CESC – BUY

Management
meeting
19 May 2017 Institutional Equities
Neat and Clean demerger Company update
Sanjiv Goenka, Chairman of the RP-SG Group, announced the Price performance (%)
CMP  Rs830
demerger of CESC, its flagship company. The business of the  

company would be divided into four entities, which would be listed
separately. The minority shareholding will remain same as that of
CESC. Such segregation would eliminate conglomerate discount and
re-rate multiples in each of the businesses. Maintain BUY.
Clean and neat structure: CESC today announced the corporate
restructuring scheme, which aims to eliminate crossholdings and improve
transparency in disclosures. As per the scheme, the overall business of CESC
12‐mth TP (Rs)     1200 (45%)
Market cap (US$m)    2,028
Enterprise value(US$m)  2,897
Bloomberg   CESC IN
Sector  Utilities
1M 3M  1Y 
Absolute (Rs)  16.0 13.5  81.3 
Absolute (US$)       18.2 20.3  92.6 
Rel. to Sensex  11.8 5.8  62.4 
Cagr (%)  3 yrs  5 yrs 
EPS  2.5  7.4 

is divided into four different companies and each shareholder will get Shareholding pattern (%)  Stock performance 
proportionate shares in the newly created entities. The scheme does not lead RP‐Sanjiv Goenka Group  49.9 Vol('000, LHS) Price (Rs., RHS)
to dilution in minority shareholding, rather it improves the overall valuation FII  21.8 5,000 1,500
multiples of its core power generation and distribution business. Hence, we DII  20.0 4,000
view demerger positively. Fig 1 shows how the businesses are divided and Others  8.3 3,000
1,000
the details of share issuance. Post demerger, each entity will be listed    
2,000
separately. The scheme is effective from 1st Oct 2017. 52Wk High/Low (Rs)  1002/531 500
1,000
Shares o/s (m)  133
Core business multiples should improve: Although the demerger does 0 0
Daily volume (US$ m)  10.2
not lead to earnings accretion, it should lead to significant improvement in

Jul‐15

Nov‐15

Jul‐16

Nov‐16
May‐15

Sep‐15

Jan‐16
Mar‐16
May‐16

Sep‐16

Jan‐17
Mar‐17
May‐17
Dividend yield FY17ii (%)  1.1
valuation multiples for the core power business. This is because under
earlier structure the power business has funded diversification initiatives, Free float (%)  50.1  
which depressed valuation multiples despite CESC having one of the best Financial summary (Rs m)
operating matrices. Moreover, the business remains vertically integrated, Y/e 31 Mar, Consolidated  FY15A FY16A FY17ii FY18ii  FY19ii 
regulated, and has managed to generate free cash flow over the years. Revenues (Rs m)  110,666 121,240 139,030 169,391  181,184 
Uniquely, while there are several vanilla listed generation companies in Ebitda margins (%)         17.5         27.1         22.4         22.4          22.2 
India, the restructuring offers an opportunity for shareholders to own a Pre‐exceptional PAT (Rs m)  2,452 7,330 8,100 10,048  11,836 
distribution entity in India. Considering growth opportunities such as Reported PAT (Rs m)  1,981 7,290 8,100 10,048  11,836 
distribution franchising, the business will arguably command a premium         14.9          54.7          60.8          75.4           88.8 
Reported EPS (Rs) 
over the vanilla generation business. Outlook for each company created
Growth (%)        (62.0)      268.0         11.1         24.1          17.8 
under the restructuring remains upbeat with Spencer's retail achieving
PER (x)          55.8          15.2          13.7          11.0             9.3 
Ebitda breakeven in FY17, and set to report PBT breakeven in FY18.
ROE (%)            3.7         11.1         11.2         13.0          13.8 
Maintain BUY: In due course, we shall analyse in detail the balance sheet Net debt/equity (x)            2.3            1.8            1.9            1.7             1.4 
of each of the business entities that will be listed. Meanwhile, we retain         12.9            7.3            7.9            6.5             6.0 
EV/Ebitda (x) 
overall consolidated earnings estimate for the entity, which are not relevant
Price/book (x)            1.8            1.5            1.5            1.4             1.2 
anymore from stock performance perspective. We see the fall in stock price
Source:  Company,  IIFL  Research.  Priced  as  on  18  May  2017  Note:  Significant  change  in  FY16 
a good entry point, and envisage significant value creation over the next six
numbers are due to adoption of Ind‐AS accounting. 
months. We think market cap of combined entities could go up 40-50% on
listing led by expansion in valuation multiples.
Harshvardhan Dole | harsh.dole@iiflcap.com Devesh Agarwal | devesh.agarwal@iiflcap.com |
91 22 4646 4660 91 22 4646 4647
 Institutional Equities CESC – BUY

Figure 1: CESC has demerged its business into 4 entities to focus on each of the businesses

CESC Distribution Distribution in Kolkata CESC expects the 3 new distribution circles of Rajastan

would starting contributing to Ebitda by March 2018.
(5 shares) Kota, Bharatpur,  Further the new entity would hold 49.5% in the Noida
(Rs660mn) Bikaner and Noida Power distribution company.

