IGI Logo

We initiate coverage on CESC with BUY and TP of Rs225 (~28% upside; SoTP of its entities). CESC’s aggressive renewable energy (RE) capacity expansion will drive a strong, ~25% capacity CAGR over FY25-29. Further, we believe securing power offtake arrangements will strengthen topline stability, and drive ~9% revenue CAGR over FY25-28E, providing unit economic benefits amid rising power demand. Additionally, in our opinion, a constructive focus on profitable distribution facilities, coupled with cashflow boost from tariff hikes and regulatory deferral benefits will drive an improvement in the return profile and support increased capex funding through internal accruals. We expect an 11% PAT CAGR, with PAT margin expanding by 40bps over FY25-28E on a consolidated basis. From a return perspective, on a consolidated level, we expect ROE/ROIC to expand by 170/280bps by FY28E

Aggressive RE expansion with strong PPA tie-ups The company has made an aggressive foray into RE, with a targeted capacity CAGR of ~25% by FY29 which would take its RE power mix to ~60%. CESC has entered arrangements and framework agreements with multiple players to develop solar-wind hybrid projects that support this expansion. Additionally, CESC has been actively focused on securing PPAs for contracted capacity (captive and non-captive) which is a key positive, in our view, considering the PPA signing delays that plagued the industry recently. In our view, the strong EBITDA margin of ~85% and ~14% ROE for phase 1 will be the key drivers supporting profit growth and returns in the medium term.

Focused distribution to expand the pan-India footprint CESC has a clear objective of turning around and strengthening its existing distribution facilities via an expected annual capex of ~Rs11bn (Rs6bn/4bn/1bn for Kolkata/Noida/Chandigarh, respectively) under the regulated equity framework. Recently, CESC also completed the acquisition of Chandigarh Power, which is the only power provider in the area. NPCL, which has consistently been ranked among the top performing private distribution facilities in India, is expected to be a key beneficiary of the transition to RE through captive power purchase. In our view, CESC’s plan to bid for private distribution licenses, and focus on strengthening its distribution facilities, is key to a pan-India presence.

Strength in cashflows to support increased capex requirement CESC Kolkata hiked fuel surcharge by ~8% in FY25; it has a massive build-up of regulatory deferral balances. Additionally, capex requirements are expected to go up significantly, owing to RE capacity expansion. Our estimate suggests additional ~Rs195bn capex requirement for capacity expansion to 3.2GW by FY29E. We expect overall cash to rise by ~Rs3bn by FY28E, accounting for capex, and believe that internal accruals will be sufficient to support the non-debt funded portion of the required capex. This, in our opinion, obviates any propensity for equity infusion and supports stable regulatory PAT growth. Consequently, we expect net debt/EBITDA to broadly remain stable at 5.2x by FY28E.

For More  Emkay Global Financial Services Ltd Disclaimer http://www.emkayglobal.com/Uploads/disclaimer.pdf & SEBI Registration number is INH000000354