Govt decision on retail FDI improves sentiment on the stock, as induction of a foreign partner may brighten prospects.
CESC’s stock spurted and outperformed the Sensex after the announcement of foreign direct investment (FDI) in multi-brand retail last Thursday. This generated a spark to the otherwise underperforming stock, which has lagged broader markets since the start of 2010.
While the following sessions (post Thursday) were volatile due to the opposition to FDI in retail from various quarters, the stock continues to outperform—it jumped almost 5 per cent to close at Rs 262.60 on Wednesday versus half a percentage gain in broader markets.
The FDI move has given the company’s 95 per cent subsidiary, Spencer’s, a new lifeline. It has been guzzling the earnings of the parent’s power business, keeping overall performance under stress. With a foreign partner, the company would be able to run its retail business more efficiently and profitably, besides helping expansion.
| CESC: STABLE OUTLOOK | |||
| Standalone (in Rs crore) | FY11 | FY12E | FY13E |
| Sales | 3,940 | 4,550 | 5,066 |
| % chg y-o-y | 20.0 | 15.5 | 11.3 |
| Operating profit | 1,001 | 1,092 | 1,144 |
| % chg y-o-y | 33.5 | 9.1 | 4.7 |
| Net profit | 490 | 483 | 515 |
| % chg y-o-y | 13.0 | -1.4 | 6.6 |
| EPS (Rs ) | 39.0 | 38.5 | 41.0 |
| % chg y-o-y | 13.0 | -1.4 | 6.6 |
| E: Estimates Source: Analysts reports | |||
| SPENCER’S DECLINING LOSSES | |||
| In Rs crore | FY09 | FY10 | FY11 |
| Sales | 1,067 | 894 | 997 |
| % chg y-o-y | 32.4 | -16.2 | 11.5 |
| Operating loss | -302 | -225 | -169 |
| Net loss | -254 | -215 | -172 |
| Source: Kotak Institutional Equities | |||
If a foreign partner comes in, Spencer’s will no longer be dependent on the parent for funds. This would help CESC invest more in the power business, which has its own project pipeline.
All this has led to improved sentiment towards the stock. Says Shankar K, analyst, Edelweiss Securities, “The overhang due to diversion of power earnings to fund the retail losses will recede.” Analysts add, if the FDI proposal gets delayed it could have some impact on sentiment, nevertheless, the improving operational performance of its retail business is positive, which is why the longer-term prospects of the company look better.
RETAIL LIFELINE
Sanjiv Goenka, chairman, CESC, has expressed his intention to induct a foreign partner for both back-end and front-end operations of Spencer’s. The company might float a separate company for back-end infrastructure like cold storage, which in turn would induct one or more strategic partners.
CESC was investing Rs 150-190 crore a year to expand the footprint of Spencer’s. However, the retail business became profitable only in June 2010, at the store level. Says Murtuza Arsiwalla, analyst, Kotak Institutional Equities, “The Union cabinet’s approval of FDI in multi-brand retail has come as a lifeline for CESC’s cash-strapped retail business, as it has been a drag on core power earnings. This will allow cash infusion for acquiring the scale necessary for profitability.”
With a foreign partner, the prospects for Spencer’s, which has been witnessing improved operational performance (due to efficiencies, closure of losing stores) in recent quarters, will brighten further. The management expects Spencer’s to break even at the net level before the end of 2012-13. Goenka expects Spencer’s to clock 20 per cent sales growth in 2011-12 and to manage 25-30 per cent in 2012-13.
LESS POWER DEBT
The company is in the process of doubling its existing 1,225-Mw generation capacity by 2013-14, with an outlay of roughly Rs 6,000 crore; about 30 per cent of this has already been spent on projects, namely Chandrapur and Haldia (600 Mw each). There will be less requirement of debt to fund the expansion plan, as the savings diverted to the retail business could now be ploughed back into the power business (85 per cent of its fair value).
“Retail development is sentimentally positive, as the company has a large pipeline of under development/construction power projects (3,000 Mw),” says Shankar of Edelweiss. Besides, there is no concern due to the poor financial health of state electricity boards (since the entire capacity is tied-up through power purchase agreements) and fuel risk (operational captive blocks).
In the near term, the company would be recovering higher rates in subsequent quarters, with retrospective effect for the first half of 2011-12 after obtaining new orders from the West Bengal State Electricity Regulatory Commission, which was delayed and affected its performance in the first half of 2011-12.
ANALYSTS RE-RATE STOCK
With overhang on the retail business reducing, analysts feel the stock is set for re-rating. They expect a 50 per cent upside on it, based on an average fair value estimate of Rs 407. A further upside of about Rs 50 per share (additional 12 per cent) is estimated if the retail deal (stake sale)happens at one-times enterprise value to sales.
