CESC Ltd reported steady performance for the March quarter. Revenue at the stand-alone level, which constitutes the electricity distribution business in Kolkata, increased 4% from a year ago. Earnings before interest, taxes, depreciation and amortization (Ebitda) grew 6%. Net profit rose 1.6% to Rs.248 crore.
Most analysts were forecasting Ebitda and net profit to drop. The company benefited from low fuel costs and electricity trading. “We estimate that a mix of own generation versus power traded turned in favour of the latter as indicated from lower fuel costs year-on-year and higher cost of power purchased during the quarter,” ICICI Securities Ltd said in a note.
The performance helped the stock close with gains on Thursday. Despite the run-up from February lows, the stock valuations are inexpensive at eight times one-year forward earnings estimates. While low valuations reflect poor investor interest in the sector, two things are clouding the earnings outlook for CESC.
One is the lack of sufficient power purchasing agreements for the 600 megawatts (MW) Chandrapur thermal power plant. The second is the continuing loss at the retail business. Both these issues are negatively impacting CESC's consolidated performance.
For the year ended 31 March, CESC reported a net profit of Rs.707 crore, slightly higher than a year ago. Of this, CESC was able to retain a profit of Rs.366 crore at the consolidated level, roughly half of what it recorded at the standalone level.
The retail venture recorded an operating loss (profit before interest and tax) of Rs.96 crore in 2015-16. The Chandrapur power project is estimated to be seeing a cost under-recovery of around Rs.90 crore on a quarterly basis due to insufficient customers, Emkay Global Financial Services Ltd said in an earnings preview note.
Nevertheless, there has been some improvement. Operating loss at the retail business dropped 16% from a year ago. A fuel-supply agreement was signed for the Chandrapur project. It is pursuing a supply agreement for 170 MW with an Uttar Pradesh utility. These developments helped improve the standalone to consolidated net profit conversion ratio from 29% in 2014-15 to around 52% last fiscal.
While the improvement is encouraging, progress is slow; and it is not yet clear when the retail business will begin to contribute to consolidated earnings.
Similarly, even if the Chandrapur plant manages to clinch a power purchasing agreement with the Uttar Pradesh utility, it will still need to find a buyer for 300MW.
Overall, while the Kolkata utility business is seeing steady performance, the other businesses are yet to achieve their potential. Hence, the low valuation of the stock.