21 onwards while also previous year included regulatory asset liquidation. Rajasthan DFs turned profitable with PAT of Rs10mn vs a loss of Rs30mn in Q2FY20 due to improvement in collection and higher reduction in AT&C losses over the past year. Both demand and collections at DFs improved significantly from Q1FY21. CESC also took over the Malegaon DF in Mar'20 and its H1FY21 revenue / loss came in at Rs1,780mn/Rs400mn.

- Maintain BUY: We maintain our BUY rating on CESC with a target price of Rs851/share. The stock is currently trading at FY22E P/E of 6.4x and P/BV of 0.7x.

Shares of CESC LTD. was last trading in BSE at Rs.586.3 as compared to the previous close of Rs. 581.95. The total number of shares traded during the day was 2278 in over 202 trades.

The stock hit an intraday high of Rs. 588.8 and intraday low of 580.55. The net turnover during the day was Rs. 1334297.

Source : Equity Bulls

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