ET Intelligence Group: CESCs approaching demerger, an exercise to unlock the value of its businesses and a recent correction in its stock price offer an opportunity for investors.The stock of the Sanjiv Goenka owned company has corrected near 20 per cent in the past two months and is now trading at a price below that when the demerger was announced last year.
This ignores the fact that the values of individual businesses have gone up during the same period.Under the demerger scheme, the companys power business will be divided into two generation and distribution.
The retail arm, led by Spencers Retail, will become the third company.The rest of the companys businesses, mainly a holding in the separately listed business process outsourcing company Firstsource, will form the fourth entity.Since the demerger announcement last year in May, the retail sector has seen a strong turnaround resulting in shares of its listed peers such as Future Retail, V-Mart Retail and Avenue Supermart grow multifold.Spencer, the retail arm of CESC, also turned profitable at the operating level on revenue of Rs 2,100 crore in FY18.
Food category was at 80 per cent of the total revenue, similar to DMart.
Its peers are trading at 2 to 8 times of sales: Assigning a one- time value to Spencer would fetch it Rs 160 per share.Shares of Firstsource, in which, CESC holds 54.5 per cent, have more than doubled in the last one year.
At 40 per cent holding discount the value per share for holding Firstsource comes to Rs 115.The biggest unlocking would be of the power distribution business (distribution business in Kolkata and adjoining areas and three Rajasthan cities), which generates nearly 20 per cent return on equity and would be the only listed distribution company.
This could attract investor interest.Analysts are assigning 2.8 to 3 times book value to this business and thus arriving at a price of Rs 650 per share.
The company also has a power generation business which at 1.5 times price-to-book can be valued at Rs 400.Based on the sum of part valuation, total value of the four businesses comes to Rs 1,325 per share.
On Tuesday, CESCs stock closed at Rs 876 on BSE.
At this price, the stock is trading at one time price to book value and analysts expect it to touch 1.3 to 1.4 times close to the demerger.With the company receiving the final demerger approval from NCLT in March, analysts tracking the company closely expect the split to happen in August-September.