F

CESC LTD BUY

May 6th, 2010
I
C.M.P: Target Price:
Rs.392.40 Rs.471.00
SYNOPSIS
CESC, incorporated in 1978 as Calcutta Electric R
Supply Corporation (India), is engaged in power
1 Year Comparative Graph generation and distribution in state of West
Bengal. S
CESC is part of the RPG Group which has a
strong presence in the fields of power
generation, transmission network, cable T
manufacturing and consultancy in the
operation and maintenance of power plants. The
group has strategic tie-ups with a number of C
Fortune 500 companies.
The company operates has three pulverized fuel
CESC LTD BSE SENSEX
(pf) fired stations namely Budge, Southern and
Titagarh. It has customer base of 2.3 million.
A
CESC has very strong relationships with
Stock Data
Sector Power
multilateral institutions like IFC and ADB who
have extended loans of about US$ 169 Million
L
for several projects.
Face Value(Rs) Rs.10.00
The Company is integrating backwards to coal
52 wk. High/Low (Rs.) Rs.452.00/245.00 mining and has acquired the necessary rights
L
for a coal mine in West Bengal.
Volume (2 wk. Avg.) 33346 The company owns two subsidiaries namely
BSE Code 500084 CESC Properties running business under real
estate and Spencer’s Retail (SRL), which is
Market Cap(Rs in Mn) 49442.40 engaged in running retail stores.
Share Holding Pattern CESC is planning to set up 1000 MW greenfield R
thermal power plant. This plant will be located
at Jharkhand and is in process of negotiations
for the same. E
Net Sales and PAT of the company are expected
to grow at a CAGR of 9% and 8% over 2009 to
2012E respectively. S
E
Financials
(Rs in Mn) FY09 FY10 FY11E FY12E A
Net Sales 31030.00 33510.00 36861.00 40547.10
V.S.R. Sastry
Equity Research Desk
R
EBIDTA 7810.00 8980.00 9737.04 10675.13
[email protected]

Dr. V.V.L.N. Sastry Ph.D.

PAT 4100.00 4330.00 4714.60 5156.50 C
Chief Research Officer EPS 32.54 34.37 37.42 40.92
[email protected] H
P/E 7.86 11.42 10.49 9.59

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Peer Group Comparison
Name of the Market
company CMP(Rs.) Cap.(Rs.Mn.) EPS(Rs.) P/E(x) P/BV(x) Dividend (%)

CESC 392.40 49442.40 34.37 11.42 1.29 40.00

NTPC 203.15 167671.52 10.70 19.00 2.84 36.00

Areva T&D 269.45 6440.27 6.03 44.67 7.44 90.00

JSW Energy 123.80 20328.48 - - - -

Investment Highlights

Q4 FY10 Results Update

CESC LTD disclosed results for the quarter ended March 2010. Net sales for the
quarter moved up 2% to Rs.7700.00 million as compared to Rs. 7540.00 million
during the corresponding quarter last year. During the quarter, PAT is increased to
Rs.1000.00 million from Rs.940.00 million in previous year same quarter. The
Basic EPS of the company stood at Rs.7.94 for the quarter ended March 2010.

Quarterly Results – Standalone (Rs in mn)

As At Mar-10 Mar-09 %Change

Net sales 7700.00 7540.00 2%

PAT 1000.00 940.00 6%

Basic EPS 7.94 7.46 6%

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Basic EPS of the company stood at Rs.7.94

EPC Project

CESC Ltd has informed that Dhariwal Infrastructure Ltd., a CESC subsidiary,
has issued a letter of intent to Punj Lloyd Ltd. for an EPC project for a value of Rs.
1023 crores in connection with its 2x300 MW Thermal Power Project undertaken
at Tadali village, near Chandrapur in the State of Maharashtra.

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 Acquision with DIPL

CESC Ltd has entered into an agreement pursuant to which an interest has been
acquired in Dhariwal Infrastructure Private Limited (DIPL) which is engaged in
setting up a 600 MW thermal power generating station at Chandrapur in the State
of Maharashtra. Consequent to this acquisition, DIPL has become CESC's
subsidiary.

