Stock To Buy: Sharekhan Says This Stock Can Gain 20%, Company Offers ~6% Dividend Yield

In the latest report, Sharekhan has recommended buying the stocks of CESC Ltd. to investors. It is a reputed midcap company. In Q4FY2022 CESC's standalone PAT was steady at Rs. 259 y-o-y, despite weak power sales volume of 2,100 MU, on higher regulatory income and lower tax rate.

Target Price, CMP, and company performance

The Current Market Price (CMP) of CESC Ltd. is Rs. 79. Sharekhan has estimated a Target Price for the stock at Rs. 95. Stock is anticipated to give a 20.25% return, in 1 year.

Stock Outlook
Current Market Price (CMP)	Rs. 79
Target Price	Rs. 95
1 year return	20.25%

In Q4FY2022, consolidated PAT was flat y-o-y at Rs. 424 crore as the strong performance of Noida Power gets offset by a higher loss at distribution franchise (DF) business amid impact on demand due to Covid-19 third wave. However, Haldia/Dhariwal PAT declined by 21%/10% on weak demand and a high base of Q4FY2021, especially for Dhariwal. The company has reported a flat y-o-y consolidated PAT of Rs. 424 crore as strong profitability in Noida Power standalone business performance was steady with PAT of Rs. 259 crore, down 4% y-o-y on a lower power sales volume of 2,100 million units (down 5.8% y-o-y) due to the impact of Covid-19 in January/February 2022.

Rajasthan DF net loss increased to Rs. 11 crore (versus Rs. 4 crore in Q4FY2021) because of weak power demand in Kota (still below pre-Covid level), while Bharatpur and Bikaner remain profitable. Profit at Haldia and Dhariwal declined by 21%/ 10% y-o-y to Rs. 60 crore/Rs. 28 crore, respectively, primarily due to lower plant PF of 64.4%/80.5% (versus 69.6%/85% in Q4FY2021), given weak power demand and high base for Dhariwal (had benefit of one-off clean energy surcharge income) in Q4FY2021.

Advantages and disadvantages as Sharekhan says

About the stock's advantages, the firm said, "Noida Power has shown strong performance with 2.3x y-o-y rise in PAT. Dhariwal Infra signed a 210 MW medium-term PPA with Central Railways for three years. Dhariwal Infra signed a 210 MW medium-term PPA with Central Railway for three years, which would further aid the profitability of Dhariwal Infra (FY2022 PAT of Rs. 137 crore versus Rs. 106 crore in FY2021). RJ losses to reduce in FY2022 but break-even timeline extends due to weak demand in Kota."

However, losses that had widened at Rajasthan DF to Rs. 11 crore as demand still remains below pre-Covid level in Kota circle, and sustained losses in the distribution franchisee for an extended period and lower utilization of Chandrapur plant are the key risks.

Maintaining buy rating, Sharekhan added, "The recent sharp fall in the stock price provides a good entry opportunity and potential scale-up of power distribution (recently won Chandigarh discom) could create long-term value for investors. We maintain a Buy on CESC with a revised PT of Rs. 95 (lower valuation for standalone and DF valuation), given an attractive valuation of 0.9x its FY2024E P/BV and a dividend yield of ~6%."

About the company: CESC

After starting operation in 1899, CESC has become a fully integrated power utility company. The company is the sole distributor of electricity within an area of 567 sq. km of Kolkata and Howrah and serves 3.3 million consumers (including domestic, industrial, and commercial users). The company owns and operates 3 thermal power plants with a generation capacity of 1,125 MW for its Kolkata distribution business. Additionally, CESC has independent power plants at Haldia (600 MW) and Chandrapur (600 MW) along with renewable energy (174 MW wind projects). CESC has a distribution license within an area of 335 sq. km of Noida and serves 82,000 consumers. The company also has distribution franchisees in 3 cities in Rajasthan and 1 city in Maharashtra.

Disclaimer

The above stock was picked from the brokerage report of Sharekhan. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.

(Also read: Sharekhan Suggests Buying This Stock For 27% Upside: Consolidated Revenue Up Sharply At Rs. 1102 Crore)