JM Financial

CESC (Buy)

Target: ₹790

CMP: ₹687.10

CESC reported 21 per cent y-o-y growth in consolidated PAT, largely led by a) Dhariwal plant reporting positive PAT of ₹28 crore as against ₹15 crore loss in Q3-FY21 b) Malegaon franchisee , acquired in Q4-FY20, reporting PAT of ₹17 crore after two consecutive quarters of loss and c) renewables business reporting PAT of ₹6 crore as against loss of ₹18 crore last year.

Rajasthan franchisee business also reported strong earnings recovery on sequential basis at ₹21 crore as against ₹1 crore in Q2-FY21, led by reduction in T&D loss post relaxation of lockdowns. The Q3-FY21 standalone PAT was stable (+3.4 per cent y-o-y). It being regulatory in nature, CESC doubled its interim dividend to ₹45/share vs ₹20/share in FY20, implying dividend yield of 6.6 per cent.

We find CESC attractive at c.6.3x FY22E P/E with steady earnings growth from a) declining losses in Dhariwal led by PPAs and merchant sales, b) steady growth in regulated profitability with limited earnings risk --about 95 per cent of FY20 PAT-- and c) moderating losses at franchises. We find limited impact from the overhang of potential regulatory action on earnings and SOTP. Even in our bear case we find limited downside which assumes no off-take from Dhariwal U-1, continued losses at franchisees and a regulatory hit in Kolkata operations. We reiterate a ‘Buy’ rating.

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