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CESC earnings are being usurped by loss-making subsidiaries like the Chandrapur plant
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The CESC Ltd stock gained 1.64% on BSE on Monday after the power utility company last week said it is in talks to sign a 150 megawatt (MW) power purchase agreement (PPA) for the troubled 600MW power plant at Chandrapur, Maharashtra. The plant is already supplying 100MW to a Tamil Nadu utility and is in an agreement to supply 170MW to Noida Power Co. Ltd. If the talks are fruitful, 70% of the Chandrapur power plant supply will be tied-up under PPAs.
That will be an achievement for CESC. The plant is losing money right now. Last fiscal year it lost ₹ 589 crore, as revenues were not even sufficient to meet finance costs. The loss is being charged to CESC’s consolidated accounts, impacting earnings. This is the primary reason why CESC’s consolidated profit fell below its stand-alone profit last fiscal year.
Once the plant begins to operate at three-fourths capacity, its losses are expected to be wiped out. Sanjiv Goenka, chairman of CESC told CNBC TV18 that together the three PPAs can reduce the Chandrapur plant’s losses by ₹ 600 crore—the first two PPAs by ₹ 400 crore and the third agreement by another ₹ 200 crore.
The total amount is roughly what the plant lost in the previous fiscal year. As this negative impact disappears from the consolidated accounts, CESC’s earnings can see a proportionate improvement. The Street is partly pricing in the impact.
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As CESC said it was pursuing the second PPA with Noida Power Co., the stock gained 42% in the last six months. HDFC Securities Ltd and Nomura have estimated the current fiscal year’s consolidated profit to rise 78%, mostly driven by reduction in losses at the Chandrapur plant. The estimates are based on the two PPAs the company announced earlier. They will change once CESC confirms signing of the third PPA.
Of course, CESC still has a long way to go. The Noida PPA is waiting for transmission corridor and is expected to begin power supply only in the second half of the fiscal year. Also, the latest agreement once signed will have to get the regulator’s approval which means the Chandrapur plant may reflect the full benefits of PPAs only in the next fiscal year.
That should not bother investors much unless the implementation is delayed inordinately. What is more important is signing of a PPA. It will not only take the plant a step closer to break-even but will also bring visibility to CESC earnings, which otherwise are being usurped by loss-making subsidiaries like the Chandrapur plant.
The writer does not own shares in the above-mentioned companies.
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