There is some spark left in CESC

CESC's net profit at Rs 152 crore grew 5% year-on-year in December quarter

CESC has seen its share price almost doubled in past one year from lows of Rs 421.70 in last February, or rise over 25 per cent in the last one month, to Rs 856.20. Improving prospects in the business, and of-late expectations of restructuring and value-unlocking have led to this rally. The power production and distribution major, which also has interests in retailing, is said to be considering a demerger of its business segments. Although clarity on value-unlocking and demerger is yet to come, improving performance across business segments is encouraging.

In the distribution segment, for instance, CESC's net profit at Rs 152 crore grew five per cent year-on-year in December quarter. Although a bit below estimates, the prospects are looking better. CESC being an integrated player involved in generation (1,125 MW), transmission & distribution of power in Kolkata owns two coal-fired plants of 600 MW each at Chandrapur and Haldia. The company has recently won some distribution circles in Rajasthan, which is a positive. For its Chandrapur thermal plant the power purchase agreements (PPAs) are being ramped up. Chandrapur has commenced sales of 34 MW to Noida from November 2016, which will likely be ramped up to 170 MW by April 2017. With about 287 MW worth of PPAs in place, the management is under discussion with the Noida Power for another 200 MW power supply agreement. This proposal is likely to be finalised in about six months, as per analysts, and any positive outcome may boost revenue and production visibility to the tune of 83 per cent. Haldia facility has already operated at 76.7 per cent capacity during the year and contributed to CESC's distribution business.

Importantly, CESC's retail arm Spencer's has seen strong improvement during the December quarter, with store sales improving 15 per cent year-on-year led by 14.5 per cent growth in same store sales (sales generated from stores in operation in a certain period, say quarter, year, etc). Store level EBITDA improved 36 per cent year-on-year to Rs 121 per square feet per month. Analysts at Kotak Institutional Equities estimate the retail business to have made an EBITDA of Rs 4.9 crore in December quarter, against average quarterly loss of Rs 6.6 crore in the preceding four quarters. A sustainable turnaround will improve CESC's financials as well as stock valuation.

While CESC's earnings are being upgraded, the stock is now close to the one-year target price of brokerages. Analysts at Emkay Global say that business restructuring will be value accretive and post-December quarter results have revised earnings estimates upward by 6.2 per cent and 7.2 per cent for FY17 and FY18, respectively. But, their target price of Rs 894 and those of Elara, Edelweiss and Kotak's ranging Rs 790-935 indicate limited upside for now. Investors could await correction for a good entry point.