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CESC Ltd.

Economic View-:

If you have not yet read the last week’s post on market updates then please read it first before reading this post.

Market Update-: https://darkhorsestocks.com/2020/04/26/market-update/

This may not be the right time to buy any of the stocks as we may be headed for the severe recession unless some extraordinary measures are taken by the government by way of heavy stimulus packages but honestly we are very sceptical about it . The real effects of slowdown may take time to surface or may only felt later in the coming period. 

(We do hope very strongly that we may be wrong but precautions are needed to be taken.)

Economy is not like a switch of light that it can be turned on and off easily but it is more of like an Industrial Boiler which once shut down may take significant time to get up to the certain minimum required temperature and only then the real production activities can be carried out.

Ground reality as faced by majority of the industrial owners is quiet different in reality. Once the lockdown ends further slowdown in certain sectors in inevitable. Workers stuck at the factories , Plants, Sites far away from their hometown will start going to their respective hometowns. Infrastructure may come to halt in event there are no special incentives if any announced by the employers which further would lead to increase in the cost of labour one of the main factors in the cost of production. 

Chances are new inflow of orders may be slowed which will put further pressure on the industries with heavy leverages, some of which can even go bankrupt. Operating margins will be under pressure specifically in those industries where fixed cost do form a significant part of the investments which can lead to increase in borrowings and further to increase interest expenses.

Although furred with the sufficient liquidity banks are reluctant to lend money and the situation may even worsen after the lockdown if there is further delay in payments of the instalments. In such cases the cost of capital can rise further with almost all large to medium to small companies finding it extremely difficult to raise money via debt instruments.

In past during some of the sever crisis the market returned to the normal levels within very short period of time making people believe that the V-shaped recovery had taken plane but it was only until later the real effects were started to feel on the economy. After the sharp recovery in short term the recession lasted for about 3 years.

(If you are not familiar with the recovery models request you to watch our short web series effects of covid-19 on the world economy which may help you grasp some of the economic contents mentioned here in dept.)

EFFECTS OF COVID-19 ON THE WORLD ECONOMY

However when the economic expansion begins, the economic activity starts picking up but which sector will grow at the fastest pace is very difficult to say but that is not the case with Power Generation and Distribution sector today.

Electricity is a part of our day to day lives. No matter what electricity is required everywhere . Thus consumption may vary with the economic activity taking place in the country but the home consumption can be said to remain flat irrespective of any industrial activities carried.

Further it can be said that there are three main factors of production:  Land , Labour and Capital but the industrialisation and the automation electricity can be considered as a key factor of production. So as soon as the economic activity starts picking up the same can be visible with increasing consumption of the electricity . Power consumption or Power distribution can be said to be one of the Coincident or Leading Economic indicator.

Why to Buy the company Mentioned in todays post?

Generally when the economic recovery starts, electricity being the basic necessity today in the modern era as a factor of production, consumption of it can rise faster than other factors required in the production. Thus it can be said that after the stock markets power consumption can also be termed as on of the leading economic indicators. The growth in the numbers can suggest that industrial production is picking up.

Real GDP is the most commonly-used economic indicator, but it is only available quarterly and released with some delay. No matter any kind of activities to be carried on , Electricity would be the basic necessity to start the operation. Therefore this weeks DARKHORSESTOCK company belongs to the Power generation and Distribution sector. 

CESC ltd-:

CESC is more then 100 Years old company part of the Kolkata-based flagship company of the RP-Sanjiv Goenka Group. The company traits back its history to the first demonstration of electric light conducted in Calcutta on 24 July 1879 by P W Fleury & Co. In 1881, 36 electric lights lit up a Cotton Mill of Mackinnon & Mackenzie.  On 7 January 1897 Kilburn & Co. secured the Calcutta electric lighting license as agents of The Indian Electric Company Limited. The company soon changed its name to the Calcutta Electric Supply Corporation Limited and in 1897, The Calcutta Electric Supply Corporation Limited was registered in London. The RPG group was associated with the company since 1970.

CESC is a fully integrated power utility with its operation spanning the entire value chain: right from mining coal, generating power, distribution of power. The company serves 2.4 million customers within 567 square kilometers of Kolkata and Howrah, delivering safe, cost-effective and reliable energy to our consumers.

The company has private participation in generation, transmission and distribution of electrical power. 

The company is the sole distributor of electricity within an area of 567sq km of Kolkata & Howrah and serve 2.9 million consumers which include domestic, industrial and commercial users. CESC owns & operates three thermal power plants generating 1125 MW of power. 

