Maintain ‘buy’ on CESC with unchanged FV of Rs 800

Improving pay-out. CESC reported consolidated profits of Rs 3.2bn (+23% yoy) and standalone profits of Rs 1.8 bn (+3.4% yoy). Profits at Dhariwal (600MW) improved to Rs 280 mn compared to a loss of Rs 150 mn in 3QFY20—a key driver for strong consolidated performance. CESC trades at 6.5X P/E on earnings of FY2022E, with continued improvement from earnings of Dhariwal. A healthy Rs 45/share of interim dividend shows intent of the company to increase the pay-out ratio and right-size the balance sheet. Maintain BUY rating with revised FV of Rs 815/share (from Rs 800/share).

CESC’s consolidated profits increased 23.2% yoy to Rs 3.2 bn led by profits of Rs 280 mn reported at Dhariwal compared to losses of Rs 150 mn in 3QFY20. Standalone performance was stable with PAT of Rs 1.8 bn (+3.4% yoy). Haldia reported PAT of Rs 900 mn (+8.4% yoy) as the plant operated at a PLF of 83.6% in 3QFY21. Dhariwal reported profit of Rs 280 mn compared to losses of Rs 150 mn in 3QFY20 with reported PAT in 9MFY21 of Rs 750 mn from loss of Rs 640 mn in 9MFY20.

Driven by operational improvements, Cresent Power along with Noida distribution reported PAT of Rs 60 mn (Rs 190 mn in 1HFY21) and Rs 230 mn, respectively. Distribution circles in Rajasthan reported profit of Rs 210 mn (Rs 10 mn in 2QFY21 and Rs 270 mn in 3QFY20) while the recently won distribution franchise in Malegaon reported losses of Rs 140 mn in 3QFY21.

CESC reported standalone revenues of Rs 17.7 bn (-0.6% yoy) and PAT of Rs 1.8 bn (+3.4% yoy) for 3QFY21 in line with our expectations of Rs 17.9bn and Rs 1.6 bn, respectively as demand during the quarter recovered to pre-Covid levels. Units sold during the quarter stood at 2,157MUs (+1.8% yoy). Realised tariff declined 2.3% yoy to Rs 8.2/unit while lower coal prices during the quarter led to fuel costs declining 10.5% yoy to Rs 2.16/unit. Purchased power cost remained flat at Rs 5.3/unit.

We maintain our BUY rating on CESC with revised FV of Rs 815/share, with the results for 3QFY21 further strengthening our investment thesis— stability of regulated business, moderating losses from new distribution circles and improving utilization for Dhariwal.

Dividend payout of Rs 45/share will enhance investor returns along with allaying concerns over investment of free cash. Valuations offer increased comfort at 6.5X P/E on FY2022E and 0.76X P/B on FY2022E. Maintain BUY rating with unchanged fair value of Rs 800/share.