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Motilal Oswal
CESC (Buy)
CMP: ₹668.6
Target: ₹801
CESC (formerly Calcutta Electric Supply Corporation) is among the very few opportunities that offer a play on both power distribution and generation. It is also among the few with a strong balance sheet and healthy FCF (free cash flow) generation to drive growth. In our view, distribution privatisation is an upcoming opportunity as the government focusses on improving the functioning of electricity distribution in India. We also believe that the generation sector is turning around.
CESC will benefit on its untied 300 MW capacity. It could also gain from inorganic opportunities and eventually demand for new capacities.
The existing distribution business is high-RoE and delivers steady growth. Generation assets boast healthy FCF. Untied generation capacity and scale-up of DFs have potential to boost earnings. We expect dividend payout to increase from around 20 per cent in FY17/18 to 25 per cent, led by strong FCF generation.
We value CESC at 10x FY20E P/E, based on the last five-year average of one-year forward P/E of PWGR and NTPC. Our target price stands at ₹801/share. The stock is attractively valued at about 8.5x FY20E P/E. We reiterate our ‘buy’ rating.
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