CESC is India’s first fully integrated electrical utility company and was established in 1899 for generating and distributing power in Kolkata and Howrah. The company is under the umbrella of RP – Sanjiv Goenka Group and has been a forerunner for private participation in generation, transmission and distribution of electrical power.
The company’s shares have 52 weeks price band of INR 783-365 and a total market capitalization of INR 82 billion which makes it a Mid-Cap company. The shares have a P/E ratio of 6.57 and a dividend yield of 4.64%
Now, let’s take a deep dive into the fundamentals of the company.
The company will be evaluated on 10 parameters and each would be given a rating out of 5 stars. From this, we will arrive at a combined stock rating for the company. As the ratings are based on long term past performance, they are relevant for at least 3 years in the future until FY 2022. The parameters are as follows.
1. Economic Moat
2. Business Model and Management
3. Growth Ratios
4. Profitability Ratios
5. Cash Flow Ratios
6. Liquidity and Solvency Ratios
8. Valuation Ratios
9. ROE (Du Pont Analysis)
10. Future Prospects
(All units are INR Millions except ratios and per share data)
You can get the complete excel model used for this analysis from below:
1.Economic Moat (★ ★ ★ ☆ ☆)
The company operates in the utility sector in which market dominance comes from Capacity, Distribution and Licencing. The industry is also asset-heavy and the profit margins get trimmed by depreciation and interest expenses. 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. They own and operate 3+ thermal power plants generating 1125+ MW of power.
With their 3+ generating stations, the company has accomplished 88% of total customer’s electricity requirement and the remaining 12% is achieved by the purchase of electricity from third parties. More than 50% of coal is sourced from captive mines for the generation of electricity in their generating stations. This overall shows the scale, reach and operational effectiveness for the company. Therefore this category gets 3 stars in CESC fundamental analysis.
2. Business Model and Management (★ ★ ★ ☆ ☆)
The business model of the company is such that it operates three plants namely Budge Generating Station (750 MW), Southern Generating Station (135 MW) and Titagarh Generating Station (240 MW). They also own and operate the Transmission and Distribution System comprising of 474+ km circuit of transmission lines linking the company’s generating and 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 has also undertaken 3+ projects in three different areas of renewable sources. These are Gujarat Solar, which is a solar plant in Gujarat’s Kutch generating 9+ MW solar energy, Hydro Power Venture in Arunachal Pradesh, generating 146 MW energy and Wind Power Operation, a 24 MW project at Dangi in Rajasthan. CESC has installed two thermal power plants to meet their requirement of electricity. These are Chandrapur Thermal Plant which has 600 MW project at Chandrapur, Maharastra and Haldia Thermal Plant which is 600 MW project at Haldia, West Bengal.
Mr Sanjiv Goenka is the Chairman of the company and also of the $ 4.3 billion, the RP-Sanjiv Goenka Group. He was a former President of the Confederation of Indian Industries (CII) as well as the All India Management Institute (AIMA), and a member of the Prime Minister’s Council on Trade & Industry. Mr Shashwat Goenka is the Vice Chairman of the company. He is also a Director on the Boards of Spencer International Hotels Ltd, Phillips Carbon Black Limited (PCBL), Spencer’s Retail Limited (SRL) and CESC Ventures Limited (CVL). Overall the management and company’s administration is in tight control of the promoter’s family which may be a concern for the minority shareholders. Therefore this category gets 3 stars in CESC fundamental analysis.
3. Growth Ratios (★ ★ ★ ★ ☆)
The revenue has seen a CAGR growth of 10% over the last 10 years. The operating and net income has also increased linearly during the same period. The working capital has been negative due to high payables and the Cap-Ex has also been stable over the years. This overall indicates a good growth for the company considering the asset-heavy nature of the business. Therefore this category gets 4 stars in CESC fundamental analysis.
4. Profitability Ratios (★ ★ ★ ★ ★)
The gross margin has declined significantly due to the higher expense in the power generation business. This however does not have the trickle-down effect on other margins and the return on assets have also increased. The net income is significantly improved over the years. Overall this indicates good profitability and pricing power of the company. Therefore this category gets 5 stars in CESC fundamental analysis.
