1QFY2012 Result Update | Power

August 4, 2011

CESC
Performance Highlights
Y/E March (` cr) Net sales Operating profit OPM (%) Net profit
Source: Company, Angel Research

ACCUMULATE
CMP Target Price
% chg qoq 1QFY2011 % chg yoy

`336 `383
12 Months

1QFY2012

4QFY2011

Investment Period
Stock Info Sector Market Cap (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code

1,183 267 22.6 111

875 246 28.1 112

35.2 8.5 (554) (0.9)

1,096 256 23.4 110

7.9 4.3 (79) 0.9

Power 4,232 0.9 433/257 25463 10 17,693 5,332 CESC.BO CESC@IN

For 1QFY2012, CESC delivered a flat performance on the bottom-line front. Lower-than-estimated net profit was on account of increased fixed costs. However, the company would be recovering the additional fixed costs in the ensuing quarters after obtaining the WBERC order containing tariff adjustments. On the retail front, the per sq. ft. sales of Spencers increased to `1,042 in June 2011 (5.5% higher than `987 in March 2011). More importantly, the store level EBITDA/sq. ft. stood higher at `37 during the quarter. We maintain our Accumulate recommendation on the stock. OPM down by 79bp yoy to 22.6%: CESC registered 7.9% yoy growth in its standalone top line to `1,183cr, primarily due to higher fuel cost, which is a pass-on. However, power sale volume declined by 2% to 2.232 MU. The companys OPM stood at 22.6%, down 79bp yoy, on account of higher fuel costs. The company uses a mix of domestic (40%) and imported coal (60%). The cost of imported coal was higher by ~20% during the quarter. The companys net profit was impacted by higher interest and depreciation costs. Valuation: We expect CESCs standalone top line and bottom line to grow at a CAGR of 9.6% and 7.3%, respectively, over FY201113E. At the CMP, the stock is trading at 7.5x FY2013E EPS and 0.8x FY2013E P/BV. We have assigned 0.85x FY2013E P/BV multiple to the companys power business, considering its lower RoE and higher cash component and have arrived at a value of `361/share. We have valued the retail business and real estate business at `11 and `11 per share, respectively. The stock has appreciated considerably in the last fortnight after the in-principle approval by the committee of secretaries raised hopes of legislation for 51% FDI in multi-brand retail. We maintain our Accumulate view on the stock with an SOTP-based target price of `383.

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 52.5 24.1 17.9 5.5

Abs. (%) Sensex CESC

3m

1yr

3yr 21.4 (4.0)

(4.2) (2.9) 11.9 (15.2)

Key financials
Y/E March (` cr) Net sales % chg Adj. net profit % chg OPM (%) EPS (`) P/E (x) P/BV (x) RoE (%) RoCE (%) EV/Sales (x) EV/EBITDA (x)
Source: Company, Angel Research

FY2010

FY2011

FY2012E

FY2013E

3,355 8.6 432 5.8 22.3 34.5 9.8 1.1 12.0 7.5 1.8 8.2

4,011 19.6 488 12.9 25.0 38.9 8.7 1.0 12.0 9.3 1.6 6.3

4,453 11.0 532 8.9 24.5 42.3 8.0 0.9 11.6 9.4 1.4 5.8

4,817 8.2 562 5.8 23.8 44.8 7.5 0.8 11.1 9.1 1.2 5.0

V Srinivasan
022-39357800 Ext 6831 [email protected]

Please refer to important disclosures at the end of this report

CESC | 1QFY2012 Result Update

Exhibit 1: 1QFY2012 performance

Y/E March (` cr) Net Sales Fuel cost (% of Sales) Power Purchase cost (% of Sales) Staff Costs (% of Sales) Other Expenses (% of Sales) Total Expenditure Operating Profit OPM Interest Depreciation Other Income PBT (incl. Extr. Items) (% of Sales) Provision for Taxation (% of PBT) Reported PAT PATM EPS (`)
Source: Company, Angel Research

