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Modest recovery in the standalone business

Dhariwal turns profitable, performance of DFs to improve

* CESC’s 4QFY21 result highlights a modest recovery in the standalone business. Volumes in the standalone entity improved, but grew just 6% YoY on a low base. Standalone PAT rose 8% YoY, while consolidated PAT fell 4%, led by lower profit at Dhariwal and Crescent and Surya.

* Dhariwal has turned profitable, and DFs are showing signs of improvement. CESC’s integrated business in Kolkata generates a high RoE and strong cash flows. We factor in tightening of norms at Haldia and for the standalone entity. The stock trades at an attractive 7.2x/6.9x FY22E/FY23E P/E. We maintain Buy with a TP of INR905/share.

Standalone profitability improves, but was lower than expected

* Standalone PAT rose 8% YoY to INR2.7b (10% lower v/s our estimate of INR3b). The miss was on account of: 1) a modest 6% YoY rise in sales volumes at 2.2BU (despite a low base; 4QFY20: -8% YoY), and 2) regulatory adjustments based on annual performance – the impact of which would have been felt in 4QFY21. Standalone other income in 4QFY21 doubled to INR1b (v/s INR0.5b) on recognition of income related to delayed payments

* Consolidated PAT fell ~4% YoY to INR4.2b in 4QFY21, led by lower profit at Dhariwal and Crescent and Surya.

* In FY21, standalone profit fell 11% YoY due to lower sales volumes, thereby impacting efficiency gains. At the consolidated level, PAT rose 2% YoY, led by a turnaround in Dhariwal and higher profitability at Haldia.

* Receivables, albeit lower v/s 1HFY21 levels (INR33b), remains high at INR23b (77 days) v/s INR18b (62 days) at the end of FY20. Given the stretched receivables, cash flow from operations fell 6% YoY to INR28b in FY21. The management expects receivables to normalize by 1HFY22.

New PPA and coal cess pass-through continue to aid Dhariwal

* Dhariwal reported a profit of INR310m (v/s INR540m in 4QFY20). In FY20, it benefitted from pass-through of higher coal cess in tariff. In FY21, Dhariwal reported a profit of INR1b v/s a loss of INR0.1b YoY. Dhariwal had signed a 185MW PPA with Maharashtra in 3QFY20 and the same has been extended up to Oct’21.

* Crescent and Surya reported a loss of INR30m v/s a profit of INR240m in 4QFY20.

* DFs in Rajasthan reported a loss at INR40m v/s a loss of INR90m in 4QFY20. The recently acquired Malegaon DF reported a profit of INR310m in 4Q, with T&D losses down 10pp YoY for the circle on a FY21 basis.

* Profits at Haldia improved to INR760m v/s INR680m in 4QFY20 due to savings in O&M cost.

Strong FCF generation; maintain Buy

* Subdued Power demand has impacted profitability for CESC’s businesses. However, Dhariwal has turned profitable, and performance of DFs should improve as the management gains better understanding of the circles and leverages its experience in Kolkata.

* CESC’s existing Distribution business generates high RoE and delivers steady growth. Generation assets generate healthy FCF. We raise our FY22E EPS by 9% to account for higher profitability at Haldia as the new tariff order is delayed. Even as visibility of earnings at Dhariwal improves, we factor in tightening of norms at Haldia and for the standalone entity in FY23E. The stock trades at an attractive 7.2x/6.9x FY22E/FY23E P/E.

* Untied generation capacity and scale-up of DFs have the potential to boost earnings. We value the stock at 8.5x FY22E P/E and maintain Buy with a TP of INR905.

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