CESC: Demerger To Unlock Value

CESC, the flagship company of RP-Sanjiv Goenka group, is a vertically integrated power utility engaged in generation, transmission and distribution of electricity to the consumers in Kolkata and Howrah covering an area of 567 sq.km. and catering to over 3 mn customers.

CESC would be demerged into 4 entities:
1) Distribution (Kolkata, Noida and franchise model)
It would be the only pure-play power distribution business in India with steady cash flow and growth. A power distribution business is one of the best regulated business to own, given low gestation period, steady growth and negative working capital. The regulated distribution business earns 18% RoE. CESC has 100+ years of experience in the distribution business, and has power distribution licenses in Kota, Bharatpur, Bikaner and Noida.

2) Generation (Kolkata, Chandrapur and Haldia)
The generation business has a combined capacity of ~2.5GW (thermal power: 2.37GW, wind mills: 156MW, solar plant: 18MW). The regulated generation business earns 17% RoE. Healthy dividends likely from generation business.

a) Thermal Power:
Kolkata    – 1125MW
Haldia      – 600MW
Dhariwal – 600MW

b) Renewables:
Wind Mills  – 156MW
Solar Plant  –  18W

3) Retail (Spencer and Music World)
Spencer has 124 stores including 39 hypermarkets across India.

4) CESC Ventures (Firstsource and Quest Mall)
CESC owns 55% of Firstsource Solutions

Post restructuring, a Shareholder holding 10 shares in CESC Ltd will get 5 shares of CESC Ltd, 5 shares of CESC Genco, 6 shares of Spencer’s Retail Ltd and 2 shares of CESC Ventures Ltd

CESC had a history of investments in non-core businesses:
Spencer Retail – continue to make losses over the past decade
Firstsource Solutions
Cricket team

Management clarified that new opportunities will be explored only through CESC Ventures Ltd., and the group would not use CESC as an investment vehicle.

Management:
RP-Sanjiv Goenka Group is a well known diversified business house in India

Investors:
– Promoters hold 49.9% of the company
– HDFC MF holds 9.0% of the company
– Reliance MF holds 1.9% of the company
– ICICI MF hold 1.2% of the company
– DSPBR MF hold 1.1% of the company
– Abu Dhabi Investment Authority holds 1.0% of the company

Valuation:
01-Jun-2018:
At the CMP of ₹1031, the rate of return is 12.3% based on pre-tax earnings to market cap. It’s available at 1.8 times of sales to market cap.

HDFC Securities assigns a target price of ₹1238 based on SOTP valuation.

Kotak Securities assigns a target price of ₹1211 based on SOTP basis.
cesc-1211

Resources:
RP Sanjiv Goenka: An Inspiring Story

A Marwari Legacy: RP Sanjiv Goenka

The Tale Of 2 Goenka Brothers:

CESC Demerger Math:

CESC to be split into 4 entities:

Sanjiv Goenka on business restructuring, acquisitions, Spencer Retail’s listing, sports investments and success of Saregama Carvaan. Read more: [LiveMint]

 

Disclosure:
Invested

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