CESC: Ambitious plans
Generation business’ strategy to de-risk in terms of fuel and geography augurs well.
Despite being long gestation, capital intensive and geographically risky in nature, hydel power has good prospects in India, especially in the North-East and Arunachal Pradesh, which together have a potential to produce more than 74,000 Mw.
The company plans to invest Rs 35,000 crore within the next decade to take its total capacity to 7,200 Mw (6,500 Mw thermal, 500 Mw hydel and 200 Mw solar). Of the total Rs 8,700 crore equity required, CESC plans to tap the market for Rs 1,200 crore, while the rest will be through internal accruals, stake sale in subsidiaries and special purpose vehicles to private equity players.
CESC provides low financial risk (debt to equity ratio of around 0.5 times) and fuel risk (substantial access to coal). The company’s upcoming thermal-based projects (600 Mw each at Chandrapur and Haldia, to be commissioned by 2013-14) are progressing well while long-term projects (about 4,640 Mw) are on time.
The retail business, under Spencer’s Retail, has also been reporting operating profit per square feet at the store level since June, while overall losses are expected to fall.
Analysts place the company among the top five power picks. They expect a 33 per cent upside in the stock, valued at an average Rs 497, based on a sum-of-parts valuation method. The stock currently trades at a low valuation of 10 times and one-time 2011-12 estimated earnings and book value, respectively.
Acquisition opportunities in power generation, winning distribution franchise in other states, monetisation of real estate and stake sale in the retail business will act as further upside triggers. The only major risk is delay in execution, given its ambitious power plans, a majority of which are at an expansion stage.