>CESC

Recommendation: Buy
Price target: Rs405
Current market price: Rs282

Results dented by high purchase cost; retail business improves

Result highlights

• Sales reported in line with estimate: CESC's sales in Q1FY2013 grew by 20% year on year (YoY) but declined by 4% quarter on quarter (QoQ) to Rs1,404 crore. The company reported sales in line with our estimate along with power generation units at 2430 million units (MU). The company purchased 632 MU (32% above our estimate) of power during the quarter while transmission and distribution (T&D) losses stood at 595 MU (14% higher than our estimate).
  The YoY sales growth would be attributed to both - higher power sent out (+11%) and tariff hike (+9%). Sequentially the revenue reported a growth of 4% despite the power sold volume improving by 36% (reflecting summer season demand) as CESC got approval for a 14% tariff revision in Q4FY2012 which brings in a one-off adjustment in Q4FY2012. Therefore sequentially the numbers are not comparable. 
• ..but higher power purchase cost pushed operating profit lower than estimates: Though the sales have been reported in line with our estimate, a higher than estimated power purchase cost pushed the operating profit below our estimate by 6% to Rs290 crore. The power purchase cost jumped briskly with a growth rate of 80% YoY and 193% QoQ, driven by a surprisingly high volume (up 50% YoY and 200% QoQ). During Q1FY2013, the cost of purchased power stood at Rs5.4/unit, up 20% YoY and down 3% QoQ.
  The Operating profit grew 9% YoY against a 20% sales growth, primarily on account of a surge in the power purchase cost (up 80%). Even sequentially, the higher power purchase cost impacted numbers; however due to tariff revision adjustment built in Q4FY2012 numbers, the sequential number is not comparable. However, sequentially, the operating profit declined 33%. 
• Net profit grew by 13% YoY, though lower than estimate: Below the operating profit, a higher than estimated interest and depreciation cost pushed the profit after tax (PAT) 14% below our estimate to Rs125 crore in Q1FY2013. This reflects a growth of 13% YoY. The numbers are not comparable sequentially due to one-time tariff revision adjustment done in Q4FY2012. This translates into earnings per share (EPS) of Rs9.9 for Q1FY2013. 
• Spencers store level profitability improved coupled with a 15% same store sales growth: The rationalisation and restructuring efforts in the retail business seem to be bearing results as store level profitability has improved significantly to 3.7% (against 2.4% in Q1FY2012 and 3.2% in Q4FY2012) with sustained same store sale growth of a healthy 15% YoY in this quarter. The management aims to take store level profitability to 4% in FY2013; the same would be a key monitorable.
  Despite the closure of 43 stores over last year (163 operational now), Spencer?s total trading area has improved from 9,54,000 sq ft to 9,75,000 sq ft in Q1FY2013. This indicates the focused attempt of the company to operate on a larger format to spread overheads. 
• View: retain Buy rating and target price at Rs405: Currently, the stock is trading at 0.6x its FY2013 and 0.5x its FY2014 book value (BV; standalone). We continue to remain positive on CESC as its standalone business (power) is doing fairly well and as a growth trigger, development of new projects is on track. We believe the loss making retail business is the key reason for the discounted valuations assigned to the stock. But we read the recent improvement in the retail business as a silver lining. Tactical efforts by the management to improve its loss making retail business and attempts towards bringing it into the black (store level profitability improved to 3.7% vs 2.4% over the same quarter last year) are visible. Therefore, we maintain our Buy on CESC and retain our target price of Rs405. 

RISH TRADER