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Stable quarter despite regulatory overhang Rs80

CESC reported stable earnings in Q1FY23. On consolidated basis, while its reported revenues were up 28.1% YoY to Rs42.5bn, PAT was up 5.5% YoY at Rs2.9bn. Key factors impacting consolidated profit during Q1FY23 included: 1) no profit growth for Kolkata distribution business since CESC did not hike tariffs as per the recent tariff order award; 2) increase in power sales in all distribution areas; 3) 49% increase in Noida Power’s profit; 4) 184% YoY profit growth for Chandrapur, but 26.7% YoY profit decline for Haldia; and 5) Rajasthan DFs posting 41% revenue growth and profit of Rs60mn (vs loss of Rs110mn in Q1FY22) on the back of higher demand. We are keenly watching the developments in terms of regulatory overhang at both Kolkata distribution area and now Haldia. Maintain BUY due to favourable valuations.

* Kolkata distribution business performance was sluggish despite higher power sales: Standalone revenues were up 16.5% YoY at Rs23.6bn while PAT was flat YoY at Rs1.4bn, since the state regulator has not increased tariffs for Kolkata distribution. Volumes at Kolkata were 17.4% higher YoY at 3,049MU and T&D losses were at 8.12%. Standalone generation increased 12.9% YoY at 1,745MU and power purchase was up 17.4% YoY at 1,706MU. Company is focusing on cost optimisation for its Kolkata businesses. However, consolidated PAT at Rs2.9bn was 5.5% higher YoY.

* Kolkata tariff order approved, but regulatory overhang remains: The regulator (WBERC) approved the tariff order for MYT FY21-FY23, maintaining CESC’s normative distribution loss at 14.3% and RoE of 15.5%/16.5% for generation and distribution respectively, and has also approved the capex for the said periods, which are positives. However, the regulator has maintained the tariff at the same level as FY18 (Rs7.3147/unit), subsuming a monthly variable cost adjustment (MVCA) component, and deferred recovery of ~Rs3bn p.a. for FY19-FY20, asking CESC to file and recover the same in the Annual Performance Review (APR) / true-up. Recovery of the deferred amount will increase regulated equity, hence earnings. Further, the regulator now has expressed concerns on the fuel cost increase at the Haldia plant, due to which there may be an impact of Rs600mn annually on Haldia’s profits (Haldia’s volumes were flat YoY during Q1FY23, but profit declined 26.7% YoY to Rs660mn). Company is in discussion with the regulator to get a pass-through of the higher cost of coal, while Haldia continues to earn RoE of >20%.

* Rajasthan DFs post profits; Chandrapur’s profit increases: Rajasthan DFs posted 41.6% YoY increase in revenues at Rs6bn, and profits at Rs60mn (vs loss of Rs110mn), mainly due to higher volumes. At Malegaon DF, revenues were up 3.1% YoY to Rs1.4bn due to higher power sales, but there was a loss of Rs190mn (vs profit of Rs20mn in Q1FY22) as the powerloom industry is yet to recover from covid impact. Noida Power’s revenues and profit for FY22 were up 19.5% and 48.5% YoY respectively. Chandrapur’s volumes increased 2.4% YoY to 1,048MU resulting in 184% YoY increase in profit at Rs710mn, aided by strong PLFs and higher merchant realisations

* Maintain BUY with an unchanged target price of Rs120. For the Kolkata business, we have not considered increase in regulated equity in our estimates, and we are keenly watching developments on the regulatory overhangs. The stock is currently trading at 6.7x FY24E P/E and 0.9x FY24E P/BV, with a dividend yield of >7%.

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