The possibility of a stake sale in the retail business, which has pulled down earnings, has created a positive sentiment.
First, Spencer’s merger with the parent saw a 37 per cent equity dilution for CESC. Then, operations at the retailer were a drag on earnings. In financial year 2010, CESC reported a consolidated revenue of Rs 4,200 crore, an operating profit of Rs 450 crore and a net earning of Rs 200 crore. It was the operating loss of Rs 300 crore in the retail business that shrunk the Rs 750-crore operating profit from the power business.
With the opening of the retail segment, the company will be in a position to sell a stake in Spencer’s, according to analysts. Overall, the power business has been contributing Rs 500-600 crore over the past three years and is expected to have Rs 700 crore annual cash inflows from the current financial year, as commissioning of plants in Budge Budge (West Bengal) adds to earnings. The Budge Budge-III plant, with a capacity of 250 megawatts, was commissioned in the March quarter and the full effect of its operations would be felt in the current financial year. It will allow CESC to benefit from sale of power at short-term rates during off-peak hours, say analysts.
At Spencer’s as well, the company has realigned its product strategy and will focus on high-margin products. Its sales productivity grew from Rs 660 a sq ft in 2008-09 to around Rs 811 a sq ft in FY2010.
The management also claims to have cut around Rs 100 crore costs through rational use of advertisements and other expenses. Moreover, CESC will add another 4,520 Mw capacity in the next five years, which will take its installed capacity to 5,745 Mw. Timely execution of these projects will act as a trigger for the stock’s re-rating.
However, at the moment, the positive sentiment emanates from the possibility of cashing in on the retail business.