Of the 2.3GW capacity fuel linkage and PPAs are in

Total Generation assets  place for 2.0GW, while only 300MW capacity at
CESC Generation of 2.3GW: Budge  Chandrapur has offtake issues. The plant has signed ST
(5 shares) Budge, Haldia,  PPA with Maharashtra discom, and is currently
CESC (Rs660mn) Chandrapur, Southern  operating at rated capacity. Good scope for PPA
(for every 10  TPP and Titagarh TPP rollover beyond June as Maharashtra is set to shut
shares) capacities of its older units.
(current 
equity 
capital of  Retail Business Spencer Retail has paid off its debt and the new listed
Rs1332mn) (6 shares*) Spencer Retail and  entity is debt free. Also company is confident of a
complete turnaround given improvement in SSS
(Rs400mn) Music World grpwth and margins. Over the next two years
* FV of Rs5/share company plans to add 0.2mn sq. ft. pa

CESC Ventures which will hold investments in FSOL,

IT and others Quest Mall, and CESC Properties is expected to utilise
Firstsource Solutions, 
(2 shares) cash in developing new properties, and shall remain a
FMCG business vehicle for funding other business diversification
(Rs260mn)
activities for the group.

Source: Company, IIFL Research 

h a rsh .dole@iif lcap.com 2

 Institutional Equities CESC – BUY

Figure 2: CESC offers 40‐45% upside if we value each business separately 
Description  Rs m  US$m  Per share Comment 
Distribution Business 60,000   923  450   
Kolkata Distribution  Valued at 12x PAT, on 
 5,000    
PAT  FY19 
Generation Business  53,500   823  402   
Valued at 10x PAT, on 
Kolkata Assets PAT   1,900   
FY19 
Valued at 10x PAT, on 
Haldia IPP PAT   2,300   
FY19 
Chandrapur IPP BV  11,500       Valued at BV 
Retail Business  27,147   418  204   
 FY19 Sales  27,147     1x FY19 EV/sales 
CESC Ventures  17,600   271  132   
10x FY19 PAT, adj for 
FSOL valuation  17,000   
stake; hold co disc 25% 
CESC Property  600    On FY19 PAT, valued at 6x
       
Valuation of CESC   158,247   2,435  1,188    
CESC Current Market 
 110,390   1,698  829   
Cap 
% upside  43%    43%  
Source: Company, IIFL Research Note: The per share calculation is based on existing equity capital 
(133mn shares) 

h a rsh .dole@iif lcap.com 3

 Institutional Equities
Company snapshot CESC – BUY

Background: CESC Limited is a flagship company of the Sanjiv Goenka RPG Group, incorporated in 1978. It is the sole distributor of power in Kolkata.
CESC’s business is organised across four main verticals: 1) power generation and distribution; 2) retail business; 3) real estate; and 4) IT business.
CESC’s power business generates and distributes 1.8GW power annually to 2.9m consumers in Kolkata and Howrah. Additionally, the company also
operates 600MW plant in Maharashtra. The company operates 1.1m sq ft retail area across India through its 100% subsidiary Spencer Retail. Further, it
also operates Quest, a high-end luxury mall in Kolkata with retail area of 0.4m sq. ft. It also owns a controlling stake (56%) in Firstsource Solution Ltd.
(FSOL), a leading global BPO company.
Management
Revenue break-up (%) - FY16 Consol Power capacity (GW) -
Name  Designation 
Others,   2.5 FY16
Sanjiv Goenka  Chairman  0.7 
2.0 0.6 
Aniruddha Basu  Managing Director 
IT,  26.7  1.5
Rajarshi Banerjee  CFO  0.6 
2.3 
1.0
0.5 1.1 
   Power,   0.0
57.1 

