2QFY2012 Result Update | Power

November 11, 2011

CESC
Performance Highlights
Y/E March (` cr) Net sales Operating profit OPM (%) Net profit
Source: Company, Angel Research

BUY
CMP Target Price
% chg qoq 4.6 (4.3) (186)bp 2.7 2QFY2011 1,090 303 27.8 155 % chg yoy 12.2 (20.1) (801)bp (26.5)

`265 `379
12 Months

2QFY2012 1,223 242 19.8 114

1QFY2012 1,169 253 21.6 111

Investment Period

Stock Info Sector Market Cap (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code Power 3,313 0.9 400/254 16970 10 17,193 5,169 CESC.BO CESC@IN

For 2QFY2012, CESC posted a 26.5% yoy decline in its net profit on account of customers being billed under existing tariff, as WBERCs tariff approval for FY2012 has been delayed. Although the current tariff provisions allow the hike in fuel costs to be passed on automatically, CESC has to obtain WBERCs orders for passing on the additional fixed costs. However, the company would be recovering higher tariff (adjusting for additional fixed costs incurred) in the subsequent quarters with retrospective effect for 1HFY2012 after obtaining new orders. On the retail business front, per sq. ft. sales of Spencers increased to `1,066/month in 1HFY2012 (13% higher on a yoy basis). Store level EBITDA per sq. ft. stood at `31 for 1HFY2012. We maintain our Buy view on the stock. OPM down by 801bp yoy to 19.8%: CESC registered 12.2% yoy growth in its standalone top line to `1,223cr, aided by 5% growth in sales volume and higher fuel cost, which is a pass-on. The companys OPM fell by 801bp yoy to 19.8% because of lower realization due to delay in grant of tariff approval. The company had cost adjustment of `67cr included in other expenses during the quarter as against negative `217cr in 2QFY2011, resulting in operating profit declining by 20.1% to `242cr. Valuation: We expect CESCs standalone top line and bottom line to grow at a CAGR of 10.3% and 4.0%, respectively, over FY201113E. At the CMP, the stock is trading at 6.3x FY2013E EPS and 0.6x FY2013E P/BV. We have assigned 0.85x FY2013E P/BV multiple to the companys power business, considering its low RoE, and have arrived at a value of `357/share. We have valued the retail business and real estate business at `11/share each. We maintain our Buy view on the stock with an SOTP-based target price of `379.

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 52.5 23.8 18.4 5.3

Abs. (%) Sensex CESC

3m

1yr

3yr 74.7 20.9

0.8 (16.5) (19.6) (32.0)

Key financials
Y/E March (` cr) Net sales % chg Adj. net profit % chg OPM (%) EPS (`) P/E (x) P/BV (x) RoE (%) RoCE (%) EV/Sales (x) EV/EBITDA (x)
Source: Company, Angel Research

