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Growth, the key concern

CESC reported standalone PAT of Rs2.43bn for the quarter, up 3.4% YoY and in line with our estimates. Consolidated PAT came in at Rs3.2bn, down from Rs3.4bn YoY due to lower profit at Haldia Energy. Dhariwal Infrastructure has reported 1HFY23 PAT at Rs1.15bn vs Rs590mn YoY, while Noida PAT came in at Rs750mn vs Rs520mn during the same period.

Performance of Distribution segments of Rajasthan and Malegaon was not enthusing. Malegaon reported loss of Rs480mn vs loss of Rs290mn due to lower demand, as the circle has a high proportion of textile consumers. While revenue in the Rajasthan circle improved, but there was no major change in the loss levels.

We maintain BUY, with Sep-23 TP of Rs101/share (from Rs108), as we presently keep value of Distribution franchisees (DFs) and the Chandigarh area as negligible. Once the DFs loss trajectory sees improvement, their value would become more relevant. Our FY23E/FY24E EPS has been cut by 6-7%, to factor-in the slower improvement in DFs.

Standalone performance steady, await tariff hike: Standalone PAT grew by 3.4% for 2QFY23. Generation grew by ~1.5%, while provisional T&D stood at <8%. As there is no tariff hike in the circle, profit growth remains marginal.

Dhariwal and Noida doing well; Haldia profits normalizing: Performance of Dhariwal Infrastructure has improved – 1HFY23 PAT of Rs1.15bn vs Rs590mn YoY. Similarly, demand in the Noida circle has increased, leading to 1HFY23 PAT of Rs750mn vs Rs520mn YoY.

DFs remain key concern area: Rajasthan DFs, despite having completed 4/5 years, have not been able to see break-even because of the Kota circle. Rajasthan DFs made 1HFY23 loss of Rs180mn vs Rs210mn loss YoY. Malegaon losses widened to Rs480mn during 1HFY23 vs loss of Rs290mn YoY.

Bear case valuation: For our bear-case valuation, we have assumed no expansion (growth) in the Kolkata license area, thus capping the valuation of this distribution circle. In our Bear case, we arrive at SoTP-based value of Rs70/share.

Valuation, outlook and risks: We have cut our FY23E/FY24E EPS by 6-7%, to factor-in the slower improvement in performance of distribution franchisees. In Rajasthan, while sales have seen a good increase, loss levels have not yet narrowed down. Further, due to high textile exposure, Malegaon losses have further increased for 1H. We maintain BUY, with Sep-23 TP of Rs101. Key triggers include standalone tariff increase and performance of DFs. Risks include tepid demand in distribution circles.

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