CESC – BUY

Management
meeting
15 October 2018 Institutional Equities
Demerger in sight! Company update
CESC's demerger timelines are now clear; 31st October 2018 CMP Rs901 Price performance (%)
would be the record date. The non-power businesses would be 1M 3M 1Y
12-mth TP (Rs) 1300 (44%)
initially carved out on mirror shareholding, which would house
Market cap (US$m) 1,630 Absolute (Rs) (7.4) 0.3 (13.8)
retailing business and investment book + FMCG business. Outlook
on each business is robust and separate management teams Absolute (US$) (9.2) (6.6) (22.8)
Enterprise value(US$m) 2,373
combined with improved disclosures should lead to value creation. Rel.to BSE Midcap 3.8 8.4 (3.3)
Bloomberg CESC IN
As such, CESC’s power business could be further split into G and Cagr (%) 3 yrs 5 yrs
D, subject to WBERC approval; we see its mcap at ~Rs135bn, Sector Utilities EPS 7.6 8.8
more than its combined mcap presently. We re iterate BUY.
\
Shareholding pattern (%) Stock performance
First, only non-power business to be demerged: CESC will demerge
its non-power business on October 31, 2018 to kick-start its much- RP-Sanjiv Goenka Group 49.9
awaited corporate restructuring plan. It will initially separate the retail FII 19.7
business ─ Spencer's Retail brand (RP-SG Retail) and investments, Quest DII 21.1
Properties, FMCG business (RP-SG Business process services) etc ─ while Others 9.2
further split of its power business into generation and distribution would 52Wk High/Low (Rs) 1190/801
be subject to WBERC approval. CESC shareholders would receive 6 shares Shares o/s (m) 133
(Rs5 FV) of retail entity and 2 shares (Rs10 FV) of second entity for every
Daily volume (US$ m) 8.2
10 shares of CESC. Listing of these entities should be by 5th Dec 2018.
Dividend yield FY18ii (%) 1.3
Outlook on each business is strong: Separation of businesses should Free float (%) 50.1
markedly improve the disclosures, promote a focused approach to grow
the business and significantly eliminate the web of crossholdings. Outlook Financial summary (Rs m)
on each business is upbeat; consider this: 1) integrated power business Y/e 31 Mar, Consolidated FY17A FY18ii FY19ii FY20ii FY21ii
should see steady growth driven by load growth, turnaround at Revenues (Rs m) 139,035 161,520 184,208 195,504 207,344
Chandrapur IPP, and ramp-up in franchising businesses; 2) in retail, scale Ebitda margins (%) 23.2 21.5 21.2 20.6 20.0
up in operations and focus on grocery format stores should help clock Pre-exceptional PAT (Rs m) 5,969 10,040 11,176 11,994 12,504
Rs40-45bn sales (Ebitda of 3.5-4%) by FY22 vs. Ebitda breakeven now; Reported PAT (Rs m) 6,908 10,040 11,176 11,994 12,504
3) massive scale up in its FMCG business of Guiltfree Industries (Too Yum Reported EPS (Rs) 51.9 75.4 83.9 90.0 93.9
and Apricot Foods) ─ while the business is incurring Ebitda losses, its Growth (%) 15.4 45.3 11.3 7.3 4.3
annual turnover is set to reach Rs8-9bn by FY20 vs. Rs1.5bn in FY18; PER (x) 17.4 12.0 10.7 10.0 9.6
funding of losses is met through dividends from FSOL (55% stake). 9.5 13.5 13.9 13.4 12.5
ROE (%)
Power business potentially worth > existing Mcap: Demerger should Net debt/equity (x) 1.8 1.7 1.5 1.2 1.0
unlock value of core power business, where 72% of 2.4GW capacity is EV/Ebitda (x) 7.9 7.1 6.3 5.9 5.5
operated on assured RoE returns. Cross holdings and sustained cash Price/book (x) 1.6 1.6 1.4 1.3 1.1
funding towards other entities was an overhang on valuations. With Source: Company, IIFL Research. Priced as on 12 October 2018
annual profits of Rs12bn in FY20, power business can be valued at around
Rs135bn Mcap vs. Rs119bn Mcap of combined entity. Maintain BUY.

