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Sowmya Sundar

At the recent AGM ... Reduction in high-cost debt will improve the bottomline.

INVESTORS can subscribe to the rights offer of CESC at Rs 60 per share. At the offer price, the stock trades at four times its trailing 12 month per share earnings.

The company is expected to post good earnings growth over the next couple of years, thanks to the debt restructuring in 2002-03. Post-restructuring, the cost of funds has dropped nearly 5 per cent to 13 per cent. This is already beginning to reflect on the bottomline.

The company is trying to further refinance its debt and bring down the interest cost to 10.5 per cent. The higher cash generated from tariffs and arrears was used to repay debt worth Rs 380 crore.

From this fiscal onwards, it will pay nearly Rs 500 crore for the next four years to its long-term lenders.

CESC has also improved its operating efficiency over the past couple of years, and is passing this on to consumers. The average plant load factor is up and there has been a visible drop in the transmission and distribution losses.

The higher generation from own plants has reduced its purchases from other suppliers at higher cost. All this have reduced the tariff to 4.03 per unit in 2004-05 against Rs 4.15 per unit in 2003-04.

The Electricity Act is expected to make the environment more competitive. However, open access is expected to start from 2007.

This gives the company sufficient time to repay its debt and improve efficiency. The latter would be reflected in lower tariffs and, hence, CESC would be in a better position to compete in an open environment.

The West Bengal Electricity Regulatory Commission has also proposed a flat rate of Rs 2.8 per unit for all purchases from the State Electricity Board, unlike the previous mechanism of demand charges.

This will further bring down the cost of power purchased even as CESC reduces its purchases. Against this backdrop, investors can consider subscribing to the rights issue. The stock now trades at Rs 123.

Offer details

CESC is making a rights offer to its shareholders at Rs 60 per share for every eight shares held. The issue is for 82.65 lakh shares of Rs 10 each at a premium of Rs 50 each.

The offer is being made to part-finance the working capital requirement of the company, which was being met by high-cost debt.

The offer closes on October 29. ICICI Securities is the lead manager to the offer.

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