Demerger makes CESC interesting to brokers

CESC- Calcutta Electricity Supply Company, a RP Goenka group company is involved in multiple business apart from power production and supply. The company head quartered in Victoria House, Kolkota is having 4 thermal power plants, also entered into solar and wind power generation in Gujarat and Rajasthan and hydro power in Arunachal Pradesh. They supply electricity in cities of West Bengal, Rajasthan and also in Noida. They are also into retail business in the name of Spencer's retail. The other ventures of the CESC include the listed BPO company Firstsource Solutions. Now the company plans to restructure the business into four listed companies to unlock the value of each business.
CESC demerger plan and number of shares of demerger entity investor gets

How many shares of demerged entities will the CESC investors get?

For every 10 share of the parent CESC, the investors will get
  • 5 Share of CESC of book value Rs 10
  • 5 Shares of CESC Power Generation Company of book value Rs 10
  • 6 Shares of Spencer's Retail of book value Rs 6 and 
  • 2 shares of CESC Ventures of book value Rs 10

How the demerger the business unlocks the value of the company?

Many companies do business in different industries. The value of the company should be sum of all the business in different together. It is not true in many cases. Some of the business could be making profits and some might be in loss. The loss making business could be eating the profit made by the other business. The negative trend in one of the industry could be affecting the valuation of the entire company without taking into consideration of the other business. The debt, ratings business potentials could be actually valued only when the business in different industries are analysed differently. In normal course the demerger could benefit the investors. It could also backfire if the demerger is just the gimmick to increase the valuation.  

When will be CESC demerged and get listed?

CESC has announced the date for demerger as 1st October 2017. The listing of the demerged companies likely to happen in the last quarter of this financial year, most probably by January 2018.

Motilal Oswal's research reports expects 50% upside potential

CESC Target Price Rs 1360, says the research report
A major broker and equity research firm Motilal Oswal published a research report stating there is a 50% upside potential in the CESC with target price of Rs 1360/- (CMP as on 18/08/2017 is Rs 940). The report says "The demerger into four separate businesses would drive value by unlocking the potential of the distribution and retail businesses. Distribution business valuation will get re-rated on reduced volatility in earnings, and thus, its cost of equity. Spencer too will command better valuation after expected turnaround in FY18." The report also high lighted the potential risks with the loss making subsidiaries and declined sales growth in the retail business. 

(Note: This is neither a stock recommendation nor an analysis. The research report quoted here is the property of the respective broker and investors are advised to approach them for full report. The research report is subjected to the declaimer given in it. The author owns the stock mentioned in the article and may have written a biased news report. Do a thorough study or consult your investment adviser before investing)


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