Here's why experts are bullish on CESC

The standalone net profit of CESC has grown just 2% in the second quarter of 2015-16, compared to the same period last year or on a year-on-year (y-o-y) basis. But analysts are getting bullish on this counter because the results were better than what the Street expected.

CESC’s regulated power business is doing well, especially after the commissioning of a new power plant at Haldia. Average realisation is up 7% in the third quarter y-o-y. This is because the new Haldia plant could meet 37% of the power demand and, thereby, reduce external power purchases.

The losses arising out of the company’s Chandrapur project continue to be a major drag on its performance. However, because the plant’s coal supply has been restored, it is expected to restart power production and start supplies to the Tamil Nadu State Electricity Board, in fourth quarter. The company’s BPO subsidiary, First Source, is doing well now and is expected to report further improvement in revenues and margin in 2015-16.
CESC’s retail subsidiary, Spencer’s, was another major drag on its financials, but the situation is expected to change in the near future. Spencer’s continues to show improvement at the operational level due to its new strategy of store consolidation, increased focus on profitable ‘hyper store’ formats, rationalisation of operating expenditure and increased sales of in-house products.

Its average sales grew 8% y-o-y in the second quarter and it is expected to break-even at the Ebitda (earnings before interest, tax, depreciation and amortisation) level in the fourth quarter. Since a majority of CESC earnings come from its regulated power businesses, with a 15.5% return on equity, the business is generating cash flows to the tune of Rs 500 crore per annum.

With peak capex requirement already behind, CESC is expected to generate substantial free cash flows in the coming years, provided the management does not venture into non-core business once again, due to this high cash generation possibility. According to the consensus analyst estimate, CESC’s net profit is expected to quadruple between 2014-15 and 2016-17.

The stock is also at quoting at a reasonable level because of the massive under performance in the past one year, mostly triggered by the cancellation of captive mines (Sarisatolli coal block in West Bengal). CESC has retained this mine in the new auctions.

The company is also not debt laden (debt-equity ratio stands at just 1.4) like many other Indian power producers.

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