CESC: Power-packed agenda

The Chandrapur acquisition is reasonably priced and will speed up growth.

CESC’s acquisition of a controlling 50.1 per cent stake in Dhariwal Infrastructure for Rs 200 crore will allow it to expand capacity faster because much of the groundwork for the 600-Mw project at Chandrapur in Maharashtra has been completed.

Analysts feel that an equity value of Rs 200 crore (before infusion of the money) seems to be reasonable; the company gets access to assets worth around Rs 100 crore. Also, since it’s possible that half the power generated can be sold anywhere in the country in the form of merchant sales, there could be a considerable upside given the chronic power shortages.

Industry watchers believe a sustainable merchant tariff could be somewhere around Rs 3 per kwh. However, the debt component of the project cost, of just under Rs 2,000 crore, needs to be tied up as does some portion of the equity component of Rs 840 crore. At the project cost of Rs 2,800 crore, the cost per megawatt works out to Rs 4.6 crore and analysts expect a return on equity of 20-25 per cent, though it will depend on the kind of tariffs that distribution companies are willing to pay.

The coal for the plant will be sourced from South Eastern Coalfields and with the land already acquired, the plant should be up and running in another four years. Meanwhile, in the June 2009 quarter, CESC’s revenues were up 3 per cent to Rs 809 crore with realisations coming off by 1.6 per cent year-on-year. However, a sharp fall in other expenses, down 55 per cent year-on-year, resulted in a smart 800 basis points rise in operating margins to nearly 23.5 per cent. While CESC’s power business is attractive, the retail venture, Spencer’s, has been a drag on the company’s bottom line with close to Rs 600 crore having been invested so far. Analysts value the retail business at around Rs 150 crore and the CESC stock at around Rs 400 on a sum-of-the- parts basis.