EDELSTAR • FUNDAMENTAL RESEARCH - CESC Ltd

CESC Ltd

Current Price: Rs. 300 Target Price: Rs. 415 BUY

BUSINESS OVERVIEW

CESC Ltd (CESLTD) is an RPG Group company. It was commissioned in 1899 and since then the company has been offering power to consumers in its Kolkata license area which has expanded from 5.64 sq miles to 567 sq km over the years. The number of consumers has grown from 6,000 to 2.1 mn over time. CESC has total installed capacity of 1,225 MW from four generating units at Budge Budge (750 MW), Southern (135 MW), Titagarh (240 MW) and New Cossipore (100 MW).

INVESTMENT THEME

• India’s per capita consumption of electricity, at ~600 KWh, is much lower than other large economies. With strong growth projected for the economy, the per capita consumption is likely to increase significantly, keeping demand strong over the long term.

• India is projected to have power generation capacity of ~750 GW by 2030, ~5x the current capacity, which is expected to be the third highest globally. The macro story of the power sector implies high growth, long-term visibility and sustainable returns. This, together with the demand-supply gap (~16% peak deficit), has been positive and attracting investments into the power sector.

• CESC has a huge expansion plan and intends to increase its capacity to more than 1,825 MW in its license area. The company has been allotted 110 MT of coal block using which it plans setup a power plant. CESC is also seeking growth opportunities in other parts of India in the power space by developing 600 MW power plant in Maharashtra and is also looking at opportunities to develop ~3,000 MW in Bihar, Jharkhand and Orissa.

• The recent discussion paper on FDI in retail is a step in the right direction if it is implemented. With the CESC management keen on selling stake in Spencer’s Retail, GoI’s move, along with improvement in its operational and financial performance, augurs well for the retail business. Spencers Retail’s (Spencers) financial performance has been steadily increasing, reporting a positive store EBITDA/sq ft in June. Revenues/sq ft has improved ~50% Y-o-Y to Rs. 1,100. Current losses have a run rate of Rs. 130 mn/month compared to ~ Rs. 180 mn/month in Q2FY10.

• Looking at envisaged high growth of the power sector, government’s thrust on developing infrastructure, long-term visibility and sustainable returns make the sector an attractive investment option. We are positive on the long term outlook of the stock.

INVESTMENT RISKS

• Our earnings estimates assume incentives on account of PLF and other normative parameters under regulatory norm; if the company fails to earn the same, then RoE would be lower and, hence, impact valuations.

• Escalation in project costs, delay in commissioning of generation projects, and long gestation periods could impact profitability, if delays are not compensated through tariffs.

• We have factored Rs. 3 bn of cash outflow in Spencer’s over FY11 and FY12. However, equity infusion at a greater than anticipated level, due to higher losses, or due to delay in divestment, pose risk to our estimates.

OUTLOOK AND VALUATIONS

We expect consistent performance in CESC’s power business with increasing visibility on pipeline power projects leading to sustainable RoE of ~16%. Despite higher capex in the retail venture, CESC’s net cash at ~Rs. 12 bn (excluding regulated debt) is sufficient to fund the power project pipeline. With likely PE investment in the retail subsidiary, we expect surplus cash to be retained for expanding the power project portfolio, which could lead to further upsides and rerating. CESC is trading at attractive valuations based on FY11E and FY12E standalone earnings. On our FY11E and FY12E EPS estimate of Rs. 38.9 and Rs. 39.4, the stock is currently trading at a P/E of 9.3x and P/BV of 1.07x on FY11E basis and at a P/E of 9.1x and P/BV of 0.97x on FY12E basis. Given these attractive valuations, we believe the stock offers upside potential in the near term.

EDEL WEEKLY TECHNICAL PICKS • TECHNICAL RESEARCh - 6th December 2010

Technical Pick #1: Kingfisher Airlines Ltd (KINAIR) - BUY CMP: Rs. 71.9



Rationale for call: On the weekly chart stock had formed an “Inside Bar” pattern as well broke the resistance of 21DEMA with good volumes. On the hourly chart stock broke the neckline of Inverse Head and Shoulder pattern further indicating positive momentum in the stock. Oscillator on daily chart depicts bullishness with RSI continuing their upside trend.


Buying is recommended at CMP of Rs. 71.9 with target of Rs.79.60 and stop loss of Rs. 67.5.


Target: Rs. 79.60
Stop Loss: Rs. 67.5


Technical Pick #2: Cipla Ltd (CIPLTD) - BUY CMP: Rs. 370.0


Rationale for call: On the weekly chart stock broke the resistance of 362.80 with good volumes and finally closed above the mentioned resistance. Stock is continuously making Higher Top and Higher Bottom on the daily and weekly charts further indicating strength in the stock. Oscillator still continued their upside move.


Buying is recommended at CMP of Rs. 370 with target of Rs. 400 and stop loss of Rs. 351.30.


