As CESC cuts losses at subsidiaries, investors heave a sigh of relief

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MUMBAI: Shares of CESC Ltd gained about 2% in Tuesday’s trade after the company reported a notable improvement in net earnings for the March quarter.

Consolidated profit grew 6.4% from the year ago quarter, helped by reduction in losses at the distribution franchise business and notable improvement in earnings at long-troubled subsidiary Dhariwal Infrastructure Ltd.

Profit at Dhariwal Infrastructure, which runs 600 megawatt (MW) thermal power plant, grew 90% in the March quarter, helped by better sales and revenue.

“Almost all the subsidiaries (barring Noida Power) reported an improvement in Q4FY20/FY20 profit after tax. Dhariwal’s profit (almost) doubled in Q4FY20 led by additional short-term PPAs of 185MW with MSPGCL (extended to 31 October),” analysts at Edelweiss Securities Ltd said in a note.

PPA is power purchase agreement. MSPGCL stands for Maharashtra State Power Generation Co. Ltd.

Performance at the standalone company which largely constitutes Kolkata electricity distribution business was subdued reflecting low electricity sales and other income. Net earnings on a standalone basis dropped 19% last quarter.

Still, notable improvement in performance at loss-making subsidiaries is keeping up the earnings momentum for CESC.

Losses at Dhariwal power plant dropped from 92.7 crore in FY19 to 10 crore last fiscal. Similarly annual losses reduced considerably at distribution franchisees in Rajasthan. Consequently consolidated earnings grew 9% in FY20.

Due to weak demand and insufficient availability of PPAs, Dhariwal power plant may continue to lose money in FY21. But reducing losses and steady Kolkata electricity distribution business should help CESC conserve earnings. “The results for 4QFY20 further strengthen our investment thesis-stable earnings from extant business, moderating losses from new distribution circles and improving utilization for Dhariwal,” analysts at Kotak Institutional Equities said in a note.

That said, the covid-19 pandemic and the resultant delays in collection of electricity bills provide a headwind to electricity distribution business. This coupled with tariff approval from the regulator for Kolkata electricity distribution business will be key for earnings in FY21.

“Two key monitorables: Covid-19 impact on the distribution franchise business due to collection delays; and delay in FY20 tariff order by almost a year. Overall, given CESC’s excellent free cash flow and strong balance sheet, it is poised to capitalise on emerging opportunities in distribution businesses,” add analysts at Edelweiss.

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