New CESC demerger plan may still unlock value for investors
CESC announced its demerger into three firms instead of the earlier four-way merger due to a delay in receiving approval from West Bengal State Electricity Regulatory Commission.
CESC announced its demerger into three firms instead of the earlier four-way merger due to a delay in receiving approval from West Bengal State Electricity Regulatory Commission. The demerger is expected to benefit all shareholders as they will be able to participate in the individual business where growth opportunities are better at different points of time, analysts said.
“CESC has a strong business model in distribution and generation, which generates double-digit RoE,” said Dhruv Muchhal, research analyst, Motilal Oswal Securities. “Retail business is on the verge of a turnaround and as pure-play businesses, the demerged entities will drive better value realisation and re-rating,” he added.
CESC has fixed October 31 as the record date for the demerger and the listing is expected by end of December.
Under the new demerger scheme, CESC will continue to have generation and distribution business while RP-SG Retail will have the Spencers & FMCG business. RP-SG Business Process Services will have IT, Quest Mall, real estate & other non-power and non-retail business.
Each shareholder with 10 shares will be allotted six shares of RP-SG Retail and two shares RP-SG Business Process Services. Also, CESC will receive five lakh fully paid-up preference shares of Rs 100 each of the retail company.
But the power business may not get the desired investment multiple, said some analysts. This is owing to delays in the approval for demerger of the power distribution business, which would have further enhanced the value for shareholder. The Street was keen on the listing of the distribution company as it would have been the only listed pure-play distribution company. But now, this could reduce the value unlocking by Rs 180- Rs 200 per share or around 20 per cent at the current price level.
The power distribution business comprises electricity distribution in Kolkata, Noida (49per cent holding) and three distribution franchisee circles in Rajasthan. Kolkata distribution business has regulated equity of Rs 2,600 crore with a return on equity of almost 20per cent.
The Noida distribution business is in the high growth phase and the distribution franchisee businesses are at nascent stages. With such high returns on equity, low capex intensive, strong growth and no major risks like the ones faced by the generation companies such as fuel risks and tariff risks, the Street was assigning the distribution business at 2.8 to 3 times book. This could have valued it at Rs 650 per share. Now with distribution business and generation business, the valuation multiples assigned will be less than 2, thus reducing Rs 180-Rs 200 per share. The value for this business would come down to Rs 450 per share.
According to analysts’ estimates, CESC, the distribution and generation business is valued at Rs 793 per share while the retail and venture business are valued at Rs 337 per share and Rs 829 per share, respectively post demerger. With the merger ratio, there would be atleast 25per cent upside from the current level for the stock.
“The demerger will unlock value for shareholders given the retail subsidiary has substantially improved its financial performance while other businesses like FMCG, BPO subsidiary are gradually picking up steam,” said Chirag Shah, analyst, ICICI Securities.