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Digitalising distribution growth ahead

At its maiden analyst meet, CESC’s top management unveiled its growth strategy. It: i) predominantly pertains to the distribution business; and ii) advocates embracing newer technologies to be future-ready. Management does not foresee RE as a long-term bet. Further, in a bid to assure investors, promoters assured non-utilisation of resources of listed companies for Lucknow IPL franchisee buyout.

CESC’s growth hinges on its ability to win more distribution circles, which should get a leg-up post-implementation of the Electricity Amendment Act 2020. A strong balance sheet (1x D/E), high dividend payout (60%) and improving focus on CG makes CESC an attractive investment play. Retain ‘BUY’ with a TP of INR108 (up from INR92).

4Ds reshaping energy landscape: Transformation drivers in place

Management believes ‘uberisation’ of energy is underway led by: i) decarbonisation (increasing renewable footprint); ii) decentralisation (capacities moving closer to consumer requiring microgrids); iii) digitalisation (data analytics, blockchain, etc). Further, de-regulation of distribution circles would increase the opportunity multifold and CESC is betting big on privatisation of circles. CESC is geared to reap the benefits, and in order to stay relevant, it is embracing and integrating new technologies while adding new revenue streams (not sizable).

Opportunity zeroed in on: Distribution the only viable growth option

Being an integrated generation and distribution utility, CESC has shunned from investments in RE, and firmly believes the distribution sector offers tremendous growth potential over the next decade and is the single lever for its future growth. Management is betting on implementation of the Electricity Amendment Act 2020 and believes privatisation will pick up. On the Chandigarh win, management expects to break even in 4–5 years on the back of strong per capita income and additional revenue streams. The Noida circle is gaining strong traction too led by double-digit industrial growth. On existing generation capacities, CESC is focused on improving operational efficiencies to cut overall costs (Chandrapur plant).

Outlook and valuation: Favourable risk reward; maintain ‘BUY’

With a clear focus on sustainability, CESC has zeroed in on distribution as the only growth strategy as they believe the current profitability structure of renewables in India does not fit their sustainability matrix over a longer period due to tariff issues. While we appreciate management’s clarity, we are slightly worried on the timely opportunities in the distribution sector if the implementation of Electricity Act 2020 gets delayed. That said, ramping up of existing five circles is likely to provide a kicker to earnings. The Kolkata tariff order remains elusive and is a key variable.

Maintain ‘BUY’ with a revised TP of INR108 as we roll forward the valuation to FY23 and assume new distribution circles in our SoTP framework. The stock is trading at 7.5x FY23E earnings.

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