FY2010 3,355 8.6 432 5.8 22.3 34.5 7.7 0.9 12.0 7.5 1.6 7.0

FY2011 4,011 19.6 488 12.9 25.0 38.9 6.8 0.8 12.0 9.3 1.3 5.4

FY2012E 4,533 13.0 514 5.3 24.2 40.9 6.5 0.7 11.3 9.2 1.3 5.2

FY2013E 4,880 7.6 528 2.8 23.5 42.1 6.3 0.6 10.5 8.6 1.1 4.8

V Srinivasan
022-39357800 Ext 6831 v.srinivasan@angelbroking.com

Sourabh Taparia
022-39357800 Ext 6815 Sourabh.taparia@angelbroking.com

Please refer to important disclosures at the end of this report

CESC | 2QFY2012 Result Update

Exhibit 1: 2QFY2012 performance

Y/E March (` cr) Net Sales Fuel cost (% of Sales) Power Purchase cost (% of Sales) Staff Costs (% of Sales) Other Expenses (% of Sales) Total Expenditure Operating Profit OPM (%) Interest Depreciation Other Income PBT (incl. Extr. Items) (% of Sales) Provision for Taxation (% of PBT) Reported PAT PATM EPS (`) 2QFY2012 1,223 446 36 218 18 122 10 195 16 981 242 19.8 75 72 47 142 12 28 19.7 114 9 9.0 1QFY2012 1,169 459 39 191 16 112 10 154 13 916 253 21.6 70 71 27 139 12 28 20.1 111 9 8.8 2.7 7.1 (4.3) (186)bp 7.1 1.4 74.1 2.2 26.6 8.9 14.1 % Chg qoq 4.6 (2.8) 2QFY2011 % Chg yoy 1,090 411 38 243 22 147 13 (14) (1) 787 303 27.8 77 64 32 194 18 39 20.1 155 14 12.3 (26.5) (26.5) (28.2) 24.7 (20.1) (801)bp (2.6) 12.5 46.9 (26.8) (1,492.9) (17.0) (10.3) 12.2 8.5

Source: Company, Angel Research

Exhibit 2: 2QFY2012 Actual vs. Angel estimates

(` cr) Net sales Operating profit OPM (%) Net profit
Source: Company, Angel Research

Actual
1,223 242 19.8 114

Estimates
1,155 269 23.3 146

Variation (%)
5.9 (9.9) (346)bp (21.7)

November 11, 2011

CESC | 2QFY2012 Result Update

Exhibit 3: Financial performance

1,400 1,200 1,000 1,096 1,105 939 875 1,183 1,223 35

30

(` cr)

800 600 400 200 0 1QFY11 2QFY11 3QFY11 4QFY11 Net Revenue Net Profit 1QFY12 2QFY12 OPM (%) - RHS 110 155 110 112 111 114

25

20

15

Source: Company, Angel Research

Operational highlights
For 2QFY2012, CESC registered 12.2% yoy growth in its standalone top line to `1,223cr, aided by higher realization and sales volume. Realization improved by 7.5% yoy to `5.34 per unit on account higher power and fuel costs. Sales volume increased by 5% yoy to 2,324MU despite modest 1% growth in generation and a 3.5% reduction in power purchased to 501MU. However, on a positive note, the company reported an 80bp yoy reduction in T&D losses to 12.8%, which aided growth in sales volume.

Power generation up marginally by 1% yoy

During 2QFY2012, power generation increased marginally by 1% yoy to 2,356MU and power purchase declined by 3.5% yoy to 501MU. The Budge-Budge plant reported PLF of 93% during the quarter, as against 86.9% recorded in 2QFY2011. Power generation at the Budge-Budge plant stood at 1,540MU in 2QFY2012 as against 1,532MU in 2QFY2011. Titagarh and Southern plants reported PLFs of 86.6% (95.2%) and 94.3% (99.6%), respectively.

Exhibit 4: Plant-wise generation volumes

1,800 1,532 1,500 1,200 1,439 1,411 1,057 1,555 1,540

(MU)

900 600 300 0 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 Budge-Budge Titagarh Southern 2QFY12 505 304 505 297 420 232 436 256 474 281 459 281

Source: Company, Angel Research

November 11, 2011

CESC | 2QFY2012 Result Update

Exhibit 5: Plant-wise operational performance (2QFY2012)

PLF (%) Plant Budge-Budge Titagarh Southern
Source: Company, Angel Research

Generation (MU) 2QFY12 1,540 459 281 2QFY11 1,438 505 297

2QFY12 93.0 86.6 94.3

2QFY11 86.9 95.2 99.6

Investment arguments
Power business being scaled up
Currently, CESC enjoys consistent returns of ~20% (incl. incentives) on regulated equity from its operations in the Kolkata-licensed area, where the company has sole license to distribute power. CESC's huge expansion plans in the generation front are expected to propel its growth going ahead. The company has 4,440MW of projects under the construction and development stages. CESCs 600MW Chandrapur plant has received all the clearances and the project is under construction. CESC has acquired all the necessary clearances for the 600MW Haldia Phase-I project as well. Water clearance and fuel linkages are also in place for the project. The EPC and BTG orders for the Haldia project have been placed with Punj Lloyd and Shanghai Electric Group. The project is expected to be operational in 2QFY2014.

