CESC to acquire 23.18% equity shares in associate company NPCL. CESC board of directors at its meeting on Sunday has approved a proposal for acquisition of 23.18% of the equity share capital of Noida Power Company Limited (NPCL), an associate company of CESC. The cost of acquisition is at Rs325 per NPCL share and after the proposed transaction, CESC’s direct and indirect holding in NPCL will be 72.73%.

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CESC Q3 FY21 consolidated PAT increased strongly by 21.3% yoy to Rs 324 cr as performance of key subsidiaries was robust with a 11.8% yoy growth in profit of Haldia Energy, PAT of Rs 28 cr (vs loss of Rs 15 cr in Q3 FY20) for Dhariwal Infrastructure and profit of Rs 6 cr (vs loss of Rs 18 cr in Q3 FY20 due to plant shutdown) for Crescent Power.

The Rajasthan distribution franchisee (DF) reported profit of Rs 21 cr versus marginal profit of Rs 1 cr in Q2 FY21 but profit of Noida Power declined by 21% yoy to Rs 23 cr due to lower volumes. Q3 FY21 standalone PAT at Rs 182 cr (up 3.4% yoy) was also marginally ahead of estimates due to tax benefit partially offset by slightly lower than expected power sales volume at 2157 mn units (up 1.8% yoy).

The management indicated that power demand in Kolkata has normalised to pre-COVID-19 levels and has guided for an 11% yoy growth in standalone PAT in Q4 FY21 led by higher incentive income, cost rationalisation and slight volume growth. Moreover, Dhariwal Infrastructure is expected to beat FY2021E profit guidance as it has already achieved full year PAT guidance of Rs 75 cr in 9M FY21.

Turnaround of subsidiaries, board approval to consolidate power distribution business (ex-Kolkata and adjoining areas) under one arm and decision to increase stake in Noida Power to 72.73% (from 49.6%) would act as key rating triggers for CESC. Also, the stock is available at an attractive valuation of 0.7x FY2023E P/BV and offers a healthy dividend yield of 6-7%. Hence, Sharekhan maintains their Buy rating on CESC with an unchanged SoTP-based price target of Rs 825.

Key positives:

Dhariwal Infrastructure reported PAT of Rs 28 cr vs a net loss of Rs 15 cr in Q3 FY20
Profitability of Haldia Energy improved as PAT rose by 11.8% yoy to Rs 90 cr
CESC declared a dividend of Rs 45/share (vs Rs 20/share in FY20), which implies a dividend yield of 6.6%

Key negatives:

Standalone power sales volume at 2157 mn units (up 1.8% yoy but 2% below estimates).

Key Risks:

Delay in signing of long-term PPA for the Chandrapur plant and sustained losses in the distribution franchisee for an extended period.