Buy CESC share, 28% upside likely on accelerated RE transition: Emkay Global

Emkay Global has initiated coverage on CESC with a 'Buy' rating and a target price of Rs 225, indicating a potential upside of nearly 28 per cent. This assessment is rooted in CESC's strategic focus on expanding its renewable energy (RE) capacity, which is expected to drive a compound annual growth rate (CAGR) of approximately 25 per centover the fiscal years 2025-2029.

The brokerage firm highlights that CESC's efforts to secure power offtake arrangements will be instrumental in stabilising its topline revenue. Further, Emkay Global believes securing power offtake arrangements will strengthen topline stability, and drive 9 per cent revenue CAGR over FY25-28E, providing unit economic benefits amid rising power demand. This approach is anticipated to enhance the company's economic benefits amidst growing power demand.

Emkay Global projects an 11 per centCAGR in profit after tax (PAT), with a PAT margin expected to expand by 40 basis points over the same period. "Emkay Global expects an 11 per cent PAT CAGR, with PAT margin expanding by 40 bps over FY25-28E on a consolidated basis," Emkay Global added. This outlook reflects CESC's strategy of bolstering its profitability through strategic investments and operational efficiencies.

The company's recent aggressive expansion into renewable energy includes significant collaboration with various players to develop solar-wind hybrid projects. CESC has secured power purchase agreements (PPAs) for both captive and non-captive capacities, which is essential given the industry's recent challenges with PPA delays. This proactive approach is designed to mitigate risks associated with such delays.

CESC is also focusing on strengthening its distribution facilities across India, with an expected annual capital expenditure of around Rs11 billion. This investment is part of a broader strategy to enhance its national footprint, following its acquisition of Chandigarh Power. Notably, Noida Power Company Limited (NPCL) is expected to benefit from CESC's shift towards renewable energy.

To meet the increased capital expenditure demands, CESC is leveraging strong cash flows, which have been bolstered by an 8 per cent fuel surcharge hike in Kolkata for FY25. "Emkay Global expects overall cash to rise by Rs 300 crore by FY28E, accounting for capex, and believes that internal accruals will be sufficient to support the non-debt funded portion of the required capex," Emkay Global noted. This financial strategy aims to avoid equity infusions and maintain stable regulatory profit growth.

CESC's financial metrics are expected to remain stable, with Emkay Global forecasting that net debt to Ebitda ratios will remain around 5.2 times by FY28. "Consequently, Emkay Global expects net debt/Ebitda to broadly remain stable at 5.2x by FY28E," the firm stated. This stability is crucial as the company navigates its ambitious expansion plans.

Overall, CESC's strategic focus on renewable energy and distribution expansion positions it well for future growth. With Emkay Global's positive outlook and supportive financial metrics, the company appears set to capitalise on India’s evolving energy landscape, ensuring it remains competitive and resilient in the face of industry changes.