Buy CESC, target Rs 900: IIFL
Buy CESC at a price target of Rs 900.
By ETMarkets.com |
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IIFL has a buy call on CESC with a target price of Rs 900.
The current market price of CESC is Rs 734.95.
Time period given by the brokerage is one year when CESC price can reach the defined target.
Investment rationale by the brokerage-
Well placed to capitalise on the DF opportunity: CESC is among the select few companies with rich experience in distribution and is, consequently, well placed to benefit from the growing trend of appointing a distribution franchisee (DF) by SEBs. In the last 2.5 years, CESC has won 4 circles (3 in Rajasthan and 1 in Maharashtra) under the DF model; a few more are likely in the next 18-24 months. Our visit to Kota suggested that by investing only Rs2bn, CESC has lowered T&D losses by 8-10 per cent on an average, via stringent vigilance. As such, consumers seem happy with the improved quality, as infra capacity/quality is also augmented. The losses are set to fall to 15 per cent in the next 2-3 years, with 3 circles reporting PAT by FY21ii. While profit contribution is relatively low at 3.3 per cent, the resultant FY21ii RoE & RoIC are attractive at 17 per cent & 32 per cent.
Outlook on other businesses steady: The outlook on each of CESC’s other operating segments is steady, with: i) Kolkata registering a low-risk PAT growth of 9 per cent pa; ii) the Haldia (600MW) IPP earning PAT of Rs2.6bn pa; and iii) steady performance of the renewable portfolio. Sustained loss (Rs1bn) at the Chandrapur IPP is the pain point, but not alarming, given the annual operating cash flows (Rs11-13bn pa) and strong balance sheet (net D/E 1.3x). Its consolidated PAT should grow 12 per cent pa through to FY21ii in the base case.
The current market price of CESC is Rs 734.95.
Time period given by the brokerage is one year when CESC price can reach the defined target.
Investment rationale by the brokerage-
Well placed to capitalise on the DF opportunity: CESC is among the select few companies with rich experience in distribution and is, consequently, well placed to benefit from the growing trend of appointing a distribution franchisee (DF) by SEBs. In the last 2.5 years, CESC has won 4 circles (3 in Rajasthan and 1 in Maharashtra) under the DF model; a few more are likely in the next 18-24 months. Our visit to Kota suggested that by investing only Rs2bn, CESC has lowered T&D losses by 8-10 per cent on an average, via stringent vigilance. As such, consumers seem happy with the improved quality, as infra capacity/quality is also augmented. The losses are set to fall to 15 per cent in the next 2-3 years, with 3 circles reporting PAT by FY21ii. While profit contribution is relatively low at 3.3 per cent, the resultant FY21ii RoE & RoIC are attractive at 17 per cent & 32 per cent.
Outlook on other businesses steady: The outlook on each of CESC’s other operating segments is steady, with: i) Kolkata registering a low-risk PAT growth of 9 per cent pa; ii) the Haldia (600MW) IPP earning PAT of Rs2.6bn pa; and iii) steady performance of the renewable portfolio. Sustained loss (Rs1bn) at the Chandrapur IPP is the pain point, but not alarming, given the annual operating cash flows (Rs11-13bn pa) and strong balance sheet (net D/E 1.3x). Its consolidated PAT should grow 12 per cent pa through to FY21ii in the base case.
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The utilisation of cash holds the key; BUY: CESC’s consolidated earnings growth over FY19-21ii appears moderate, but has a low risk and offers relatively high visibility, relative to other private IPPs. The stock, post the demerger, has traded inexpensively, near its BV. The utilisation of cash on books holds the key; higher payout/buybacks will be positive.Too busy to trade in stocks? Invest in Mutual Funds with ET Money!
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