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 approved the demerger of its non-power business to kick start the demerger process

Source: Company, IIFL Research

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 Institutional Equities CESC – BUY

Figure 2: CESC structure following the demerger – At present, the power distribution and generation business would be housed in the current listed entity

Source: Company, IIFL Research; while company intends to separately list the generation and distribution business, it is subject to approval from WBERC

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 Institutional Equities CESC – BUY

Figure 3: CESC (consolidated)─ Profit break-up Figure 4: SOTP valuations – New entity wise
Rs m FY17 FY18 FY19ii FY20ii FY21ii Comments FY20ii
Incremental capex of Rs7bn in Description Sales/EBIT Base Case Bull Case Comments
CESC DA/PAT
8,633 8,710 9,297 10,209 11,129 the Kolkata regulated
(Standalone)
business Rs bn Rs/share Rs/share
Haldia 2,965 3,128 2,360 2,360 2,360 Steady-state performance In base case, valued at 11x FY20ii
Upside risk if additional PPAs PAT, in line with NTPC multiples
Chandrapur (4,839) (1,991) (1,311) (1,321) (1,335) Distribution 7.4 614 781
are signed and in bull case, at 25% premium
valuation (14x)
Crescent 326 358 394 433 477 Steady-state performance
In base case, valued at 11x FY20ii
Incremental capex to drive PAT, in line with NTPC multiples
Noida Power 486 520 557 593 629 Generation 4.9 409 521
profits and in bull case, at 25% premium
Upside risk, our assumption valuation (14x)
Spencer Retail (1,076) (300) (326) (226) (134) on margins are conservative Total Power
vs mgmt guidance 12.3 1,023 1,302
business
4-5% yoy revenue growth and Valued at 0.75x EV/sales,
Firstsource 1,556 1,793 1,661 1,909 2,093
steady margins Retail Entity 26.2 148 296 considering growth stage; 1.5x
Quest Mall 81 239 95 97 98 Steady-state performance FY20ii EV/Sales in bull case
Renewables 32 39 47 56 67 Marginal addition in capacity Other businesses
Others (1,254) (2,457) (1,596) (2,116) (2,881) Inter segment adjustments Valued at M-cap with 30% holdco
FSOL 43.0 125 125
discount
Consol
6,910 10,040 11,176 11,994 12,504 Quest Mall 0.1 4 4 Valued at 5x FY20ii PAT
Reported PAT
Source: Company, IIFL Research
Fair Valuation 1,300 1,727

Potential Upside 44% 92%

Source: IIFL Research

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 Institutional Equities CESC – BUY

Figure 5: Virat Kohli is the brand ambassador of the TOO YUMM (FMCG business) Figure 6: CESC believes it can achieve FMCG sales of Rs100bn in the next 4-5 years

Source: Media, IIFL Research

Source: IIFL Research

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 Institutional Equities CESC – BUY

Figure 7: Spencer’s Retail may look forward to induct a strategic partner

Source: Media, IIFL Research

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 Institutional Equities
Company snapshot CESC – BUY

Background: CESC 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 operates 600MW
plant in Maharashtra. The company operates 1.2m sqft retail area across India through its 100% subsidiary Spencer Retail. Further, it operates Quest, a
high-end luxury mall in Kolkata with retail area of 0.4m sqft. It also owns a controlling stake (55%) in Firstsource Solution (FSOL), a leading global BPO
company.

Management
Name Designation
Sanjiv Goenka Chairman

Debasish Banerjee MD (distribution)

Rajarshi Banerjee CFO

Source: Company

Assumptions PE Chart EV/Ebitda

Y/e 31 Mar, Consolidated FY17A FY18ii FY19ii FY20ii FY21ii
Kolkata RoE (G) 15.5% 15.5% 15.5% 15.5% 15.5%
Kolkata RoE (D) 16.5% 16.5% 16.5% 16.5% 16.5%
Spencer's Revenue/sqft 1,485 1,477 1,527 1,577 1,627
Revenue growth in FSOL 9.3% -0.7% 4.0% 4.0% 4.0%
Source: Company, IIFL Research

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 Institutional Equities CESC – BUY