1QFY2012

4QFY2011

% Chg qoq

1QFY2011 % Chg yoy

1,183 459 39 191 16 112 9 154 13 916 267 22.6 70 71 13 139 12 28 20 111 9 8.8

875 286 33 140 16 94 11 109 12 629 246 28.1 58 67 20 141 16 29 21 112 13 8.9

35.2 60.5 36.4 19.1 41.3 45.6 8.5 (554)bp 20.7 6.0 (35.0) (1.4) (3.4) (0.9)

1,096 376 34 184 17 97 9 183 17 840 256 23.4 67 67 15 137 13 27 20 110 10 8.7

7.9 22.1 3.8 15.5 (15.8) 9.0 4.3 (79)bp 4.5 6.0 (13.3) 1.5 3.7 0.9 0.9

Exhibit 2: 1QFY2012 Actual vs. Angel estimates

(` cr) Net sales Operating profit OPM (%) Net profit
Source: Company, Angel Research

Actual
1,183 267 22.6 111

Estimates
1,191 274 23.0 125

Variation (%)
(0.6) (2.5) (43)bp (11.5)

August 4, 2011

CESC | 1QFY2012 Result Update

Exhibit 3: Financial performance

1,400 1,200 1,000 1096 1105 28.8 23.4 110 155 110 112 939 26.9 875 28.1 25 22.6 20 111 15 1QFY11 2QFY11 3QFY11 Net Profit 4QFY11 OPM (%) 1QFY12 1183 35 30

(` cr)

800 600 400 200 0

Net Revenue
Source: Company, Angel Research

Operational highlights
CESC registered 7.9% yoy growth in its standalone top line to `1,183cr, aided by a 10.3% increase in realisation to `5.23 per unit. The increase in realisation was on account of the pass-on of higher power and fuel costs. Power sales declined by 2% yoy to 2,232MU. Higher fuel cost during the quarter was due to the increase in coal costs internationally. CESC posted a 79bp decline in OPM to 22.6% due to higher fuel costs and other expenses.

Power generation volumes down 2% yoy

During 1QFY2012, power generation was lower by 2% yoy to 2,395MU and power purchase declined by 5.6% yoy to 422MU. The Budge-Budge plant reported PLF of 94.9% during the quarter as against 93.5% recorded in 1QFY2011. Power generation at the Budge-Budge plant stood at 1,555MU as against 1,532MU in 1QFY2011. Titagarh and Southern Plants reported PLFs of 90.4% (96.3%) and 95.3% (103%), respectively.

Exhibit 4: Plant-wise generation volumes

1,800 1,500 1,200 1,532 1,439 1,555

1,411 1,057

(MU)

900 600 300 0 1QFY11 2QFY11 Budge-Budge 3QFY11 Titagarh 4QFY11 Southern 1QFY12 505 304 505 297 420 232 436 256 474 281

Source: Company, Angel Research

August 4, 2011

CESC | 1QFY2012 Result Update

Exhibit 5: Plant-wise operational performance (1QFY2012)

PLF (%) Plant Budge-Budge^ Titagarh Southern
Source: Company, Angel Research

Generation (MU) 1QFY12 1,555 474 281 1QFY11 1,532 505 304

1QFY12 94.9 90.4 95.3

1QFY11 93.5 96.3 103

Investment arguments
Power business being scaled up
CESC's huge expansion plans are expected to propel its growth going ahead. The company has 4,440MW of projects under the construction and development stages. CESCs 600MW Chandrapur plant has received all the clearances and is under construction. The EPC and BTG orders for the Chandrapur plant have been placed with Punj Lloyd and Shanghai Electric Group. The project is expected to be operational in 2QFY2014. CESC has acquired all the necessary clearances for the 600MW Haldia Phase-I project as well. Water clearance and fuel linkages are also in place for the project. Currently, CESC enjoys assured returns from its operations in the Kolkata-licensed area. Going ahead, the company is expected to have a mix of PPA and merchant-based projects.