Break Up of Expenditure

Company Profile

CESC, incorporated in 1978 as Calcutta Electric Supply Corporation (India), is

engaged in power generation and distribution in state of West Bengal.In the year
1983 the company commissioned the Titagarh generating station, with a capacity of
240 MW, has partly solved the power shortage in Calcutta (now known as Kolkata).
On 1 January, 1987, the name of the company was changed to CESC. Being part of
RPG Group, the company made Calcutta a free of load shedding and brought in new
power connections, fault-free supply, and quick response to local faults, complaint-
free billing and swift redressal of customer grievances.

The RPG Group has business interest in tyres, cables, power transmission,
telecommunications, pharmaceuticals, specialty chemicals, retail and consumer

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marketing, hotel and tourism, entertainment and agri-business.The company set up
135 MW Southern generation station and started supply from September 1990. The
second unit started its supply in May 1991. CESC decided to add 500MW to its
existing capacities. For this project, the company took financial support from
international lending agencies like the Asian Development Bank at Manila and the
IFC at Washington.

The company operates has three pulverized fuel (pf) fired stations namely Budge
Budge, Southern and Titagarh. It has customer base of 2.3 million. The company has
received ISO 14000 and ISO 9000 certifications for its quality management. CESC
has a total generation capacity of 975 MW.The company owns two subsidiaries
namely CESC Properties running business under real estate and Spencer’s Retail
(SRL), which is engaged in running retail stores.

Subsidiary Companies

Spencer's Retail Limited (SRL)

Music World Retail Limited (MWRL),
Au Bon Pain Cafe India Limited (ABPCIL)
CESC Properties Limited
Metromark Green Commodities Private Limited
Haldia Energy Limited

Upcoming Projects

Location Capacity Type Commissioning

Chandrapur, Maharashtra 600 MW Thermal 2012

Haldia Phase I, West Bengal 600 MW Thermal 2012

Dumka, Jharkahand 1000 MW Thermal 2013

Haldia Phase II, West Bengal 1400 MW Thermal 2013

Dhenkanal, Orissa 1000 MW Thermal 2013

Pirpainti, Bihar 2000 MW Thermal 2013

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Financials Results
12 Months Ended Profit & Loss Account (Standalone)
Value(Rs.in million) FY09A FY10A FY11E FY12E

12m 12m 12m 12m

Description

Net Sales 31030.00 33510.00 36861.00 40547.10

Other Income 970.00 840.00 890.40 943.82

Total Income 32000.00 34350.00 37751.40 41490.92

Expenditure -24190.00 -25370.00 -28014.36 -30815.80

Operating Profit 7810.00 8980.00 9737.04 10675.13

Interest -1410.00 -1780.00 -1958.00 -2153.80

Gross Profit 6400.00 7200.00 7779.04 8521.33

Depreciation -1750.00 -1980.00 -2098.80 -2308.68

Profit before Tax 4650.00 5220.00 5680.24 6212.65

Tax -550.00 -890.00 -965.64 -1056.15

Profit after Tax 4100.00 4330.00 4714.60 5156.50

Equity Capital 1260.00 1260.00 1260.00 1260.00

Reserves 32670.00 37000.00 41714.60 46871.10

Face Value(Rs) 10.00 10.00 10.00 10.00

EPS 32.54 34.37 37.42 40.92

*A=Actual, *E=Estimated

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Quarterly Ended Profit & Loss Account (Standalone)
Value(Rs.in million) 30-Sep-09 31-Dec-09 31-Mar-10 30-Jun-10

3m(A) 3m(A) 3m(A) 3m(E)