Chandrapur

Haldia

Total
Standalone
  
    Retail,  
    15.5 

 
PE Chart EV/Ebitda
Assumptions
Y/e 31 Mar, Consolidated  FY15A  FY16A  FY17ii  FY18ii FY19ii 12m fwd EV/EBITDA Avg  +/‐ 1SD
12m fwd PE Avg  +/‐ 1SD
Kolkata RoE (G)  15.5%  15.5%  15.5%  15.5% 15.5%
KolkataRoE (D)  16.5%  16.5%  16.5%  16.5% 16.5% 21.0 17.0 (x)
Spencer's Revenue/sq ft  1,305  1,451  1,475  1,500  1,525  (x)
18.0 15.0
Revenue growth in FSOL  ‐4.0%  5.7%  8.0%  8.0% 8.0% 13.0
Source: Company data, IIFL Research  15.0
11.0
12.0
9.0
9.0 7.0
6.0 5.0
3.0
3.0
Apr‐07 Apr‐09 Apr‐11 Apr‐13 May‐15 May‐17
Apr‐07 Apr‐09 Apr‐11 Apr‐13 May‐15 May‐17
 

h a rsh .dole@iif lcap.com 4

 Institutional Equities CESC – BUY

Financial summary
Income statement summary (Rs m)  Balance sheet summary (Rs m)
Y/e 31 Mar, Consolidated FY15A  FY16A FY17ii FY18ii FY19ii Y/e 31 Mar, Consolidated FY15A FY16A FY17ii FY18ii  FY19ii 
Revenues    110,666    121,240   139,030   169,391   181,184  Cash & cash equivalents 16,453 15,400 20,120 20,620  21,120 
Ebitda      19,412      32,806     31,110     37,980     40,154  Inventories  6,625 6,970 8,450 11,335  13,339 
Depreciation and amortisation      (5,889)       (7,660)     (8,160)     (8,290)     (8,601) Receivables  17,066 14,130 15,600 20,925  24,627 
Ebit      13,523      25,146     22,950     29,691     31,553  Other current assets 20,210 14,050 16,882 20,586  22,025 
Non‐operating income        1,490         2,640        2,990        1,556        1,596  Creditors  39,457 41,388 37,700 45,972  49,186 
Financial expense       (9,565)     (15,926)   (14,970)   (15,554)   (15,412) Other current liabilities 4,105 3,040 3,680 3,864  4,057 
PBT         5,448      11,860     10,970     15,692     17,736  Net current assets 16,792 6,122 19,672 23,630  27,869 
Exceptionals          (471)             (40)              ‐              ‐              ‐ Fixed assets  208,687 243,060 246,160 246,595  246,719 
Reported PBT         4,977      11,820     10,970     15,692     17,736  Intangibles  0 0 0 0  0 
Tax expense       (1,992)       (3,130)     (3,810)     (3,766)     (4,098) Investments  735 6,040 7,040 7,040  7,040 
PAT         2,985         8,690        7,160     11,926     13,638  Other long‐term assets 6,500 5,050 3,910 5,890  5,890 
Minorities, Associates etc.      (1,004)       (1,400)          940      (1,878)     (1,802) Total net assets 232,714 260,272 276,782 283,156  287,518 
Attributable PAT         1,981         7,290        8,100     10,048     11,836  Borrowings  156,098 143,450 156,720 155,219  150,135 
Other long‐term liabilities 16,326 45,270 46,870 46,870  46,870 
Ratio analysis  Shareholders’ equity 60,290 71,552 73,192 81,067  90,513 
Y/e 31 Mar, Consolidated FY15A  FY16A FY17ii FY18ii FY19ii Total liabilities 232,714 260,272 276,782 283,156  287,518 
Per share data (Rs)     

Reported EPS           14.9           54.7          60.8          75.4          88.8  Cash flow summary (Rs m) 