These are Budge Budge Generating Station (750 MW), Southern Generating Station (135 MW), & Titagarh Generating Station (240 MW) . 

From three generating stations, it accomplishes 88% of our customer’s electricity requirement and remaining 12% is achieved by purchase of electricity from third parties.

CESC also owns & operates the Transmission & Distribution System through which it supplies electricity to consumers. This system comprises of 474 km circuit of transmission lines linking the company’s generating & receiving stations with 105 distribution stations, 8,211 circuit km of HT lines further linking distribution stations with LT substations, large industrial consumers and 12,269 circuit km of LT lines connecting the LT substations to LT consumers.

The company is recent course have significantly moved upon renewable sources. 

In and endeavour to pursue that CESC has brought forth three projects in three different areas of renewable sources. These are Gujarat Solar, which is a solar plant in Gujarat’s Kutch generating 9MW solar energy, Hydro Power Venture (Papu Hydropower Projects Limited & Pachi Hydropower Projects) in Arunachal Pradesh, generating 146 MW energy and Wind Power Operation, a 24 MW project at Dangi in Rajasthan.

CESC has also installed two thermal power plants to meet the requirement of its electricity. These are Chandrapur Thermal Plant which is 600 MW project at Chandrapur, Maharastra and Haldia Thermal Plant which is 600 MW project at Haldia, West Bengal.

CESC’s future goals include expanding generating capacity to 7,000 MW over the next five or six years. The new power generating projects will involve investments of more than â‚ą300 billion (US$4.2 billion or €3.9 billion).

Performance Reports-:

The company has reported a decent to strong performance in the third quarter of the FY-20. Also the performance of all the generation and distribution subsidiaries has increased across all the verticals. Losses form one of the subsidiaries Dhariwal Infra has seen strong reduction from the losses of 121 crore in Q3FY19 to 64 crore in Q3FY20. Haldia Energy was operating satisfactorily as the profit for 9 months FY20 was at 250 crore. However on the distribution side, losses have declined from 38 crore in Q3FY19 to 29 crore in Q3FY20.

The company has also declared an interim dividend of rs 20/share.

CESC reported a decent operational performance in Q3FY20. Revenues were in line with estimates while lower power purchase cost led to a beat in EBITDA and PAT. Consequently, PAT was higher than estimates. However, on the subsidiaries front, the performance of all generation and distribution subsidiaries has significantly improved across all verticals. The company has also declared an interim dividend of | 20/share. 

Financials-:

  • The debt of the company has been stable over a period of 5 years.
  • Although higher debt levels do remain a concern over the longer period.
  • CESC has sufficient amount of investments which is above 1000Crore Rs.
  • The company also has sufficient cash and equivalents.
  • Cesc has decent operating margins in range of 25-30% over past 2-3 Years.
  • The compounded profit growth rate of the company over the period of 3 and 5 year stands at 19% .

Concern-:  Q4FY20 earnings are expected to be disappointing . Further the power ministry’s move to provide a moratorium on bill payments is likely to impact distribution company’s collection efficiency and would stretch its working capital cycles.

Overall View-: The country-wide lockdown due to Covid-19 has led to a significant 30-35% decline in power demand and generation, mainly due to a complete shutdown of industrial and commercial sectors. Demand is expected to remain subdued during Q1FY21, as many states have already extended the lockdown till 30 April, which may get further extended depending upon the situation. In addition, the demand decline is forcing many untied entities to shut down their power plants, which should further aggravate their distressed financial condition. Merchant players should continue to face the heat as recent government schemes such as Pilot projects and SHAKTI are unlikely to produce desired results due to the lockdown, which would lead to subdued demand. Power purchase is likely to decline along with PAT due to the lockdown impact.

Conclusion-: It may not be advisable to go out and instantly start buying the stock but depending upon the risk investors are willing to take this is one such stock which one needs to keep a eye on. Instead of buying some of the stable FMCG or Pharma companies which are already trading at decent high valuations with very moderate to almost no growth prospects, this stock is worth looking at with cheap valuations and good growth prospects once the economy is on the path of recovery.

CESC DEMERGER DETAILS AS POSTED WITH PREVIOUS REPORT.
CESC suggested in DARKHORSESTOCKS along with the date and the price on that date,

Previously CESC was suggested before demerger of the company took place. Link to the past report is – https://darkhorsestocks.com/2019/12/13/calcutta-electric-supply-corporation/

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