Assign Outperformer Rating on CESC - Cholamandalam Securities

Revenues were slightly above estimates

For Q2FY12 CESC reported revenues of Rs.12,410 mn vs Rs. 11,050 mn, an increase of 12.31% (YoY) and was up by 4.90% (QoQ). Revenues were marginally higher than estimates on account of increase in realizations. In Q2FY12 CESC sold 2.3 bn units vs 2.2 bn units in Q2FY11 an increase of ~5%. CESC during Q2FY12 had a realization per unit of Rs.5.34 vs Rs.4.97 in Q2FY11 an increase of 7.48%YoY.

Recovery in Retail Business

CESC retail business' (Spencer's) half yearly average sales increased from Rs.940/Sq.ft in H1FY11 to Rs.1,066/Sqft in H1FY12. Same Stores Sales (SSS) increased from Rs.981/Sq.ft in H1FY11 to Rs.1,146/Sq.ft in H1FY12 registering a growth of 18.8%. Spencer's has made a store level EBIDTA of Rs.31/Sq.ft per month in H1FY12.

PLF remains stable while technical losses drop

CESC in Q2FY12 had recorded PLF (Plant Load Factor) of about 91.8% vs 90.2% in Q2FY11, excluding new Cossipore generating station. PLF saw a increase of about 1.6% YoY in Q2FY12. Budge Budge station during Q2FY12 reported a PLF of about 93.8% vs 86.9% in Q2FY11 an increase of about 7.94%. The Transmission and Distribution (T&D) losses during Q2FY12 was at 12.8% vs 13.6% in Q2FY11 registering a decline of 80bps. Earlier, the management indicated T&D losses would be ~13% in FY12 and FY13.

Outlook & Recommendation:

CESC has a stable distribution business and has a proven track record. It is expanding its capacity by about 1,200 MW; this additional capacity would drive its growth from FY14. The stock has seen some negative reaction post the Spencer's buy out. A breakeven of Spencer's would result in re-rating for the stock. We expect CESC to report EPS of Rs.41.18 in FY12 and Rs.43.29 in FY13 respectively. The stock at the CMP of Rs. 265.5 trades at about 6.44X and 6.13X its FY12E and FY13E EPS respectively. We assign a P/E of 8X to its FY12E EPS to arrive at a target price of Rs.330. The stock has an upside potential of about 24.3%. We assign an 'Outperformer' rating to the stock.

Source : Equity Bulls

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