5. Cash Flow Ratios (★ ★ ★ ☆ ☆)
The net income margin has improved and the Cap-Ex as a percentage of sales has remained stable. The free cash flow as a percentage of net income has been positive can decline over the recent years. The operating and free cash flow growth rate has also flat over the years. This overall indicates a moderate cash flow position for the company. Therefore this category gets 3 stars in CESC fundamental analysis.
6.Liquidity and Solvency Ratios (★ ★ ★ ★ ☆)
The company operates in asset-heavy industry and hence has significant debt in its capital structure. The financial leverage and debt to equity ratio have declined over recent years due to management’s plan of reducing debt in its capital structure and improving profitability. The current and quick ratios are below the minimum threshold. Hence the company overall only has a moderate liquidity and solvency position. Therefore this category gets 4 stars in CESC fundamental analysis.
7. Efficiency Ratios (★ ★ ★ ☆ ☆)
The table in the excel model is colour formatted so the worst performance over the period is highlighted in red colour and the best performance is highlighted by green.
The Inventory days have declined over the years along with the payables period. The receivable days have increased as the company expanded its distribution into new regions. The cash conversion cycle overall has increased linearly over the years which indicates deteriorating business efficiency for the company. Therefore this category gets 3 stars in CESC fundamental analysis.
8. Valuation Ratios (★ ★ ★ ★ ☆)
The company has been trading at almost flat multiples over the years due to the nature of the industry like slow growth, asset intensity and lower profitability. However, the multiples can see a steady increase in the coming years due to the privatization of the public sector and the increasing focus on renewable energy. Thus the company has good revenue growth opportunities in the future. Therefore this category gets 4 stars in CESC fundamental analysis.
9. ROE 5 way Du Pont Analysis (★ ★ ★ ★ ☆)
The asset turnover has remained flat and the tax efficiency has seen a slight improvement. The interest burden ratio along with operating margin has seen a small improvement over the years. The Return on Equity overall has been stable due to improving interest burden ratio and profitability. Therefore this category gets 4 stars in CESC fundamental analysis.
10. Future Prospects (★ ★ ★ ★ ☆)
Some insights for the coming years from management discussion & analysis (MD&A) and con calls are as follows.
- For the quarter ended September 2020, the company reported a Consolidated sales of INR 2990.00 Crore, up 23.55 % from last quarter Sales of Rs 2420.00 Crore and down -0.66 % from last year same quarter Sales of INR 3010.00 Crore. The company also reported net profit after tax of INR 357.00 Crore in the latest quarter.
- The Kolkata distribution business is being affected by lower volumes and the inability of the company to give a tariff increase. Receivables have increased but the management has not taken any action till now. The collections have improved over the last few months and the company is confident of recovering dues.
- Venturing into a renewable business can help the company to attract new sources of capital and it can see a reduction in debt.
Overall the company has week fundamentals but good growth prospects. This may lead to a certain increase in valuation multiples for the company in the near future. Therefore this category gets 3 stars in CESC fundamental analysis.
The overall rating is arrived by taking the average of the above 10 parameter ratings and rounded up if it is above 0.5 and rounded down if it is below 0.5.
Overall Fundamental Rating:
CESC SHARE (3.7/5)
Therefore it is a 4-star stock
★ ★ ★ ★ ☆
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|Summary of the Analysis|
|Economic Moat||★ ★ ★ ☆ ☆|
|Business & Management||★ ★ ★ ☆ ☆|
|Growth Ratios||★ ★ ★ ★ ☆|
|Profitability Ratios||★ ★ ★ ★ ★|
|Cash Flow Ratios||★ ★ ★ ☆ ☆|
|Liquidity & Solvency||★ ★ ★ ★ ☆|
|Efficiency Ratios||★ ★ ★ ☆ ☆|
|Valuation Ratios||★ ★ ★ ★ ☆|
|ROE (Du Pont Analysis)||★ ★ ★ ★ ☆|
|Future Prospects||★ ★ ★ ★ ☆|
|Overall Fundamental Rating||★ ★ ★ ★ ☆|
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