CESC Reports Flat Topline, Strong Bottomline

Kolkata based power company CESC has announced its December 2012 quarter results. Its topline witnessed a muted growth of 5% to Rs 1022 crore. Net profit, however, grew by a robust 36% to Rs 101 crore, thanks to the lower material and fuel costs which led to margin improvement in the quarter.

CESC currently operates two business segments - retail business and power business. It has recently forayed in the IT business by acquiring Firstsource Solutions during the December quarter. Its shares had come under selling pressure after it announced the purchase of Firstsource. The management had said that the company is looking to diversify into other businesses as the returns in the power sector had become thin. Lately the stock has recovered and has reached to its October 2012 levels.

Coming back to the quarterly numbers, the expansion of the margins during the quarter was primarily due to the decline in the cost of materials (by 3%) and cost of fuel (by 9%). Thanks to the decline in these two cost items, which form 65% of its total expenses, the company’s EBITDA margins improved by 391 basis points. On a sequential basis too, the margins have expanded by 244 basis points.

In its non operating costs, the interest expenses have increased by 30% on a YoY basis to Rs 86 crore. Taxes were up by 44% and effective tax rate was 20%.

Though the operating performance of CESC has been good in the quarter, the subdued topline growth has been very disappointing. The power companies, due to the heavy capacity additions, are showing a strong topline growth. The 5% growth that the company has shown in the quarter is very less in that context. It is also quite less compared to the 20% growth that the company had reported in the first half of the current fiscal.

Acquisition of Firstsource is also a drag on the stock as there is no synergy between its power, retail and IT businesses. Until the management clears how Firstsource will help CESC achieve the growth going ahead, we advise investors to avoid the stock.