Exhibit 6: Projects under construction/development

Location Chandrapur Purpose PPA (50%) and Merchant (50%) PPA (75%) and Merchant (25%) 25% to Orissa at regulated tariff, balance not yet decided 25% to Jharkhand at regulated tariff, balance not yet decided Not yet decided Size (MW) 600 Cost (` cr) 2,900 Exp comm. date 2QFY2014 Remarks Fuel linkage received; EPC and BTG orders have been placed; Project is under construction Required clearances, including environmental clearances, have been obtained; Ministry of coal has awarded coal linkages; Financial closure has been achieved; Final approval has been received from WBERC; BOP order has been placed with Punj Lloyd. BTG order has been placed with Shanghai Electric Group Land acquisition has been completed; All major approvals have been received; Coal allocation is being pursued 110mt coal block allocated; MoU signed with Jharkhand government; Land acquisition process initiated. The company has acquired prospecting license for mine Land acquired; Fuel linkage awaited; TOR received

Haldia Phase-1

600

3,300

FY2015

Dhenkanal, Orissa

1,320

6,500

FY2016

Dumka, Jharkhand

600

3,200

FY2016

Balagarh Total
Source: Company, Angel Research

1,320 4,440

6,800 22,700

FY2017

November 11, 2011

CESC | 2QFY2012 Result Update

Leading private sector player with a proven track record

CESC is one of the oldest utility companies in India. The company has been generating and distributing power in Kolkata since 1897. CESC is an integrated power player with presence in power generation, distribution and coal mining. The company has a customer base of about 2.5mn customers in Kolkata and Howrah. CESCs overall PLF has remained healthy (more than 90%) over the last few years, barring FY2011 when PLF stood at 85.2% (largely due to low PLF in the newly commissioned Budge-Budge plant). The companys efficiency has improved in the distribution front as well, with AT&C losses reducing to 13.3% in FY2010 from 18.8% in FY2003. CESC has tied up with SP Global Solutions, a subsidiary of Singapore Power, to improve the reliability of its distribution system, which could aid further reduction in losses.

Retail business showing signs of recovery

Currently, Spencers has 195 outlets spread across the country and operates 24 hyper stores and 14 super stores with total area of 571,000 sq. ft. and 95,000 sq. ft., respectively. The companys sales/sq. ft. has improved considerably in the last few quarters and stood at `1,066 in 1HFY2012. During 1HFY2012, store EBITDA/sq. ft. stood at `31.

Tapping the unexplored land bank

CESC Properties, a 100% subsidiary of CESC, plans to develop a 0.4mn sq. ft. shopping mall in Central Kolkata. The mall is expected to start operations in September 2012. Going ahead, CESC Properties also plans to monetize its 35-acre land at Mulajore.

Outlook and valuation

At the CMP, the stock is trading at 6.3x FY2013E EPS and at 0.6x FY2013E P/BV of its power business. We have assigned 0.85x FY2013E P/BV multiple to the companys power business, considering its low RoE, and have arrived at a value of `357/share. We have valued Spencer's on mcap/sales basis at 0.1x FY2013E sales, which is at a significant discount to its peers, and have arrived at a value of `11/share. We have valued CESCs mall in Central Kolkata and land in Mulajore (35 acres) on NAV basis and have arrived at a price of `11/share for its real estate business. We maintain our Buy recommendation on the stock with an SOTP-based target price of `379.

November 11, 2011

CESC | 2QFY2012 Result Update

Exhibit 7: SOTP valuation

Business portfolio Existing power plants Retail Spencer's (94% stake) Real estate CESC Properties Total
Source: Company, Angel Research

Methodology 0.85x FY2013E BV 0.1x FY2013E Sales NAV

Value/Share (`) 357 11 11 379

Exhibit 8: Change in estimates

(` cr) Earlier Net sales Operating exp. Operating profit Depreciation Interest PBT Tax PAT 4,453 3,361 1,092 278 307 664 132 532 FY12E Revised 4,533 3,436 1,098 300 313 642 128 514 Variation (%) 1.8 2.2 0.6 7.9 2.0 (3.3) (3.3) (3.3) Earlier 4,817 3,672 1,145 283 344 702 140 562 FY13E Revised 4,880 3,735 1,145 314 356 660 132 528 Variation (%) 1.3 1.7 0.0 10.8 3.6 (6.0) (6.0) (6.0)

