Recommendation from electricity Sector

This section gives a recommendation of a stock having stock price below Rs 150 with sound fundamentals and expected to give handsome returns over a one-year time horizon.

CESC LTD : TURNING POWER INTO PROFITS

HERE IS WHY
✓Monopolistic operations such as distribution licenses.
✓Distribution and power generation businesses demonstrate strong performance.
✓Focus on profitability

The country’s electricity demand has rapidly increased, necessitating a massive increase in installed generating capacity to meet this upward spiral. The peak power demand in the country stood at 243.27 GW in January 2024. Better power demand (peak power demand in India is likely to cross 400 GW by 2030) would drive up PLFs for power-generation companies and better PLF incentive income. The Ministry of Power has made efforts to address power shortages by establishing a single national grid, fortifying distribution networks, and achieving universal household electrification. Owing to this importance of the power sector and rising demand, our low-price scrip recommendation for this issue is CESC Ltd.

CESC is a flagship company of the RP-Sanjiv Goenka Group. It is India’s first fully integrated electrical utility company with private participation in the generation, transmission and distribution of electrical power in Kolkata, Hooghly, Howrah, and North and South 24 Parganas in West Bengal. It serves 3.4 million consumers which include domestic, industrial and commercial users.

In Q4FY24, on a consolidated basis, the net revenue of the company increased by 4.41 per cent to ₹3,387 crore as compared to ₹3,244 crore in the previous quarter. On a YoY basis, the net sales increased by 9.19 per cent. The net profit of the company increased 37.87 per cent to ₹415 crore as compared to ₹301 crore in the previous quarter. On a YoY basis, the net profit decreased by 6.74 per cent. CESC is poised for growth due to its diverse business portfolio, regulatory business strength, operational excellence, renewable energy push, hydrogen future, and potential for distribution expansion. The company’s presence across power generation, distribution and retail sectors mitigates risk and positions it to capitalise on opportunities in diverse markets. CESC’s monopolistic operations, such as distribution licenses, offer stability and predictable cash flow. Its distribution and power generation businesses demonstrate strong performance, indicating efficient management and a focus on profitability.

The company’s exploration of renewable energy projects aligns with the government’s green energy initiatives, and its bid for a 10,500 MT per annum green hydrogen production facility that will bring it at the forefront of clean energy technology. CESC’s strategic positioning allows it to benefit from the government’s privatisation plans for state distribution companies, expanding their reach and customer base. At TTM, CESC is trading at a PE of 13.9 times, which is higher than its three-year median PE of 7.8 times. The company has maintained a healthy three-year average ROE and ROCE of 12.6 per cent and 11.7 per cent, respectively.

While the current PE ratio suggests a slightly higher valuation, CESC’s strong financial performance with healthy ROE and ROCE demonstrates its ability to generate profits. The shares of the company provide a very healthy dividend yield of more than 3 per cent at the current price. This gives comfort and support during volatile times. CESC is focusing on renewable energy, capex revival and turnaround of the power distribution businesses and its earnings are expected to gradually improve in the coming years. Considering the aforementioned factors, we recommend BUY.