Exhibit 6: Projects under construction/development

Location Chandrapur Purpose PPA (50%) and Merchant (50%) PPA (75%) and Merchant (25%) 25% to Orissa at regulated tariff, balance not yet decided 25% to Jharkhand at regulated tariff, balance not yet decided Not yet decided Size (MW) 600 Cost (` cr) 2,900 Exp comm. date 2QFY2014 Remarks Fuel linkage received; EPC and BTG orders have been placed; Construction has begun Required clearances, including environmental clearances, have been obtained; Ministry of coal has awarded coal linkages; Financial closure achieved; Final approval received from WBERC; ICB has been completed Land acquisition has been completed; All major approvals have been received; Coal allocation is being pursued 110mt coal block allocated; MoU signed with Jharkhand government; Land acquisition process initiated. The company has acquired prospecting license for mine Land acquired; Fuel linkage awaited; TOR received

Haldia Phase-1

600

3,300

FY2015

Dhenkanal, Orissa

1,320

6,500

FY2016

Dumka, Jharkhand

600

3,200

FY2016

Balagarh Total
Source: Company, Angel Research

1,320 4,440

6,800 22,700

FY2017

August 4, 2011

CESC | 1QFY2012 Result Update

Leading private sector player with a proven track record

CESC is one of the oldest utility companies in India. The company has been generating and distributing power in Kolkata since 1897. CESC is an integrated power player with presence in power generation, distribution and coal mining. The company has a customer base of about 2.5mn customers in Kolkata and Howrah. CESCs overall PLF has remained healthy (more than 90%) over the last few years, barring FY2011 when PLF stood at 85.2% (largely due to low PLF in the newly commissioned Budge-Budge plant). The companys efficiency has improved in the distribution front as well, with AT&C losses reducing to 13.3% in FY2010 from 18.8% in FY2003. CESC, which is involved in distribution only in Kolkata, is now looking at entering into power distribution in other cities as well. Further, the company has tied up with SP Global Solutions, a subsidiary of Singapore Power, to improve the reliability of its distribution system, which could aid further reduction in losses.

Retail business showing signs of recovery

Currently, Spencers has 208 outlets spread across the country and operates 21 hyper stores and 14 super stores with total area of 505,000 sq. ft. and 95,000 sq. ft., respectively. The companys sales/sq. ft. has improved considerably in the last few quarters and stood at `1,042 in June 2011. As a result, EBITDA/sq. ft. has turned positive at the store level. During 1QFY2012, EBITDA/sq. ft. stood at `37.

Tapping the unexplored land bank

CESC Properties, a 100% subsidiary of CESC, plans to develop a 0.4mn sq. ft. shopping mall in Central Kolkata. Going ahead, CESC Properties also plans to monetise its 35-acre land at Mulajore.

Outlook and valuation

At the CMP, the stock is trading at 7.5x FY2013E EPS and at 0.8x FY2013E P/BV of its power business. We have assigned 0.85x FY2013E P/BV multiple to the companys power business, considering its lower RoE and higher cash component and have arrived at a value of `361/share. We have valued Spencer's on mcap/sales basis at 0.1x FY2013E sales, which is at a significant discount to its peers. We have valued CESCs mall in Central Kolkata and land in Mulajore (35 acres) on NAV basis and have arrived at a price of `11/share for its real estate business. We maintain our Accumulate view on the stock with an SOTP-based target price of `383.

August 4, 2011

CESC | 1QFY2012 Result Update

Exhibit 7: SOTP valuation

Business portfolio Existing power plants Retail Spencer's (94% stake) Real estate CESC Properties Total
Source: Company, Angel Research

Methodology 0.85x FY2013E BV 0.1x FY2013E Sales NAV

Value/Share (`) 361 11 11 383

Exhibit 8: Change in estimates

(` cr) Earlier Net sales Operating exp. Operating profit Depreciation Interest PBT Tax PAT 4,457 3,302 1,155 277 312 673 134 539 FY12E Revised 4,453 3,361 1,092 278 307 664 132 532 Variation (%) (0.1) 1.8 (5.5) 0.6 -1.9 (1.3) (1.3) (1.3) Earlier 4,821 3,558 1,264 299 372 699 139 559 FY13E Revised 4,817 3,672 1,145 283 344 702 140 562 Variation (%) (0.1) 3.2 (9.4) -5.3 (7.8) 0.5 0.5 0.5