DPS             9.0           10.0          12.3          13.6          15.0  Y/e 31 Mar, Consolidated FY15A FY16A FY17ii FY18ii  FY19ii 
BVPS         452.6         537.1        549.4        608.5        679.4  Ebit    12,519     23,746     23,890     27,812      29,751 
Growth ratios (%)    Tax paid      (1,992)     (3,130)     (3,810)     (3,766)       (4,098) 
Revenues             8.6             9.6          14.7          21.8            7.0  Depreciation and amortization       5,889        7,660        8,160        8,290         8,601 
Ebitda           13.8           69.0           (5.2)         22.1            5.7  Net working capital change   (12,216)       9,617      (8,830)     (3,458)       (3,739) 
EPS         (62.0)         268.0          11.1          24.1          17.8  Other operating items              ‐              ‐              ‐              ‐                ‐ 
Profitability ratios (%)   Operating cash flow before interest       4,201     37,893     19,410     28,878      30,515 
Ebitda margin           17.5           27.1          22.4          22.4          22.2  Financial expense     (9,565)   (15,926)   (14,970)   (15,554)     (15,412) 
Ebit margin           12.2           20.7          16.5          17.5          17.4  Non‐operating income       1,490        2,640        2,990        1,556         1,596 
Tax rate           40.0           26.5          34.7          24.0          23.1  Operating cash flow after interest     (3,874)    24,607        7,430     14,880      16,698 
Net profit margin             2.7             7.2            5.1            7.0            7.5  Capital expenditure     (8,470)   (37,034)     (7,510)   (10,705)       (8,725) 
Return ratios (%)     Long‐term investments               2      (5,305)     (1,000)              ‐                ‐ 
ROE             3.7           11.1          11.2          13.0          13.8  Others    (55,335)    30,927      (5,502) ‐                ‐ 
ROCE             7.1           11.3            9.7          11.2          11.6  Free cash flow   (67,678)    13,195      (6,582)       4,175         7,973 
Solvency ratios (x)    Equity raising     48,944               ‐              ‐              ‐                ‐ 
Net debt‐equity             2.3             1.8            1.9            1.7            1.4  Borrowings     24,203    (12,648)    13,270      (1,501)       (5,083) 
Net debt to Ebitda             7.2             3.9            4.4            3.5            3.2  Dividend      (1,436)     (1,600)     (1,968)     (2,173)       (2,390) 
Interest coverage             1.4             1.6            1.5            1.9            2.0  Net chg in cash and equivalents       4,033      (1,053)       4,720           500            500 
Source: Company data, IIFL Research  Source: Company data, IIFL Research 

h a rsh .dole@iif lcap.com 5

 Institutional Equities CESC – BUY

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h a rsh .dole@iif lcap.com 6

 Institutional Equities CESC – BUY

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National Stock Exchange of India Ltd. SEBI Regn. No. : INB231097537/ INF231097537/ INE231097537, Bombay Stock Exchange Ltd. SEBI Regn. No.:INB011097533/ INF011097533/ BSE-Currency, MCX Stock
Exchange Ltd. SEBI Regn. No.: INB261097530/ INF261097530/ INE261097537, United Stock Exchange Ltd. SEBI Regn. No.: INE271097532, PMS SEBI Regn. No. INP000002213, IA SEBI Regn. No. INA000000623, SEBI
RA Regn.:- INH000000248

Key to our recommendation structure

BUY - Absolute - Stock expected to give a positive return of over 20% over a 1-year horizon.

SELL - Absolute - Stock expected to fall by more than 10% over a 1-year horizon.

In addition, Add and Reduce recommendations are based on expected returns relative to a hurdle rate. Investment horizon for Add and Reduce recommendations is up to a year. We assume the current hurdle rate at
10%, this being the average return on a debt instrument available for investment.

Add - Stock expected to give a return of 0-10% over the hurdle rate, i.e. a positive return of 10%+.

Reduce - Stock expected to return less than the hurdle rate, i.e. return of less than 10%.

Distribution of Ratings: Out of 205 stocks rated in the IIFL coverage universe, 114 have BUY ratings, 7 have SELL ratings, 56 have ADD ratings and 28 have REDUCE ratings

Price Target: Unless otherwise stated in the text of this report, target prices in this report are based on either a discounted cash flow valuation or comparison of valuation ratios with companies seen by the analyst as
comparable or a combination of the two methods. The result of this fundamental valuation is adjusted to reflect the analyst’s views on the likely course of investor sentiment. Whichever valuation method is used there is
a significant risk that the target price will not be achieved within the expected timeframe. Risk factors include unforeseen changes in competitive pressures or in the level of demand for the company’s products. Such
demand variations may result from changes in technology, in the overall level of economic activity or, in some cases, in fashion. Valuations may also be affected by changes in taxation, in exchange rates and, in certain
industries, in regulations. Investment in overseas markets and instruments such as ADRs can result in increased risk from factors such as exchange rates, exchange controls, taxation, and political and social conditions.
This discussion of valuation methods and risk factors is not comprehensive – further information is available upon request.

Date Close price Target price Rating

CESC: 3 year price and rating history
(Rs) (Rs)
(Rs) Price TP/Reco changed date 23 Jun 2014 596 740 BUY
1,200 30 Sep 2014 763 1005 BUY
1,000 22 May 2015 590 761 BUY
800 11 Feb 2016 434 600 BUY
600 25 Apr 2016 536 750 BUY
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h a rsh .dole@iif lcap.com 7