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T&D loss remains key for profitability of distribution franchisees

* In the past few years, CESC has secured the distribution franchisees (DF) for four states – namely Bikaner, Bharatpur, Kota, and Malegaon. However, these still remain a drag on the company’s performance due to various reasons including Covid.

* In FY22, Kota incurred loss of Rs410mn and Malegaon suffered loss of Rs575mn. While Malegaon circle is yet to complete three years, Kota has been reporting loss for the past six years.

* We highlight that Kota witnessed a ~17% decline in its sales in FY21 due to Covid. Although FY22 reported 11% growth, sales in FY22 at Rs8bn still remained below FY20 levels (Rs8.7bn). It is important to note that FY22 T&D loss levels were brought down to 19.2% from 20.4% in FY20, indicating better operational efficiency. During Q1FY23, Kota circle witnessed 17.5% demand growth, and various media articles of Q2 suggest uptick in demand as students have returned to India’s coaching capital.

* We believe improvement in the performance of Kota circle, Noida Power, and Dhariwal IPP will lead to decent earnings growth in FY22, which was missing in the past two years. We maintain our BUY rating with March’23 TP of Rs108.

* A look into the performance of DFs in FY22 and Q1FY23: 1) Bharatpur: Sales growth remained muted at 4%, with PAT of Rs22mn. This circle has reported breakeven since FY19. In this circle, T&D loss has come down from 32% to ~13% in the past six years. Since FY20, T&D loss has remained at 12-14%; hence, unless significant improvement in demand is seen, substantial uptick in PAT will not be reported. 2) Bikaner: Sales growth in this circle also remained muted at 2%, with PAT of Rs89mn. This circle has reported breakeven since FY20. In this circle, T&D loss has come down from 28% to ~14% in the past six years. Since FY20, T&D loss has remained at 14-15%. 3) Kota: Sales growth in FY22 stood at 11%, but it was largely due to a 17% decline in FY21. Sales at Rs8bn in FY22 still remain below Rs8.7bn seen in FY20. While sales in FY22 were below FY20 levels, things seem to be turning around on the operational front. T&D loss levels declined to 19.2% in FY22, as against 20.4%/21.8% in FY20/FY21. During Q1FY23, sales growth stood at 17.5%; hence, we believe, there will be significant improvement in performance of Kota circle in the next 18 months. Loss levels in FY22 stood at Rs410mn. 4) Malegaon: Loss stood at Rs575mn. T&D loss levels have remained high at 35-39% during FY21- FY22. We believe improvement in this circle will take some more time.

* Valuation and outlook: CESC will likely see double-digit earnings growth in FY23 with 210MW medium-term PPA of Dhariwal (Q1FY23 PAT of Rs750mn vs. Rs250mn YoY), expectation of lower loss in Kota, and demand growth in Noida. We maintain BUY with March’23 TP of Rs108. Risks include: Higher T&D loss levels and lower demand growth.

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