Uncertainty over retail, IT biz valuations stump Street

The CESC stock tanked 15% to Rs 829.80 on Thursday

The lower-than-expected March quarter results of CESC was a disappointment but the firm’s much-awaited business restructuring initiative, too, failed to impress the Street. Following these announcements on Thursday, the CESC stock tanked 15 per cent to Rs 829.80. What’s weighing on Street sentiment?

The firm with diverse interests is splitting into four firms, to handle its power distribution, power generation, retail and information technology/business process outsourcing businesses. Analysts feel, prima facie, the restructuring has been fair. The holding firm structure will also cease, which is a positive. 
 

Arun Gopalan vice-president, research and investments at Systematix Shares, said CESC has seen clear demerger of its businesses. The share distribution also seems fair and it will be beneficial for the firm and investors. After the restructuring, investors can choose the business segments they want to stay invested in.

Rupesh Sankhe, senior analyst, Reliance Securities, too, said this was the right option for CESC. Its power businesses will now start getting higher multiples as other businesses get demerged and concerns on investments from the power business being utilised to fund others will reduce. 

The Street reaction, Sankhe said, was due to uncertainty on what valuations retail arm Spencer’s and the IT business would fetch when they are listed separately on exchanges. Spencer’s has of late attained break-even, according to the management, who plan to expand in states where the profitability is high. While this bodes well and Gopalan feels Spencer’s will offer significant value unlocking on being demerged, Sankhe is not confident. He feels both Spencer’s Retail and Music World, which will be under the retail arm, to be de-merged and listed separately, have negative net worth.

Another reason for the stock to fall could be profit-booking. The CESC stock has gained 54 per cent since the start of 2017. Expectations on new power purchase agreements, a new distribution franchisee, hopes of a turnaround in retail, and demerger expectations had led to this favourable sentiments. Consequently, the stock had hit its 52-week high of Rs 1,001.85 on Wednesday.

Gopalan also adds that the fall could also have been fuelled by the Street not being able to understand why preference shares were issued even as the same has been done to facilitate merger of various retail businesses into one.

With respect to the company’s March quarter performance, the disappointment was due higher coal cost and benign power demand. Revenues at Rs 1,572 crore came lower than Bloomberg consensus estimates of Rs 1,655 crore. The bigger miss was on operating profit level as Ebitda at Rs 204 crore came way lower than consensus estimates of Rs 434 crore. The net profit at Rs 295 crore, which was ahead of estimates of Rs 211 crore, was helped by regulatory income of Rs 341 crore.