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Photo: Mint
Photo: Mint

Covid-19, cyclone Amphan batter CESC, subsidiaries hold out hope

  • With the government easing restrictions and industry, commercial activities resuming, the mainstay Kolkata electricity distribution business can improve in the current quarter

Covid-19 and cyclone Amphan hit CESC Ltd’s performance in the June quarter. Standalone revenue, which largely reflects the Kolkata electricity distribution business, slumped 32.8% as the cyclone aggravated the demand slump. Sales volumes dropped 30.7%.

The sharp fall in volumes impacted incentive income, pulling down the standalone net earnings by 38% from the year ago quarter.

The company fared better on the consolidated level. Thanks to a new power off-take, contract utilisation levels at the long troubled Dhariwal power plant at Chandrapur, Maharashtra, improved. This helped the power plant report a profit compared to a loss in the year ago quarter.

Other subsidiaries, notably Crescent Power and electricity distribution entities in Noida and Rajasthan, reported decent performance amid the lockdown and hit to revenue (bill) collections.

While profits at Crescent Power increased, losses at Rajasthan distribution circles reduced. Consequently, the profit fall at the consolidated level was contained a 13.4%.

“Lockdown affected not only the distribution franchise (DF) businesses, but also incentive income in the regulated business though DF losses were lower than expected," analysts at ICICI Securities Ltd said in a note.

With the government easing restrictions and industry, commercial activities resuming, the mainstay Kolkata electricity distribution business can improve in the current quarter (Q2 FY21).

But the recovery can be slow. Demand from the commercial sector (shops, offices and other public places) remains weak as consumers restrict their outings. “Subdued power demand with the onset of covid-19 has impacted volumes in the distribution and generation businesses. Accordingly, profitability would be impacted in the near term amid lower efficiency gains and the lack of new tariff order approvals," analysts at Motilal Oswal Financial Services Ltd said in a note.

Still, large regulated businesses (generation and distribution) which assure minimum returns holds CESC in good stead.

Moreover, Dhariwal power plant’s electricity off-take agreement with Maharashtra has been extended till October. Further electricity distribution businesses outside Kolkata are slowly turning around.

Together, these factors can aid consolidated earnings, mitigating the impact of demand softness. “CESC’s existing distribution business has high RoE (return on equity) and delivers steady growth. Generation assets generate healthy FCF (free cash flow). The stock trades at an attractive ~6x FY22E P/E, even as earnings visibility at Dhariwal improves, and factoring the tightening of norms at Haldia (power plant) and S/A (standalone business)," said brokerage firm Motilal Oswal. PE is price to earnings multiple.

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