During Q1 FY10, one of Budge Budge’s 250MW unit faced outage thus resulting into lower than expected Plant Load Factor (PLF).
The plant remained idle for nearly 15 days in the quarter. As a result Budge Budge reported PLF of 97.6% against 102.5% in the corresponding period last year.
Also, Southern and New Cossipore operated at marginally lower PLF thus resulting into 92.6% PLF for the company during the quarter against 96.3% last year.
During the quarter CESC reported average realizations of Rs3.92/unit, lower by 4.3% y-o-y as the regulator has not yet approved its FY10 tariff order.
We expect the tariff order to be approved during this quarter, thus resulting into better average realizations from Q2 onwards. CESC’s power purchase during the quarter remained high, translating into 46% rise in power purchase cost.
Higher sale volume offset by lower realizations resulted into flat 0.5% revenue growth during Q1 FY10 to Rs8.2 billion.
CESC’s profit grew by 11.7% y-o-y to Rs1 billion against Rs940 million in the corresponding period last year, in line with our expectations.
This was due to better operational performance, as the company reduced the overheads by 59% y-o-y. However, this improvement was offset by 27% higher interest burden. The company also experienced higher tax outgo.
Cash generated from the annuity business of power generation is being burnt by the company’s retail venture. CESC has over the past few quarters been continuously infusing ~Rs200 million every month into its retail arm, Spencer’s Retail.
With the current economic slowdown, Spencer’s has been facing many headwinds. Spencer’s reported a loss of Rs1.8 billion during FY09, significantly higher than our estimate.
During the year the company has shut down many of its unviable stores, thus reducing the area under operations to just about 1mn sq ft across 244 stores.
We do not expect Spencer’s to break even anytime in the near future. Hence we factor negative Rs20/share contribution from Spencer’s into out SOTP based target price for CESC.
CESC has been operating at above 90% PLF for the past three years. This robust performance makes it a strong contender for a higher PBV multiple.
We value only its existing power business and Budge Budge III, which is expected to commission by end of Q2 FY10. At 1.9x FY11E book value, its power business is valued at Rs321/share.
However continuous cash infusion into its retail venture remains our biggest concern. We believe Spencer’s urgently requires cash from external sources to allow CESC to undertake its expansions smoothly.
We believe Spencer’s will face difficulty in raising funds from external sources, either through listing or a PE investment, as it is not expected to break even anytime soon. Thus implying CESC will have to continue to fund the venture.
The positive trigger could be if the management is able to turnaround the venture over the next 12 months.
Inorder to account for the cash generating and cash burning businesses we value each of them separately.
Our SOTP based target price of Rs302/share values the power division at Rs321/share and the retail venture at negative Rs19/share. With limited upside we continue to rate the stock as MARKET PERFORMER.