Broking firm, Emkay Global is upbeat on the stock of power generation and power utility company, CESC. The company sees a sharp increase in price of the stock in the coming days.
Price correction offers opportunity
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According to Emkay Global, the stock of CESC has corrected 12% in the last one and a half months since the FY19-20 tariff order for the Kolkata license area came out.
"Investors are mainly concerned about the non-consideration of interest on short-term borrowings and working capital in the present tariff, though WBERC has clearly mentioned submitting details in APR. WBERC will examine the necessity of such loans on the tariff gap during the year and will decide accordingly. We believe that it will be eventually passed on to consumers. It is important to note that capex for FY19-20 has been approved and that the T&D loss has been kept unchanged at 14.3%. The actual T&D loss for FY19-20 stood at 9%, and hence CESC will benefit. We believe that the Kolkata license area will remain a steady cash cow for the company," Emkay Global has stated.
Distribution: Key growth driver for the company
Distribution remains the growth driver for CESC according to the brokerage. "In the last few years, it has won four distribution-based franchises - three in Rajasthan (Kota, Bharatpur and Bikaner in FY17/18) and one in Malegaon, Maharashtra. The loss at Malegaon has come down to Rs410mn (9MFY22) from Rs540mn (9MFY21). While the performance of the Malegaon circle was satisfactory, Rajasthan discoms' performance has been impacted by Kota circle. Losses from Rajasthan circles have widened to Rs190mn in 9MFY22 from Rs110mn in 9MFY21. Of these, Bharatpur and Bikaner have already turned positive. CESC, through its subsidiary, has emerged as the highest bidder to acquire a 100% stake in the power distribution company of Chandigarh," Emkay Global has said.
Valuation and view
Emkay Global has maintained its positive view on CESC with a Sept '22 target price of Rs 101 (unchanged). At current market price, the stock offers a 6% dividend yield and mid-single digit earnings growth.
"We believe CESC remains one of the key beneficiaries of the distribution reforms anticipated in the country in the coming years. With 13% RoE and PB of 0.8x, it remains attractively priced. Maintain Buy," the brokerage has said.