Improving consumer sentiment bodes well for companies like Spencer’s Retail, the retail wing of RPG group flagship CESC. Spencer’s has been on a cost-cutting spree for sometime now. This has helped bring down the average monthly cash losses to Rs16-18 crore from around Rs27 crore last fiscal. While a complete turnaround of the business would take a while, the decline in losses and improvement in outlook are positive triggers for the stock.
Average price realisations are expected to increase as the proportion of grocery declines and that of apparels and private labels increases. Margins on apparels and private labels are higher than that on grocery, which would help improve margins. Analysts expect Spencer’s to break even by FY2013. Further, according to news reports, CESC plans to sell 20% stake in Spencer’s. This would ease pressure on CESC, as continuous infusion of funds in retail business would imply a risk to fund its power business. CESC recently acquired a 51% stake in a 600 megawatt (mw) project in Maharashtra for Rs200 crore. It would pay a further Rs100 crore to acquire the remaining stake on achieving certain milestones.
CESC is also bidding for Bihar State Electricity Board’s distribution franchise. The company’s total generation capacity has gone up 25% to 1.2 gigawatt after completion of its 250 mw unit at Budge Budge. Currently, this unit is operating at a plant load factor (PLF) of 25-30%. CESC expects to ramp up PLF by the March 2010 quarter. Meanwhile, higher realisation offset the impact of muted sales volume growth in the September quarter. CESC’s revenues increased 26.2% year on year, driven by a 24.9% increase in average price realisation. Operating profit margins dropped 267 basis points (100 basis points make one percentage point) to 24.7% on account of higher raw material costs.
Analysts like the CESC stock, which is currently trading at Rs392.95 per share. Investors could consider it on declines.
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