CESC: Analysts see benefits even in part demerger, stock price recovers

Though split of power segment is still awaited, separate listing of retail and other businesses will help unlock value

The long-awaited value unlocking in CESC is finally taking place and bringing joy to investors as the stock price has started to recover. Since multiple businesses under a single umbrella resulted in holding company discount (when a firm owns various businesses under subsidiaries, the market typically values the latter at a discount), and thus impacted overall valuations, CESC’s decision on separate listing of all businesses should result in value unlocking for investors.

After the company’s announcement of restructuring last year, the stock had seen highs in January 2018, but it trended lower thereafter.

With the process getting delayed given CESC awaited approval from the West Bengal Electricity Regulatory Commission (WBERC) regarding the split of its power generation and distribution businesses, the stock corrected by about a third to hit 52-week lows in early October.

With CESC announcing October 31, 2018, as the record date for the split of businesses in three verticals — power, retail, and other ventures including malls and IT services — the stock is likely to gain, say analysts. Though earlier target prices of analysts, factoring in four listed entities, may now get tweaked, the fresh target prices still indicate a substantial upside. Consider this: The target prices of Motilal Oswal Securities, Kotak Institutional Equities and Reliance Securities, ranging from Rs 1,077-1,180, indicates a potential upside of 19-30 per cent for the stock, trading at Rs 903.60.

CESC still stands to benefit, given the key objective of the business re-structuring was a reduction in dependence of the retail business on capital infusion from the power business, say analysts at Kotak. 

Further, the improved capacity utilisation at its Chandrapur (thermal power station) plant helps the company earn normalised returns, while the restructuring means better operating metrics for the retail business, say analysts. The company’s retail business’ (Spencer) operation had already turned positive at operating levels during FY18, and is likely to see increased profits here on.

CESC has a strong business model in power distribution and generation, which generates double-digit return on equity, say analysts at Motilal Oswal Securities. Though the distribution business has a more steady growth profile as well as opportunities to win new circles under the franchise, the under-utilisation at its Dhariwal thermal power plant is a slight negative. 

Though losses at Dhariwal are reducing, analysts expect the power business split happening over time and thus driving valuations further. Analysts feel that since there is precedence, from earlier, on demerger of generation and distribution business, the case for demerger of CESC’s power business remains strong.