Target Price: Rs. 400
Stop loss: Rs. 351



Technical Pick #3: Dr Reddys Laboratories Ltd (DRREDD) - BUY CMP: Rs. 1825.0


Rationale for call: Last few trading session stock was consolidating in the range of 1813-1765. On Friday stock broke the resistance of 1813 with good volumes. Beside this on the weekly and daily chart continuously making “Higher Top and Higher Bottom”, further indicating strength in the stock.


We reiterate a Buy on Dr Reddy at CMP of Rs. 1825 with target of Rs. 1955 and stop loss of Rs. 1735.


Target: Rs. 1955
Stop Loss: Rs. 1735

Book your profits before the market tanks again

The recent stock market rally has seen prices of a few scrips rise without change in fundamentals . Some of the stocks that should be offloaded at current levels before the market tanks again

THE stock market has been reaching for the skies since early March 2009. Over the past six weeks, the 50-share Nifty has gained by more than a third. Many stocks have surged past the broader index, even as the slowdown takes a toll on their fundamentals. For retail investors, though, there couldn’t be a better time to book profits; they could even consider re-entering the market at lower levels. The stock market has been through similar rallies in the past, and there is a strong likelihood that it will be followed by a slump, providing an attractive opportunity to investors who are willing to wait it out. ETIG picks out some stocks that have off late seen huge jumps, providing investors with a golden opportunity to sell. Tata Motors has seen its stock price rise by nearly 80% since early March. The company is a commercial vehicle (CV) manufacturer, a sector that is witnessing its worst slump in recent times. CV sales were down by 50% in March 2009 on a year-on-year basis. The company incurred a loss of Rs 84.5 crore on a standalone basis in the December 2008 quarter. Moreover, it needs huge reserves for Jaguar and Land Rover, which it has acquired. Traditionally, the twists and turns in the CV industry’s performance are far greater than those of the economy. In a downturn, this is only expected to aggravate. Similarly, Suzlon Energy’s stock has witnessed a 80.3% rise in price in the past one-and-a-half months. The company incurred a loss in the December 2008 quarter. Even after excluding exceptional losses on account of foreign exchange and blade restoration costs, its performance was dismal. Defective blade issues and the global slowdown continue to cripple its performance. Siemens is another cyclical stock. Its price has risen by 58.5% since March 2009. This capital goods giant has seen its topline shrinking in the December 2008 quarter, as its sales fell by 14.9% on a year-on-year basis. Much like automobiles, the capital goods industry also witnesses higher variability than the economy. It will see tough times ahead as corporates postpone capital expenditure. Fundamentally, then, Siemens is in a weak spot right now and investors could use the recent surge in its stock price to book profits. Close on its heels is Reliance Communications (Rcom), which has seen its stock price jump by 68.9% in the past six weeks. However, the company’s performance in terms of revenue and net profit is way behind that of other players in the industry like Bharti Airtel and Idea Cellular. In the December 2008 quarter, Reliance Communication’s sales and net profit grew by 18.8% and 2.7% compared to the 39.1% and 38.3% growth reported by Bharti Airtel. Reliance Infrastructure (Rel Infra) too has seen its share price go up by 62.3% since the market started rising in the beginning of March, while the fundamentals haven’t really changed. In fact, its profit fell by 16.5% in December 2008 quarter. Moreover, the company is planning to transform itself from a power utility to an infrastructure company. It is an equity investor in the Mumbai Metro Rail project and road projects of the National Highway Authority of India. Such projects have long gestation periods. Revenue and profits projections are stretched, making investments in the company loaded with risk. Retail investors could use the opportunity provided by the markets to reduce exposure to this stock. Another company, which falls into this category, is Reliance Capital (Rcap), a non banking finance company (NBFC) with a presence in asset management, distribution, insurance and consumer banking. Its stock price has risen by 89.4% in the current run, while its performance is hardly anything to write home about. This is because of the slowing economy, which has affected the financial services industry’s growth. Most NBFCs are re-evaluating their growth plans. Reliance Capital’s profit grew by just 11.3% in the December 2008 quarter. Moreover, the company’s performance has poor visibility due to its presence in many businesses. Metal companies Tata Steel and Sterlite Industries too have seen their stock prices rise by 72.5% & 59.4% respectively. Metals — which have one of the longest cycles in industry — are well past their prime. Up until last year, high demand growth in China was fuelling metal prices. This phase is now over, with demand for metals likely to be subdued in the near-to-medium-term, and the two companies’ third quarter results clearly showed this. While Sterlite’s net profit declined by 38.5% YoY in the December 2008 quarter, Tata Steel saw a 21.5% slump in profits. It is clear that the rally in these two scrips is purely for technical reasons — where it is merely following a market trend — and investors could reduce exposure to these stocks. ICICI Bank too witnessed a 61.1% rise in its stock price since March. The bank continues to be a laggard among its domestic peers, going by its FY09 performance. Its net profit has remained flat in the first nine months of FY09. Moreover, the banking industry will face tough times as credit growth slows and non-performing assets go up. Retail investors should thus use the rally to book profits and wait for the market to cool before making their next move. Real estate players like Unitech and DLF have also been at the forefront of this rally. The two stocks have appreciated by 84.5% and 71.6% respectively since early March. Both these companies have undertaken ambitious debt restructuring to improve their financial situation. Unitech’s outstanding debt is at Rs 8,500 crore as on March 2009. It was able to restructure Rs 1,000 crore, which will be due for repayment in the second half of fiscal 2010, depending on the restructuring terms. The company has also managed to place its QIP and repay mutual funds. Similarly, DLF has managed to replace Rs 4,000 crore of short-term debt payable in calendar 2009 with long-term debt. It appears that the stock price has factored in the improvement in fundamentals, and it makes sense for investors to reduce a portion of their holding in these two real estate companies at current levels. While the current rally may call for a reduction in exposure to these stocks, many of the companies dissected here could prove to be a good bet over a very long horizon. If an investor does want to remain long in one of these stocks, he can sell a part of its holdings now, and buy it again at lower price, bringing down the average acquisition cost.

