Any successful listed company must work to consistently create long term value for itsshareholders. Sometimes that full value often does not come into play remainingobscured because of the unlisted subsidiaries. In other words the aggregate value of allthe unlisted firms howsoever growing or profitable does not reflect in that of thelisted entity. This happens often enough throughout the corporate world especially forconglomerates that have just a few listed entities along with many other unlistedcompanies.
In such situations fiduciaries often play an active role in unlocking the 'hidden'value. More often than not it is done by demerger and subsequent listing of the majorsubsidiaries.
It was with this objective in mind that the Directors of your Company decided in theBoard meeting held on 18 May 2017 to approve a restructuring plan to demerge all the largebusinesses into four separate entities :
1) Power generation which will include all thermal wind solar and renewable.
2) Power distribution which will include the Kolkata license Noida Power and thedistribution franchisee business.
3) Retail which will largely comprise Spencer.
4) Other businesses which will include the business process outsourcing entity underFirstsource Solutions as well as Quest.
The rationale is to unlock hidden corporate value create greater currency for theshareholders provide more flexibility to each company in accessing capital and allow eachof these to prepare and execute its focused strategy for sustained growth.
This is not a dilution. It is a demerger. As per the proposal for every ten CESCshares held a shareholder will get five shares of the power generation arm five of thedistribution company three of the retail firm and two of the entity which will hold theother businesses. All four will be listed entities. The appointed date of demerger is 1October 2017 subject to approval of the National Company Law Tribunal.
With this I expect that each of the demerged and listed entities will be able to growunfettered and that the sum of shareholder values of each of these will be greater thanwhat it is for CESC today.
Now for a brief synopsis of how your Company fared in 2016-17 it was exactly as I hadwritten in my letter to you last year. The business hummed along without any upheavalsdownturns nor negative surprises.
Here are the key financial results of CESC as a standalone entity prepared under thenew accounting standards (Ind-AS) :
During 2016-17 your Company's revenue from operations increased by over 6%versus the previous year to reach Rs.7220 crore. Total income (including other income)also grew by over 6% to Rs.7366 crore.
After considering regulatory income profit before taxes (PBT) increased by over5% to Rs.1101 crore.
Profit after taxes (PAT) was Rs.863 crore i.e. an increase of 2.1% over theprevious year.
Total comprehensive income increased marginally to Rs.824 crore.
There have been operational successes that have driven this performance. Let me share afew.
Thermal power generation : Budge Budge had excellent plant load factor (PLF) of82.4% with a plant availability factor (PAF) of 85.2%. Even as the Company reducedgeneration from the older Titagarh and Southern stations the overall combinedavailability of the three stations was 89.4%. The 2x300 MW plant at Haldia achieved a PLFof 76.7% and with a plant availability factor exceeding 95%. These are significantly abovethe national norms. In addition your Company has two other operational thermal powerprojects with a combined capacity of 640 MW the 2x300 MW thermal power facility atChandrapur (Maharashtra) and a 40 MW power plant using shale and washery rejects atAsansol (West Bengal).
Power distribution in the Kolkata and Howrah licensed area : Your Company metthe needs of over 3.1 million customers and added some 96000 new customers in 2016-17.The average time taken to provide a new connection ranges between one and two days.Adoption of various e-services and digital solutions which had begun two years agoincreased significantly in the course of the year.
Wind and solar : There are four wind projects. These are at Dangri (Rajasthan)Surendranagar (Gujarat) Nipaniya (Madhya Pradesh) and Rojmal (Gujarat). The first twohave been profitable since inception; the third is expected to be profitable in 201718;and the fourth is still being commissioned in phases. Your Company's solar power venturelocated in Ramnathapuram (Tamil Nadu) was profitable in its first full year of operationin 2016-17.
Distribution franchisees : CESC won three such tenders. All three are inRajasthan at Kota Bharatpur and Bikaner. The first two franchisees became operational in2016-17 and Bikaner in May 2017. These currently have a combined customer base of 4 lakhand an annual energy consumption of around 1900 million units (MUs). This translates to arevenue of approximately Rs.1250 crore a year.
Retail : Spencer's Retail Limited (SRL) is the flagship company of CESC inretail with 124 stores including 39 hypermarkets across India under the Spencer's brandname. In 2016-17 it registered a same store sales growth of almost 9% with an averagerevenue per square foot of '1576 per month. SRL has started its online sales channelwww.spencers.in. Au Bon Pain Cafe India Limited is a subsidiary of SRL and caters to the'fast casual restaurants' segment. In 2016-17 it opened eight new cafes and expanded itsoperations in Delhi. The number of cafes in operation at the end of the year was 29 withpresence in Bengaluru Kolkata and Delhi. Omnipresent Retail India Private Limited is a100% subsidiary of SRL and has developed and owns the e-commerce platform which isdeployed by SRL for its customers to order online and get their food and grocery productsdelivered at their doorstep.
Business process management (BPM) services : Through a subsidiary your Companybought a majority stake in Firstsource Solutions Limited (FSL) in 2012-13. FSL providesBPM services in customer management transaction processing and collections for Fortune500 and FTSE 100 companies in the US and the UK as well as corporations in India. Itoperates in the spaces of healthcare telecom and media banking financial services andinsurance and the mortgage sectors. With an employee strength of 25871 and 48 servicefacilities in the USA the UK Philippines India and Sri Lanka FSL has a marquee clientbase that any such company would be proud of having.
Real estate : In November 2013 Quest Properties India Limited (QPIL) a whollyowned subsidiary of your Company launched Kolkata's first upscale shopping mall theQuest. The mall has completed its third full year of operation and has been a majorsuccess with annual footfall of about 12 million and gross sale of around '580 crore byall retailers. At present QPIL is implementing a residential project in Haldia to caterto the housing requirement of some large corporate houses and individual residents.
So as you can see this is a rich menu of businesses across different verticals. Notsurprisingly therefore your Directors unanimously opted for the demerger proposal on 18May 2017 to unlock substantial value not only for the companies but also far moreimportant for you the shareholders.
Let us hope that the demergers occur as expected and according to the management's timeline.
I am optimistic about India's growth. Yes it has taken a percentage point hit for2016-17 versus the previous year perhaps on account of demonetisation. That negativeeffect has clearly worn off and unless some terrible unforeseen events hit us I expectIndia to grow at anywhere between 7.5% and 7.7% in 2017-18. That will continue to make usthe fastest growing nation among all developed countries and major emerging markets.
Faster GDP growth good governance continuation of policy reforms and benefits of theGoods and Services Tax (GST) coupled with the positive effects of your Company'sdemerger ought to result in even better results in 2017-18. I certainly believe that tobe the case.
|Thank you for your support. || |
|With best wishes ||Yours sincerely |
| ||Sanjiv Goenka |
|18 May 2017 ||Chairman |