CESC Rating: Buy: Stable earnings for the company in Q3FY22

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CESC posted stable profits in its consolidated businesses in Q3FY22. Its revenue increased 15.3% YoY to Rs 31.1 billion while PAT increased 1.5% YoY to Rs 3.3 billion. On a stand-alone basis, revenue increased 5.1% YoY to Rs 18.6 billion, while PAT increased 1.1% YoY to Rs 1.8 billion. Key factors impacting consolidated earnings during Q3FY22 included: (i) lower RoE for the Kolkata distribution business as the rate order remains pending, due to which additional RoE is not is not taken into account; (ii) high market prices increasing Chandrapur’s earnings by 79% year-on-year; (iii) weaker demand in the Rajasthan DFs, eroding earnings by 91% YoY; (iv) a 7.8% year-over-year decline in Haldia’s earnings due to a one-time cost reduction exercise in FY21, which benefited Q3FY21 earnings; (v) 17.4% increase in profit of Noida Power due to increase in CESC stake. CESC declared an interim dividend of Rs 4.5/sh resulting in a 64% payout of 9MFY22 EPS of Rs 7.1/sh.

The sale of Surya Vidyut and the transfer of Discom from Chandigarh are expected to be completed in FY22. Continued strong performance of the Buy.Kolkata distribution business, but rising PPC and fuel costs offset the Profits: Own source revenue increased by 5.1% year-on-year to Rs 18.6 billion, while PAT increased by 1.1% to Rs 1.8 billion, mainly due to lower ROE of Kolkata’s distribution business. the tariff decree remains pending. For the consolidated business, PAT increased by 1.5% year-on-year to Rs 3.3 billion, boosted by a 200% increase in other income to Rs 1.3 billion and a decline of 10 .2% of interest accounts receivable at Rs 2.7 billion.

Distribution volumes in Kolkata increased by 0.7% to CU2,173 and T&D losses fell by 50 basis points to 8.5%. Autonomous production increased by 2.7% to 1,242 UM. The purchase of electricity decreased by 2% over one year to reach 1,242 UM. High merchant prices boost Chandrapur’s profits: For Chandrapur, even though volumes were down 23.3% year-on-year, profits were up 79% to Rs 500 million, mainly due to from the increase in market prices during the quarter, which have now normalized.

Haldia’s volumes were down 4.6% year-on-year and its profit was down 7.8% year-on-year to Rs 830 million, mainly due to a one-off exercise reduction in costs during the year. ‘EX21. The Chandrapur Unit 1 PPA with Maharashtra for the supply of 185MW is extended until 31 March 22. The company has also offered to supply 210MW for three years under a medium tender term launched by the Railway Energy Management Company (REMCL).

Increase in distribution franchise losses due to lower volumes: For 9MFY21, Rajasthan DF post-tax revenue/loss was 12.5 billion / 190 million rupees, up 6.1% / 72.7 % year over year, mainly due to lower volumes. At Malegaon DF, the loss fell to Rs 410 million from Rs 540 million in 9MFY21 due to reduction of AT&C losses to ~35% from 50% at the time of takeover in March 2020. increased by 17.4% YoY in Q3FY22 and 12.9% YoY in 9MFY22, mainly due to CESC’s increased stake in the subsidiary.

Chandigarh discom takeover expected in the current financial year: our initial calculations indicate an IRR of 9-10% (including terminal value) at the offer value of Rs 8.2 billion, which, although costly, will help CESC expand its distribution footprint and make it a prime bidder in future discom privatizations, especially in Punjab (due to proximity). Maintaining a long position with an unchanged target price of Rs 120. The stock is currently trading at FY24E P/E of 7.5x, P/BV of 1x, and the annual dividend yield is expected to be 5-6% over the the next 2 to 3 years. CESC has declared an interim dividend of Rs 4.5/sh for FY22.

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