Description

Net Sales 9640.00 7970.00 7700.00 8316.00

Other Income 210.00 260.00 200.00 210.00

Total Income 9850.00 8230.00 7900.00 8526.00

Expenditure -7390.00 -6090.00 -5700.00 -6153.84

Operating Profit 2460.00 2140.00 2200.00 2372.16

Interest -460.00 -420.00 -470.00 -498.20

Gross Profit 2000.00 1720.00 1730.00 1873.96

Depreciation -490.00 -490.00 -520.00 -540.80

Profit before Tax 1510.00 1230.00 1210.00 1333.16

Tax -250.00 -210.00 -210.00 -226.64

Profit after Tax 1260.00 1020.00 1000.00 1106.52

Equity Capital 1260.00 1260.00 1260.00 1260.00

Face Value(Rs) 10.00 10.00 10.00 10.00

EPS 10.00 8.10 7.94 8.78

*A=Actual, *E=Estimated

Key Ratios
Particulars FY09 FY10 FY11E FY12E
EPS (Rs.) 32.54 34.37 37.42 40.92
EBITDA Margin (%) 25.17% 26.80% 26.42% 26.33%
PAT Margin (%) 13.21% 12.92% 12.79% 12.72%
P/E Ratio (x) 7.86 11.42 10.49 9.59
ROE (%) 12.08% 11.32% 10.97% 10.71%
ROCE (%) 8.72% 9.05% 8.88% 8.84%
EV/EBITDA (x) 4.12 5.51 5.08 4.63
Debt-Equity Ratio 1.05 1.02 1.00 0.97
Book Value (Rs.) 269.29 303.65 341.07 381.99
P/BV 0.95 1.29 1.15 1.03

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Charts:

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9
Outlook and Conclusion

At the current market price of Rs.392.40, the stock is trading at 10.49 x FY11E
and 9.59 x FY12E respectively.

Price to Book Value of the stock is expected to be at 1.15 x and 1.03x

respectively for FY11E and FY12E.

Earning per share (EPS) of the company for the earnings for FY11E and FY12E
is seen at Rs.37.42 and Rs.40.92 respectively.

Net Sales and PAT of the company are expected to grow at a CAGR of 9% and
8% over 2009 to 2012E respectively.

The company operates has three pulverized fuel (pf) fired stations namely
Budge, Southern and Titagarh. It has customer base of 2.3 million.

CESC has very strong relationships with multilateral institutions like IFC and
ADB who have extended loans of about US$ 169 Million for several projects.

CESC is planning to set up 1000 MW greenfield thermal power plant. This plant
will be located at Jharkhand and is in process of negotiations for the same.

On the basis of EV/EBITDA, the stock trades at 5.08 x for FY11E and 4.63 x for
FY12E.

We expect that the company will keep its growth story in the coming quarters
also. We recommend ‘BUY’ in this particular scrip with a target price of
Rs.471.00 for Medium to Long term investment.

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Industry Overview

Sector structure

As the Indian economy continues to surge ahead, its power sector has been
expanding concurrently to support the growth rate. The demand for power is growing
exponentially and the scope of growth of this sector is immense. India's total installed
capacity of electricity generation has expanded from 105,045.96 MW at the end of
2001–02 to 150,323.41 MW at the end of June 2009. In fact, India ranks sixth
globally in terms of total electricity generation.
Source-wise, thermal power plants account for an overwhelming 63.9 per cent of the
total installed capacity, producing 96,044.24 MW. Hydel power plants come next with
an installed capacity of 36,916.76 MW, accounting for 24.6 per cent of the total
installed electricity generation capacity.

Besides thermal and hydel power, renewable energy sources contribute 8.8 per cent
to the total power generation in the country producing 13,242.41 MW. Nuclear energy
makes up the balance 2.7 per cent contributing 4,120 MW.

Growth Potential

India's energy sector will require an investment of around US$ 120 billion-US$ 150
billion over the next five years. The government has revised its target of power
capacity addition to 90,000 MW in the 11th Five-Year-Plan (2007-12), up by 11,423
MW from the earlier estimate of 78,577 MW to sustain the growth momentum of the
economy.

Further, according to the Planning Commission estimates, renewable energy (RE)

projects worth US$ 16.50 billion, for the generation of 15,000 MW power, would come
up in the 11th Plan. Moreover, the government has earmarked a total capital subsidy
of US$ 6.88 billion for providing electricity connections and for the distribution of
infrastructure to rural households.

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Nuclear Power Generation

Subsequent to the Indo-US nuclear deal and India getting clearance from the Nuclear
Suppliers Group (NSG), nuclear power generation is likely to provide an opportunity
of US$ 10 billion in the next five years, according to a JP Morgan estimate. India will
now also be partnering several countries for nuclear fuel technology projects.