Source: Company, Angel Research

Exhibit 9: Recommendation summary

Company CESC GIPCL NTPC Reco. Buy Buy Buy CMP (`) 265 78 174 Tgt. price (`) 379 95 201 Upside (%) 43.0 22.6 15.7 FY2013E P/BV (x) 0.6 0.7 1.7 FY2013E P/E (x) 6.3 7.1 13.2 FY2011-13E EPS CAGR (%) 4.0 0.8 7.6 FY2013E RoCE (%) 8.6 11.7 10.3 FY2013E RoE (%) 10.5 10.8 13.7

Source: Company, Angel Research

Exhibit 10: One-year forward P/BV band

800 650

(Share Price ` )

500 350 200 50 Apr-06 Apr-07 Price Apr-08 0.75x Apr-09 1.15x Apr-10 1.55x Apr-11 1.95x

Source: Company, Angel Research

November 11, 2011

CESC | 2QFY2012 Result Update

Profit & loss statement (Standalone)

Y/E March (` cr) Total operating income % chg Total Expenditure Net Raw Materials Personnel SG&A and other costs EBITDA % chg (% of Net Sales) Depreciation& Amortisation EBIT % chg (% of Net Sales) Interest & other Charges Other Income (% of PBT) Share in profit of Associates Recurring PBT % chg Extraordinary Expense/(Inc.) PBT (reported) Tax (% of PBT) PAT (reported) ADJ. PAT % chg (% of Net Sales) Basic EPS (`) Fully Diluted EPS (`) % chg FY08
2,829 11.8 2,255 1,244 926 85 574 (4.8) 20.3 168 406 (8.9) 14.3 182 179 45.7 392 15.8 (11) 403 48 11.8 355 344 15.4 12.2 28.3 28.3 (20.0)

FY09
3,088 9.2 2,426 1,357 363 705 662 15.4 21.5 175 488 20.2 15.8 193 170 36.7 464 18.4 (1) 465 55 11.9 410 409 18.7 13.2 32.6 32.6 15.3

FY10
3,355 8.6 2,605 1,714 418 473 750 13.2 22.3 206 544 11.6 16.2 178 156 30.0 521 12.4 (1) 522 89 17.0 433 432 5.8 12.9 34.5 34.5 5.8

FY11
4,011 19.6 3,010 2,094 472 444 1,001 33.6 25.0 267 734 34.9 18.3 272 152 24.8 614 17.8 614 126 20.5 488 488 12.9 12.2 38.9 38.9 12.7

FY12E
4,533 13.0 3,436 2,389 534 513 1,098 9.6 24.2 300 797 8.6 17.6 313 157 24.5 642 4.5 642 128 19.9 514 514 5.3 11.3 40.9 40.9 5.3

FY13E
4,880 8 3,735 2,608 574 552 1,145 4 23 314 831 4 17 356 185 28 660 3 660 132 20 528 528 3 11 42.1 42.1 2.8

November 11, 2011

CESC | 2QFY2012 Result Update

Balance sheet (Standalone)

Y/E March (` cr) SOURCES OF FUNDS Equity Share Capital Reserves & Surplus Shareholders Funds Total Loans Deferred Tax Liability Total Liabilities APPLICATION OF FUNDS Gross Block Less: Acc. Depreciation Net Block Capital Work-in-Progress Goodwill Investments Current Assets Cash Loans & Advances Other Current liabilities Net Current Assets Mis. Exp. not written off Total Assets
126 2,847 2,972 2,569 5,541 7,129 3,534 3,595 620 570 2,089 986 611 491 1,341 748 9 5,541 126 3,267 3,392 3,557 9 6,958 7,938 3,826 4,112 1,280 310 2,936 1,251 1,084 601 1,688 1,248 8 6,958 126 3,697 3,823 3,708 7,531 9,990 4,131 5,859 278 679 2,884 1,120 1,026 738 2,176 708 7 7,531 126 4,179 4,304 3,952 8,256 10,704 4,490 6,214 272 1,084 2,893 839 1,189 865 2,213 680 6 8,256 126 4,689 4,814 4,352 9,166 11,341 4,790 6,550 567 1,184 3,235 803 1,343 1,088 2,376 859 6 9,166 126 5,157 5,283 4,952 10,235 11,852 5,104 6,748 593 2,084 3,265 666 1,446 1,153 2,460 804 6 10,235