Source: Company, Angel Research

Exhibit 9: Recommendation summary

Company CESC GIPCL NTPC Reco. Acc. Buy Acc. CMP (`) 336 80 177 Tgt. price (`) 383 94 202 Upside (%) 14.2 17.5 14.2 FY2013E P/BV (x) 0.8 0.8 1.8 FY2013E P/E (x) 7.5 7.2 13.1 FY2011-13E EPS CAGR (%) 7.3 1.5 9.2 FY2013E RoCE (%) 9.1 11.0 10.1 FY2013E RoE (%) 11.1 11.0 14.0

Source: Company, Angel Research

Exhibit 10: One-year forward P/BV band

800 650
Price 0.75x 1.15x 1.55x 1.95x

(Share Price `)

500 350 200 50 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11

Source: Company, Angel Research

August 4, 2011

CESC | 1QFY2012 Result Update

Profit & loss statement (Standalone)

Y/E March (` cr) Total operating income % chg Total Expenditure Net Raw Materials Other Mfg costs Personnel EBITDA % chg (% of Net Sales) Depreciation& Amortisation EBIT % chg (% of Net Sales) Interest & other Charges Other Income (% of PBT) Share in profit of Associates Recurring PBT % chg Extraordinary Expense/(Inc.) PBT (reported) Tax (% of PBT) PAT (reported) ADJ. PAT % chg (% of Net Sales) Basic EPS (`) Fully Diluted EPS (`) % chg FY08
2,829 11.8 2,255 1,089 926 240 574 (4.8) 20.3 168 406 (8.9) 14.3 182 179 45.7 392 15.8 (11) 403 48 11.8 355 344 15.4 12.2 28.3 28.3 (20.0)

FY09
3,088 9.2 2,426 1,200 363 863 662 15.4 21.5 175 488 20.2 15.8 193 170 36.7 464 18.4 (1) 465 55 11.9 410 409 18.7 13.2 32.6 32.6 15.3

FY10
3,355 8.6 2,605 1,569 418 619 750 13.2 22.3 206 544 11.6 16.2 178 156 30.0 521 12.4 (1) 522 89 17.0 433 432 5.8 12.9 34.5 34.5 5.8

FY11
4,011 19.6 3,010 1,903 472 635 1,001 33.6 25.0 267 734 34.9 18.3 272 152 24.8 614 17.8 614 126 20.5 488 488 12.9 12.2 38.9 38.9 12.7

FY12E
4,453 11.0 3,361 2,121 524 716 1,092 9.0 24.5 278 813 10.8 18.3 307 157 23.7 664 8.1 664 132 19.9 532 532 8.9 11.9 42.3 42.3 8.9

FY13E
4,817 8 3,672 2,331 567 774 1,145 5 24 283 861 6 18 344 185 26 702 6 702 140 20 562 562 6 12 44.8 44.8 5.8

August 4, 2011

CESC | 1QFY2012 Result Update

Balance sheet (Standalone)

Y/E March (` cr) SOURCES OF FUNDS Equity Share Capital Reserves & Surplus Shareholders Funds Total Loans Deferred Tax Liability Total Liabilities APPLICATION OF FUNDS Gross Block Less: Acc. Depreciation Net Block Capital Work-in-Progress Goodwill Investments Current Assets Cash Loans & Advances Other Current liabilities Net Current Assets Mis. Exp. not written off Total Assets 126 2,847 2,972 2,569 5,541 7,129 3,534 3,595 620 570 2,089 986 611 491 1,341 748 9 5,541 126 3,267 3,392 3,557 9 6,958 7,938 3,826 4,112 1,280 310 2,936 1,251 1,084 601 1,688 1,248 8 6,958 126 3,697 3,823 3,708 7,531 9,990 4,131 5,859 278 679 2,884 1,120 1,026 738 2,176 708 7 7,531 126 4,179 4,304 3,952 8,256 10,704 4,490 6,214 272 1,084 2,893 839 1,189 865 2,213 680 6 8,256 126 4,706 4,832 4,152 8,984 11,140 4,768 6,372 557 1,184 3,199 913 1,320 967 2,335 865 6 8,984 126 5,209 5,335 4,652 9,987 11,340 5,052 6,289 567 2,084 3,495 1,037 1,427 1,031 2,455 1,040 6 9,987 FY08 FY09 FY10 FY11 FY12E FY13E

