| Summary of Contents STOCK UPDATE CESC
Recommendation: Buy
Price target: Rs600
Current market price: Rs485 Positive levers in place; price target revised to Rs600 Key points -
CESC's steady cash generating utility (stand-alone) business will benefit from the recent power tariff hike (the benefit will get reflected in the Q4 results). In addition, the company has filed for a tariff revision for a multi-year period (FY2015, FY2016 and FY2017) with the regulator and is seeking a double-digit tariff hike in the first year. -
CESC's management has reaffirmed its confidence that the loss-making retail subsidiary, Spencer's, will break even at the operating level in FY2015. Spencer's has been a drag on CESC's valuation; hence this would be crucial for rerating of the stock. FirstSource Solutions is turning out to be a dark horse among all the subsidiaries of CESC. The market value of its investments has more than doubled since CESC picked up a controlling stake in it. -
We are rolling over the valuation of the stand-alone business to the FY2016 estimate and realigning the value ascribed to the subsidiaries and the other investments in line with the recent positive developments related to CESC (especially FirstSource Solutions and Spencer's). Accordingly, we arrive at a revised price target of Rs600 (based on SOTP method) for CESC. We retain our Buy call on the stock.
SECTOR UPDATE Banking Relief for PSU banks Key points -
In addition to asset quality issues, the migration to Basel-3 norms (which stipulate a higher capital adequacy ratio for banks) creates a need for huge capital infusion into the public sector banks (PSBs; private banks are relatively well capitalised) and has been an overhang on banking stocks (due to equity dilution concerns and the fiscal constraints of the government to substantially increase the budgetary support for the same). -
However, media reports suggest that the government could look at ways for pension funds and insurance companies to invest in long-term perpetual debt of banks (considered as tier-1 capital). If true, this could address the need for capital infusion without significantly expanding the equity capital of the PSBs. Moreover, the sale of non-performing loans and advances to asset restructuring companies would ease the pressure on the balance sheet and step up the recovery process (and potential reversal of provisions) of the PSBs. -
We remain positive on Bank of Baroda and Punjab National Bank as the equity dilution risk is lower for them and valuations are reasonable. We have upgraded State Bank of India to a Buy rating as its capital position has improved after the recent QIP issue. We continue to have a cautious stance on the mid-sized PSBs due to their higher equity dilution risk and subdued operating performance.
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