CESC is on track to demerge its businesses into four verticals – generation, distribution, retail, and other investments.
CESC is on track to demerge its businesses into four verticals – generation, distribution, retail, and other investments. We expect regulatory approvals to come through by Q3FY18 and issuance of shares to complete latest by Q1FY19. Outlook for each of the businesses is upbeat.
Post demerger, we expect valuation for the power business to improve significantly, considering its unique business profile of coal-to-wire ownership. Approaching the demerger, we expect market cap of the existing entity at Rs 216 billion in the bull case scenario (56% upside).
CESC is undergoing a corporate restructuring that would demerge it into four companies. Each shareholder will receive proportionate shares in the newly created entities. The demerger will take 6-8 months more to complete as CESC awaits approvals from Sebi, shareholders and NCLT. Although the scheme is effective from 1st Oct 2017, the new entities should be listed only by March 2018.
Each of the new entities has its own growth potential. In power distribution, CESC has won rights for the distribution franchise to operate in three cities (Kota, Bharatpur, and Bikaner) in Rajasthan. Similarly, in power generation, it expects a turnaround, driven by the Chandrapur IPP. It expects to sign an additional long-term PPA for 200MW this year and achieve PBT breakeven in FY18 vs loss of Rs 5 billion inFY17.
Further, CESC has pruned cash losses at Spencer Retail to Rs 0.7 billion in FY17 and it expects cash profits in FY18. The company is also confident of pickup in its IT (FSOL, 55% stake) and FMCG businesses.
We estimate, CESC’s consolidated earnings to grow at 16% pa over FY17-20. Although the demerger does not bring about earnings accretion, it would significantly improve valuation multiples for the core power business. This is because the power business funded the diversification initiatives under the earlier structure, which depressed valuation multiples. Considering growth opportunities such as distribution franchising, the business will arguably command a premium over a plain-vanilla generation business.
We expect market cap of the existing entity at `169 billion, 22% upside in the base case and at `216 billion in the bull case, 56% upside. ‘Buy’.