Market Outlook for 19.2.2009

US markets ended flat.
Europe ended marginally lower.
Asia is trading mixed.
Expect Indian Markets to open flat to negative.

The support for the Sensex is 8865 and the resistance to the up move is at 9445

Nifty: (2776) the support for the Nifty is at 2727-2685 and the resistance to the up move is at 2890

Day Trading Ideas -

LNT

Buy above 659 for targets of 664 and 670

Sell below 648 for targets of 645 and 641

Unitech

Buy above 29.90 for targets of 30.40 and 30.90

Sell below 27.50 for targets of 27.05 and 26.50

Power Grid

Buy above 88.45 for targets of 89.10 and 89.70

Sell below 86.45 for targets of 86.00 and 85.40

A special Report on how markets will react in 2009 is comming this Sunday

Brokers Stock Picks / Market Reports / Stock Ideas of the day

Anagram Daily Call20102008

Anagram Daily Call 21102008

Analyst Presentation on HCC

Arihant Capital Market Updates

BASF LKP

Biocon Ltd

HCL Technologies RM

Eagle Eye Oct21

HDFC SSKI

ICICI - Textile and Retail Earnings Preview

ICICIdirect Freight Q2+Earnings+Preview

ICICIdirect Pipes Q2Earnings Preview

ICICIdirect Sugar Q2 Earnings Preview

Infrastructure Stock Updates

Infrastructure updates - Roads

Jubiliant Organosys KRChoksey

Maruti Ltd

Niit Tech

Stock Picks

Real Estate Updates

Steel Updates

Value Guide Oct 2008 Sharekhan

Stocks Trading Near Cash Balance per share

HowtoBuildWealthLikeWarrenBuffet.pdf

Top 5 Sectorial Picks for long term

Pharma Sector

Cadila, Piramal Healthcare 

It is a play on the huge available opportunities in the contract research and manufacturing services space and on account of the blockbuster drugs going off-patent over the next few years.

FMCG Sector

Colgate, Godrej Consumers, GSK Consumers 

The growth momentum is expected to continue on the back of rising incomes and higher consumer spending.

Telecom Sector

Bharti Airtel, Reliance Communications 

There remains tremendous potential for mobile companies to increase tele-density. Thus, performance by telecom companies is likely to remain strong.

Banking Sector

HDFC Bank, Axis Bank, ICICI Bank 

The long-term prospects remain strong (underpinned by strong GDP growth of 7-8% and increasing credit penetration), especially for large private banks that continue to gain market share, have strong core profitability and are available at attractive valuations.

Media

Balaji Telefilms, PVR 

For similar reasons and greator discretionary spending going forward, it is a good domestic story to bank upon.

Nifty Charts in Bear Markets

CORRECTIONS IN A BEAR MARKET - SENSEX
TOP	BOTTOM	PEAK	BOTTOM	Value	FALL	Period of
YEAR	YEAR	VALUE	VALUE	Of Fall	%AGE	Correction
APR 1992	APR 1993	4546	1980	2566	56%	12 Months
FEB 2000	SEP 2001	6151	2595	3556	58%	20 Months
JAN 2008	So Far	21207	10240	10967	52%	9 Months
CORRECTIONS IN A BEAR MARKET - NIFTY
TOP	BOTTOM	PEAK	BOTTOM	Value	FALL	Period of
YEAR	YEAR	VALUE	VALUE	Of Fall	%AGE	Correction
APR 1992	APR 1993	1281	600	681	53%	12 Months
FEB 2000	SEP 2001	1818	850	968	53%	20 Months
JAN 2008	So Far	6357	3199	3158	50%	9 Months

 

 

DOW JONES

 

NASDAQ

 

NIFTY LINE CHART

 

 

NIFTY CHANNEL

 

Will these supports (Dow, Nasdaq, Nifty) hold as shown above?

 

Your guess is as good as mine.

 

Best Strategy would be to presume they will hold atleast for the near term and take a call. If breaks then exit.  Risk seems limited.  In extreme panic do exactly opposite of what the herd does. No one can buy at the lowest reversal point of this bear market. Don't try, you will never succeed in it, but try and do strategic planning keeping in mind systemic risk and do take your own decisions with consultation with an investment advisor.