Stock Review: CESC

CESC's foray into hydel power, with commissioning of the `630crore 90-Mw Jarong Hydro Electricity project in Arunachal Pradesh (to be completed by 2015-16), is part of the company's strategy to expand geographically and diversify in the renewable energy segment. Currently, its entire 1,225 Mw capacity is coal-based, with the power business (including distribution) catering only to Kolkata.

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 `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 `8,700 crore equity required, CESC plans to tap the market for `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 longterm 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 `497, based on a sum-of-parts valuation method. The stock currently trades at a low valuation of 10 times and one-time 201112 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.

The company's foray into the generation business to lower risk in terms of fuel and geography augurs well