Buy This Power Sector Stock 29% Upside Says HDFC Securities
Investment rationale for CESC according to HDFC Securities
- CESC’s consolidated PAT in Q3FY22 remained flat at INR3.4bn (+0.6% YoY) as higher earnings across the Dhariwal project (from high merchant rates in Q3FY22) were offset by increased losses in the distribution franchisee (DF) business (a loss of INR100mn vs profit of INR70mn YoY), given subdued power demand and delays in loss recovery. Dhariwal continued to perform strongly, benefitting from rising merchant tariffs, while standalone profit after tax (PAT) growth remained flat despite the delayed West Bengal Electricity Regulatory Commission (WBERC) tariff order. The Dhariwal project has emerged as L1 for 210 MW bid in a medium-term tender floated by the Railway Energy Management Company (REMCL). CESC’s bid for a 100% stake in the Chandigarh discom is likely to receive a letter of intent (LoI) in Q4FY22. We now expect CESC’s franchisee division to attain profitability only in FY23 while reporting a loss of INR211mn in FY22 (vs the earlier estimate of INR112mn PAT).
- CESC’s wholly-owned subsidiary Dhariwal Infrastructure has emerged as an L1 with a tariff of INR4.1/unit for a 210-MW capacity. REMCL floated a 1,500-MW medium-term tender for three years against which it received bids only for 600 MW. We have not yet factored these developments into our financials as we wait for the awarding of LoI. Further, its Case IV PPA with Maharashtra discoms for the supply of 185 MW has been extended to 31 March 2022.
Buy With A Target Price of INR 119
HDFC Securities has said in its research report that “We have marginally revised our consolidated earnings estimates downward by 1.9% and 1.2% for FY22E and FY23E respectively to factor in the delay in loss recovery in the DF business in Rajasthan. We expect this nosiness to turn profitable in FY23, with a PAT of INR388mn in FY24. On a consolidated basis, CESC is valued at an attractive P/BV of 0.9x and PE of 7.4x for FY24. A high dividend yield of ~5-6% is in line with investor expectations. Hence, we retain BUY with a revised TP of INR119 (vs INR120).”