Pinc Research calls a ‘Buy’ on CESC
CMP: Rs. 291 Target Rs. 350
CESC’s Q3FY12 PAT of Rs 740mn was significantly below our estimate. This was due to under-recoveries of fixed cost as the company is yet to receive the tariff order for FY12. During Q3FY12, CESC created provision of ~Rs350mn for increase in employee cost and other overheads – which will be fully reimbursed once the tariff order is approved. Spencer’s Retail performance continued to improve with avg. realisations increasing to Rs 1,087/sq ft/month in 9MFY12. Maintain BUY with a target price of Rs 350/share.
Better realisations and higher PLF aid revenue growth: CESC achieved a PLF of 81.9% during Q3FY12 as compared to 80.0% last year, thus reporting 2.3% yoy growth in generation. Improved generation at its Budge Budge and Southern units offset lower PLFs at its other stations. Higher sale volumes (up by 3.3% yoy) coupled with 6.4% yoy increase in average realisations translated into 9.9% yoy growth in revenues.
Attractively valued asset, BUY: CESC is one of the most efficient power generators and distributors in the country with its stations being available for over 90%. We believe the company will continue to trade at discounted valuation given funding of Spencer’s losses by the cash cow generating business. However, we believe the parent shall be able to generate sufficient cash to fund losses of Spencer’s and undertake capex of various projects.
We expect FY16 to be the turnaround year as 1) it will be the first full year of operations of CESC’s expanded capacity and 2) Spencer’s turnaround year (generates PAT for the first time since acquisition). As we continue to build in full recovery of costs during FY12 – on the premise that the new tariff order will be awarded during Q4 – we estimate CESC to report PAT of Rs4.9bn. We run the risk of not only further delays in issuing FY12 tariff order but also delays in issuance of future tariff orders. We estimate the parent’s earnings to be at Rs4.9bn and Rs5.1bn during FY12 and FY13 respectively. We value the generating business on FCFE basis – existing business at Rs 306/share and Chandrapur at Rs23/share, assign Rs2/share to CESC Properties, Rs18/share for its nonstrategic investments and nil value to its retail business to arrive at our SoTP based target price of Rs 350/share. Maintain ‘BUY’ rating on the stock with an upgraded target price of Rs 350/share as we roll forward to FY13, implying a 30% upside.
Sharekhan calls a ‘Buy’ on Bajaj Holdings & Investment
CMP: Rs. 797 Target Rs. 1051
Q3FY2012 result highlights: The consolidated income of Bajaj Holdings and Investment Ltd (BHIL) declined by 76.4% year on year (YoY) to Rs62.4 crore against Rs265 crore reported in the corresponding period of the previous year. During each of the last four quarters the company had reported a lacklustre top line of under Rs100 crore. The subdued equity market had presented limited profit booking opportunities for the company in the last few quarters. The company’s income from associates grew 27.5% YoY. This moderated the profit after tax (PAT) decline to 28.8% YoY, lower than the top line growth. During Q3FY2012, the total market value of the company’s investments declined by 2.3% sequentially while there was no major change in the cost of the investments. The market value of the equity investments in the subsidiary company and the joint venture declined by 16% quarter on quarter (QoQ). One of the reasons for the same is the 6% fall in the share price of Maharasthra Scooters in which the company has a 24% stake.
Market value in other equity instruments eroded sharply: During Q3FY2012, the company reported a 22.7% yearon-year (Y-o-Y) increase in the investments in its joint venture and its subsidiary company. However, the reported market value of the investments have declined by 25% YoY.
Increasing stake in Bajaj Finserv: BHIL increased its stake in Bajaj Finserv by 0.42% during the quarter under review.
Valuation: Bajaj Auto is the key investment of BHIL and has been valued at 12.5x FY2013 earnings per share (EPS). The company reported good quarterly numbers, but there are concerns of sharp moderation in the domestic demand for its products. Our price target for Bajaj Finserv has been derived using the sum-of-the-parts (SOTP) valuation method. Given the strategic nature of BHIL’s investments, we have given a holding company discount of 50% to BHIL’s equity investments. The liquid investments have been valued at cost. Our price target of Rs 1,051.4 implies a 31% upside for the stock. We maintain our Buy recommendation on the stock.