Financial summary
Income statement summary (Rs m) Balance sheet summary (Rs m)
Y/e 31 Mar, Consolidated FY17A FY18ii FY19ii FY20ii FY21ii Y/e 31 Mar, Consolidated FY17A FY18ii FY19ii FY20ii FY21ii
Revenues 139,035 161,520 184,208 195,504 207,344 Cash & cash equivalents 23,110 24,112 24,612 25,112 25,612
Ebitda 32,216 34,800 39,056 40,321 41,409 Inventories 8,450 8,670 10,898 12,724 14,847
Depreciation and amortisation (8,164) (8,740) (8,656) (8,969) (9,283) Receivables 15,600 19,580 24,611 28,736 33,529
Ebit 24,052 26,060 30,400 31,352 32,126 Other current assets 16,882 17,620 20,134 21,372 22,669
Non-operating income 2,987 2,800 1,544 1,784 1,824 Creditors 37,700 43,520 49,729 52,786 55,991
Financial expense (16,070) (14,820) (15,578) (15,416) (15,254) Other current liabilities 3,680 4,210 4,421 4,642 4,874
PBT 10,969 14,040 16,366 17,720 18,696 Net current assets 22,662 22,252 26,105 30,517 35,792
Exceptionals 939 - - - - Fixed assets 246,160 249,190 248,744 247,995 246,932
Reported PBT 11,908 14,040 16,366 17,720 18,696 Investments 4,050 4,250 4,250 4,250 4,250
Tax expense (4,290) (2,980) (3,862) (4,200) (4,519) Other long-term assets 3,910 2,200 4,171 3,171 2,171
PAT 7,618 11,060 12,503 13,519 14,177 Total net assets 276,782 277,892 283,269 285,932 289,145
Minorities, Associates etc. (710) (1,020) (1,327) (1,526) (1,673) Borrowings 156,720 152,570 148,779 141,653 134,766
Attributable PAT 6,908 10,040 11,176 11,994 12,504 Other long-term liabilities 46,870 49,610 49,610 49,610 49,610
Shareholders’ equity 73,192 75,712 84,880 94,669 104,769
Ratio analysis Total liabilities 276,782 277,892 283,269 285,932 289,145
Y/e 31 Mar, Consolidated FY17A FY18ii FY19ii FY20ii FY21ii
Per share data (Rs)
Reported EPS 51.9 75.4 83.9 90.0 93.9 Cash flow summary (Rs m)
DPS 10.0 11.8 12.6 13.8 15.0 Y/e 31 Mar, Consolidated FY17A FY18ii FY19ii FY20ii FY21ii
BVPS 549.4 568.3 637.1 710.6 786.4 Ebit 23,343 25,040 29,072 29,826 30,453
Growth ratios (%) Tax paid (4,290) (2,980) (3,862) (4,200) (4,519)
Revenues 14.7 16.2 14.0 6.1 6.1 Depreciation and amortization 8,164 8,740 8,656 8,969 9,283
Ebitda (1.8) 8.0 12.2 3.2 2.7 Net working capital change (8,830) 1,412 (3,353) (3,912) (4,776)
EPS 15.4 45.3 11.3 7.3 4.3 Other operating items - - - - -
Profitability ratios (%) Operating cash flow before interest 18,386 32,212 30,513 30,683 30,441
Ebitda margin 23.2 21.5 21.2 20.6 20.0 Financial expense (16,070) (14,820) (15,578) (15,416) (15,254)
Ebit margin 17.3 16.1 16.5 16.0 15.5 Non-operating income 2,987 2,800 1,544 1,784 1,824
Tax rate 36.0 21.2 23.6 23.7 24.2 Operating cash flow after interest 5,303 20,192 16,479 17,051 17,011
Net profit margin 5.5 6.8 6.8 6.9 6.8 Capital expenditure (10,972) (10,060) (10,181) (7,220) (7,220)
Return ratios (%) Long-term investments (620) (200) - - -
ROE 9.5 13.5 13.9 13.4 12.5 Others (286) (2,899) 0 (0) (0)
ROCE 10.1 10.4 11.4 11.6 11.8 Free cash flow (6,575) 7,033 6,299 9,831 9,791
Solvency ratios (x) Equity raising - - - - -
Net debt-equity 1.8 1.7 1.5 1.2 1.0 Borrowings 13,270 (4,150) (3,791) (7,126) (6,887)
Net debt to Ebitda 4.1 3.7 3.2 2.9 2.6 Dividend (1,596) (1,881) (2,008) (2,205) (2,404)
Interest coverage 1.5 1.8 2.0 2.0 2.1 Net chg in cash and equivalents 5,100 1,002 500 500 500
Source: Company, IIFL Research

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 Institutional Equities CESC – BUY

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 Institutional Equities CESC – BUY

A graph of daily closing prices of securities is available at http://www.nseindia.com/ChartApp/install/charts/mainpage.jsp, www.bseindia.com and http://economictimes.indiatimes.com/markets/stocks/stock-quotes.
(Choose a company from the list on the browser and select the “three years” period in the price chart).

Name, Qualification and Certification of Research Analyst: Harshvardhan Dole(B.Tech, PGBDA), Devesh Agarwal(PGDBM)

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Key to our recommendation structure

BUY - Stock expected to give a return 10%+ more than average return on a debt instrument over a 1-year horizon.

SELL - Stock expected to give a return 10%+ below the average return on a debt instrument over a 1-year horizon.

Add - Stock expected to give a return 0-10% over the average return on a debt instrument over a 1-year horizon.

Reduce - Stock expected to give a return 0-10% below the average return on a debt instrument over a 1-year horizon.

Distribution of Ratings: Out of 220 stocks rated in the IIFL coverage universe, 124 have BUY ratings, 7 have SELL ratings, 60 have ADD ratings and 27 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 analy st’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

(Rs) (Rs)
11 Feb 2016 434 600 BUY
25 Apr 2016 536 750 BUY
19 May 2017 830 1200 BUY
04 Sep 2017 1040 1270 BUY
24 May 2018 1010 1300 BUY

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