CESC has demerged operations into 4 different business segments, namely generation, distribution, retail and IT & Mall. While shareholding of the new entities would be similar to CESC’s, the demerger is a relatively logical split and one that seems fair to investors. It maintains intrinsic value and potentially offers shareholders a more specific investment/play and some value/ multiple enhancement. To that extent, the -15% stock reaction was a surprise, and likely reaction to expectations/ recent strong performance (+50%, 3m) rather than the transaction per se.
Q4FY17 itself was little ahead of expectations. While we expect some leveling off given recent performance.
CESC has demerged generation undertaking to Haldia Energy (HEL), retail undertaking to RP-SG Retail (RP-SG) and IT undertaking to RP-SG Business Process Services (RP-SG BPS). Equity shares of HEL, RP-SG and RP-SG BPS are proposed to be listed on the exchanges. For every 10 shares of CESC currently, 5 shares of generation of Rs 10 each, 5 shares of distribution of Rs 10 each, 6 shares of retail of Rs 5 each and 2 shares of Venture business of Rs 10 each will be allotted to shareholders.
Though total sales of Q4FY17 fell 1%, revenue at Rs 15.7 billion grew 6.7% y-o-y, indicating better realisations y-o-y. In spite of better revenue, EBIDTA fell 57% y-o-y owing to the 52% surge in fuel and power purchase costs. CESC reported PAT of Rs 2.95 billion (Rs 2.93 billion last year), driven by Rs 3.4 billion of regulated income. FY17 witnessed sub-optimal PLFs. Spencer’s average sales increased from Rs 1,452/sq ft per month to Rs 1,576/sqft per month in FY17.
Restructuring of business segments will reposition CESC in a manner where it will enhance focus on each business segment. Further, a strategy that CESC seems to be pursuing is higher exposure to low capital intensive distribution businesses, which could enable it to meet its capex and FCF generation requirements over next few years. We maintain ‘Buy’ with a revised TP of Rs 910.