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S/A improves as demand recovers

Dhariwal, DF performances continue to improve

* CESC’s 3Q results highlight volume recovery in the S/A business. Volumes in S/A were just 1% YoY lower (v/s 1H: -21% YoY). S/A PAT was up 3% YoY. Consol. PAT, on the other hand, grew 21% YoY, partly led by profit at Dhariwal and improved performance at Crescent & Surya.

* Performances at Dhariwal and distribution franchises (DFs) would continue to improve. Furthermore, the co. has declared an interim dividend of INR45/sh, highlighting the co.’s willingness to return excess cash. Despite factoring in the tightening of norms at Haldia and S/A, the stock trades attractively at 7x FY22 P/E. Maintain Buy, with TP of INR873/sh.

S/A profitability improves; dividend of INR45/sh declared

* S/A PAT rose 3% YoY to INR1.8b (broadly in line with our estimate of INR1.7b). This was largely on account of just 1% YoY decline in sales volumes at 2.6BU. Consolidated PAT, though, was up 21% YoY to INR3.2b in the quarter, led by improved performances at Dhariwal and Crescent & Surya.

* CESC has further declared an interim dividend of INR45/sh, indicating payout ratios of ~50% (v/s 20–25% payout historically), significantly higher than our est. of INR23/sh for FY21. This is a positive surprise and highlights the co.’s willingness to return excess cash to shareholders. As per our interaction with the co., receivables have declined to ~INR28b from INR33b at the end of 1H. Further recovery is expected in 4Q.

* CESC approved a proposal to consolidate all its distribution businesses (except Kolkata) into a new wholly owned subsidiary. The co. further indicated plans to increase its holding in NPCL to 72.7% from the current 49.6%.

New PPA, coal cess pass-through aids Dhariwal

* Dhariwal reported profit of INR280m (v/s loss of ~INR150m in 3QFY20) on account of a new PPA signing and the pass-through of higher coal cess in tariff. Dhariwal had signed a 185MW PPA with Maharashtra in 3QFY20, which had been extended up to Jan ’21.

* Profits of Crescent & Surya rose to INR60m in 3QFY21 v/s loss of INR180m in 3QFY20. The previous year was impacted by equipment-related issues.

* DFs in Rajasthan reported profit of INR210m in 3QFY21 v/s profit of INR270m in 3QFY20. The co.’s recently acquired Malegaon DF reported loss of INR140m in 3QFY21.

* Profits of Haldia improved to INR900m in 3QFY21 v/s INR830m in 3QFY20 on account of O&M savings.

Strong FCF generation; maintain Buy

* Subdued power demand has impacted the profitability of CESC’s businesses in the near term. However, the medium-term story remains intact. Dhariwal has turned profitable, and the performances of DFs should continue to improve as the co. gains a better understanding of the circles and leverages from its experience in Kolkata.

* CESC’s existing Distribution business is high RoE and delivers steady growth. Generation assets have healthy FCF. The stock trades attractively at ~7x FY22E P/E, even as earnings visibility at Dhariwal improves, despite factoring in the tightening of norms at Haldia and S/A.

* Untied generation capacity and scale-up of DFs have the potential to boost earnings. We value the stock at 9x 1yr forward P/E. Maintain Buy, with TP of INR873/sh.

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