• As a part of the Eleventh Five-Year-Plan, Nuclear Power Corporation of India Ltd

(NPCIL) will be commencing work on 12 reactors. NPCIL will be developing a
series of nuclear reactors with capacities between 1,000 MW to 1,650 MW at 5-6
sites along the country's coastline.
• GE Hitachi Nuclear Energy has tied up with NPCIL and Bharat Heavy Electricals
Ltd (BHEL) for building multiple GEH-designed nuclear reactors.
• Sweden sees a market of around US$2 billion in India for back-end operations
like nuclear waste management.
• NTPC Ltd and NPCIL would jointly invest around US$ 3.09 billion in the next
eight years to set up nuclear power plants in the country.
• BHEL plans five joint ventures in the nuclear sector and locomotive
manufacturing. The company has decided to invest US$ 204.4 million in a
castings and forgings joint venture.
• French-major, Areva is planning a large scale nuclear reactor forgings facility in
India with Bharat Forge and will invest over US$ 408.79 million in two shell
companies.

Investments

According to an ASSOCHAM study during January-June 2008, investment

announcements totaling to US$ 40.84 billion were made in the power sector.

• Reliance Power Transmission will invest nearly US$ 348.66 million in setting up
a 1,500-km transmission line.
• Hyderabad-based Greenko Group plans to invest about US$ 300 million in three
years for setting up about 15 clean energy projects in the country.

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 • Japan Bank of International Cooperation (JBIC) has agreed to lend US$ 153.1
million to L&T-MHI Boilers Private Ltd (LTMB) for manufacturing and sale of
thermal power generation facilities in India.
• Private power equipment makers such as Alstom and Toshiba will set up their
power manufacturing base in India in the next three-four months.
• The National Thermal Power Corporation (NTPC) has signed a Memorandum of
Understanding (MoU) with the Chhattisgarh government to set up a 4000-MW
power project in the state. The project cost has been estimated at US$ 4.09
billion.
• Sterlite Industries, the country’s largest private sector power producer, is
planning to invest US$ 4.1 billion over the next year to create additional capacity
of 4,500 MW.
• Power Finance Corporation (PFC) will raise US$ 4.75 billion by the end of this
fiscal for financing various power projects.
• The Haryana government has drawn up an investment plan of US$ 377.48
million for the current financial year to strengthen the power distribution system
in the state.

Government Initiatives

The government has taken several proactive steps to open the sector for the private
players and realize the full potential of the country in the power sector.

• Introduction of the Electricity Act 2003 and the notification of the National
Electricity and Tariff policies.
• Constitution of Independent State Electricity Regulatory Commissions in the
states.
• Allowing the private sector to set up coal, gas or liquid-based thermal projects,
hydel projects and wind or solar projects of any size.
• Allowing foreign equity participation up to 100 per cent in the power sector under
the automatic route.

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 • Providing income tax holiday for a block of 10 years in the first 15 years of
operation and waiver of capital goods' import duties on mega power projects
(above 1,000 MW generation capacity).
• The government has also taken up some ambitious programmes like the Ultra
Mega Power Projects (UMPP), Rajiv Gandhi Grameen Vidhyutikaran Yojana
(RGGVY), Accelerated Rural Electrification Programme and the goal of Power for
All by 2012 among others to rapidly increase the installed capacity.

Looking ahead

A recent study by consultancy major McKinsey estimates India's power demand to

increase from the present 120 gigawatt (GW) to 315 GW–335 GW by 2017, if India
continues to grow at an average of 8 per cent over the next 10 years. This would
require a five- to ten-fold rise in power production, entailing investments worth US$
600 billion over the next ten years.

To feed its rapidly growing economy, India is planning to get an additional 60,000 MW
of electricity from various hydro-power projects by the end of 2025. The government
targets providing electricity for all by 2012. Under the Rajiv Gandhi Grameen
Vidyutikaran Yojna, the Ministry of Power plans to electrify 120,000 villages in the
current Five Year Plan (2007–12).

________________ ____ _________________________

Disclaimer:
This document prepared by our research analysts does not constitute an offer or solicitation
for the purchase or sale of any financial instrument or as an official confirmation of any
transaction. The information contained herein is from publicly available data or other
sources believed to be reliable but do not represent that it is accurate or complete and it
should not be relied on as such. Firstcall India Equity Advisors Pvt. Ltd. or any of it’s
affiliates shall not be in any way responsible for any loss or damage that may arise to any
person from any inadvertent error in the information contained in this report. This document
is provide for assistance only and is not intended to be and must not alone be taken as the
basis for an investment decision.

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