FY08

FY09

FY10

FY11

FY12E

FY13E

November 11, 2011

CESC | 2QFY2012 Result Update

Cash flow statement (Standalone)

Y/E March (` cr) Profit before tax Depreciation Change in Working Capital Less: Other income Direct taxes paid Cash Flow from Operations (Inc)/ Decin Fixed Assets (Inc)/ Dec in Investments Other income Cash Flow from Investing Issue of Equity Inc./(Dec.) in loans Dividend Paid (Incl. Tax) Others Cash Flow from Financing Inc./(Dec.) in Cash Opening Cash balances Closing Cash balances FY08 403 168 495 179 48 840 (835) (328) 179 (984) 622 18 58 182 400 255 731 986 FY09 465 175 153 170 55 568 (1,469) 259 170 (1,040) 0 988 58 193 737 265 986 1,251 FY10 522 206 734 156 89 1,217 (1,050) (368) 156 (1,262) 151 58 178 (85) (131) 1,251 1,120 FY11 614 267 (109) 152 126 494 (708) (406) 152 (961) 244 58 186 (281) 1,120 839 FY12E 642 300 (160) 157 128 497 (932) (100) 157 (874) 400 59 341 (36) 839 803 FY13E 660 314 (84) 185 132 573 (537) (900) 185 (1,253) 600 59 541 (138) 803 666

November 11, 2011

CESC | 2QFY2012 Result Update

Key ratios
Y/E March Valuation Ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Sales EV/EBITDA EV / Total Assets Per Share Data (`) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value DuPont Analysis (%) EBIT margin Tax retention ratio Asset turnover (x) ROIC (Post-tax) Cost of Debt (Post Tax) Leverage (x) Operating ROE Returns (%) ROCE (Pre-tax) Angel ROIC (Pre-tax) ROE Turnover ratios (x) Asset Turnover (Gross Block) Inventory / Sales (days) Receivables (days) Payables (days) WC cycle (ex-cash) (days) Solvency ratios (x) Net debt to equity Net debt to EBITDA Interest Coverage (EBIT / Int.)
0.5 2.8 2.2 0.7 3.5 2.5 0.7 3.5 3.1 0.7 3.1 2.7 0.7 3.2 2.5 0.8 3.7 2.3 0.4 22 47 195 (26) 0.4 23 42 228 (14) 0.4 24 48 271 (23) 0.4 24 49 266 (26) 0.4 26 53 244 (4) 0.4 27 57 236 7 8.0 10.8 13.9 7.8 11.7 12.8 7.5 10.3 12.0 9.3 11.1 12.0 9.2 10.7 11.3 8.6 9.9 10.5 14.3 88.2 0.7 8.5 6.3 1.0 10.9 15.8 88.1 0.6 8.4 5.5 1.0 11.1 16.2 83.0 0.6 7.5 4.1 1.0 10.9 18.3 79.5 0.6 8.4 5.6 0.9 11.1 17.6 80.1 0.6 8.1 6.0 0.9 10.0 17.0 80.1 0.5 7.4 6.1 0.9 8.6 28.3 28.3 41.7 4.7 237 32.6 32.6 46.5 4.7 270 34.5 34.5 50.9 4.7 304 38.9 38.9 60.2 4.6 343 40.9 40.9 64.8 4.7 383 42.1 42.1 67.1 4.7 421 9.4 6.4 1.1 1.8 1.5 7.6 0.8 8.1 5.7 1.0 1.8 1.7 8.1 0.8 7.7 5.2 0.9 1.8 1.6 7.0 0.7 6.8 4.4 0.8 1.7 1.3 5.4 0.6 6.5 4.1 0.7 1.8 1.3 5.2 0.6 6.3 4.0 0.6 1.8 1.1 4.8 0.5

FY08

FY09

FY10

FY11

FY12E

FY13E

November 11, 2011

10

CESC | 2QFY2012 Result Update

Research Team Tel: 022 - 39357800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

DISCLAIMER
This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Broking Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Broking Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may have investment positions in the stocks recommended in this report.

Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

CESC No No No No

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors

Ratings (Returns):

Buy (> 15%) Reduce (-5% to 15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

November 11, 2011

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