August 4, 2011

CESC | 1QFY2012 Result Update

Cash flow statement (Standalone)

Y/E March (` cr) Profit before tax Depreciation Change in Working Capital Less: Other income Direct taxes paid Cash Flow from Operations (Inc)/ Decin Fixed Assets (Inc)/ Dec in Investments Other income Cash Flow from Investing Issue of Equity Inc./(Dec.) in loans Dividend Paid (Incl. Tax) Others Cash Flow from Financing Inc./(Dec.) in Cash Opening Cash balances Closing Cash balances FY08 403 168 495 179 48 840 (835) (328) 179 (984) 622 18 58 182 400 255 731 986 FY09 465 175 153 170 55 568 (1,469) 259 170 (1,040) 0 988 58 193 737 265 986 1,251 FY10 522 206 734 156 89 1,217 (1,050) (368) 156 (1,262) 151 58 178 (85) (131) 1,251 1,120 FY11 614 267 (109) 152 126 494 (708) (406) 152 (961) 244 58 186 (281) 1,120 839 FY12E 664 278 (56) 157 132 596 (721) (100) 157 (664) 200 59 141 74 839 913 FY13E 702 283 (53) 185 140 608 (210) (900) 185 (926) 500 59 441 124 913 1,037

August 4, 2011

CESC | 1QFY2012 Result Update

Key ratios
Y/E March Valuation Ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Sales EV/EBITDA EV / Total Assets Per Share Data (`) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value DuPont Analysis (%) EBIT margin Tax retention ratio Asset turnover (x) ROIC (Post-tax) Cost of Debt (Post Tax) Leverage (x) Operating ROE Returns (%) ROCE (Pre-tax) Angel ROIC (Pre-tax) ROE Turnover ratios (x) Asset Turnover (Gross Block) Inventory / Sales (days) Receivables (days) Payables (days) WC cycle (ex-cash) (days) Solvency ratios (x) Net debt to equity Net debt to EBITDA Interest Coverage (EBIT / Int.) 0.5 2.8 2.2 0.7 3.5 2.5 0.7 3.5 3.1 0.7 3.1 2.7 0.7 3.0 2.7 0.7 3.2 2.5 0.4 22 47 195 (26) 0.4 23 42 228 (14) 0.4 24 48 271 (23) 0.4 24 49 266 (26) 0.4 26 49 247 (8) 0.4 20 41 238 (2) 8.0 10.8 13.9 7.8 11.7 12.8 7.5 10.3 12.0 9.3 11.1 12.0 9.4 11.1 11.6 9.1 10.8 11.1 14.3 88.2 0.7 8.5 6.3 0.7 10.2 15.8 88.1 0.6 8.4 5.5 0.6 10.1 16.2 83.0 0.6 7.5 4.1 0.7 9.7 18.3 79.5 0.6 8.4 5.6 0.7 10.4 18.3 80.1 0.6 8.4 6.1 0.7 10.0 17.9 80.1 0.6 8.1 6.2 0.7 9.4 28.3 28.3 41.7 4.7 237 32.6 32.6 46.5 4.7 270 34.5 34.5 50.9 4.7 304 38.9 38.9 60.2 4.6 343 42.3 42.3 64.5 4.7 385 44.8 44.8 67.3 4.7 425 11.9 8.1 1.4 1.4 1.9 9.1 0.9 10.3 7.2 1.2 1.4 2.0 9.4 0.9 9.8 6.6 1.1 1.4 1.8 8.2 0.8 8.7 5.6 1.0 1.4 1.6 6.3 0.8 8.0 5.2 0.9 1.4 1.4 5.8 0.7 7.5 5.0 0.8 1.4 1.2 5.0 0.6 FY08 FY09 FY10 FY11 FY12E FY13E

August 4, 2011

10

CESC | 1QFY2012 Result Update

Research Team Tel: 022 - 39357800

E-mail: [email protected]

Website: www.angelbroking.com

DISCLAIMER
This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies 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. Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Broking Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Broking Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may have investment positions in the stocks recommended in this report.

Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

CESC No No No No

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors

Ratings (Returns):

Buy (> 15%) Reduce (-5% to 15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

August 4, 2011

11