RPG Group's power flagship CESC will continue to record robust growth in power business in the near term despite a rise in input cost, analysts and industry experts said. Its retail unit Spencer's Retail, which has seen losses declining over the past few months, will be one of the major contributors to future earnings. The unit is likely to take another two years to break even, a company official said.
While the power business contributes 80% to the company's total revenue, the rest comes from retail. The power business posted a net profit of . 488 crore in the financial year ended March, while retail operations recorded an operating loss of . 200 crore. Power operation offers a 15% return-oncapital and retail operates at a gross margin of 18%.
Rise in raw material cost, including coal, will not have much impact on the company's margins, going ahead as it has ample scope to pass it on to customers, said analysts. The company needs 6 million tonnes (mt) coal per annum for power generation, of which 3 mt comes from its coal captives, 2.5 mt from Coal India, and rest from imports. CESC recently acquired an 11.6% stake in an Australian resource generation firm that will also contribute to its future coal requirement.
In the past two years, the company has been earning a return-on-equity of 20-21%. It has two capacity-expansion plans in the pipeline for power segment, including a 600-mw plant at Chandrapur (to be commissioned by FY13) and a 600-mw project at Haldia (to be commissioned in FY14).
The company has planned a capital expenditure of about . 6,000 crore for the plants at Chandrapur and Haldia. Of the total capex, 25% will be funded via equity. It has already invested . 700 crore and another . 800 crore, which can be funded via cash available on books, will be invested over the next three years. The company's management said that there is still time to figure out funding of further expansion. Its current debt-to-equity ratio is 0.7. In the retail business, the company will add 2.5 lakh square feet to the existing 9.5 lakh square feet.
At the current market price of . 338, the stock trades at 8.7 times its FY11 earnings.
With upcoming capacity enhancements and an expected drop in losses from the retail unit, CESC is expected to fare well in the next few years.
