CESC is going to acquire a 23.18 per cent additional stake in Noida Power Company Ltd (NPCL) from promoter group entities for Rs 450 crore, turning the profit making electricity distribution venture a subsidiary of the company.

The RP-SG Group held a 72.73 per cent stake in NPCL while Uttar Pradesh government entity Greater Noida Industrial Development Authority held the balance 27.27 per cent. CESC Ltd directly held 49.55 per cent in the company, which started operations in 1993, while the rest was owned by two promoter group entities — Shaft Investment Pvt Ltd and Stel Holdings Ltd.

The decision adds one more dimension to the company’s stated decision to consolidate existing and future distribution businesses under Eminent Electricity Distribution Ltd, a wholly owned step-down subsidiary.
CESC, which supplies power in Calcutta and surrounding areas, is likely to fund the stake purchase from the healthy cash reserve it has on the balance sheet. Post acquisition, which requires statutory approvals, the company will hold 72.73 per cent in NPCL. The acquisition is being routed through Eminent.

“The idea has been to consolidate various fragments of the distribution business under one roof. The acquisition of additional stake in NPCL by Eminent is a move in that direction,” a senior CESC official said.
While the promoters cash out, analysts tracking the sector and the company said the deal is positive for CESC, pointing that the transaction is being done at a fair valuation. Moreover, the transaction is being seen as a positive from the corporate governance point of view as well.

Valuation

In a note to clients, ICICI Securities said the deal terms put the enterprise value of NPCL at Rs 1,950 crore. “The transaction is being done at 7.1 times of 2019-20 EBIDTA of Rs 270 crore, while market transactions are being done at eight times EV to EBIDTA. So it is not expensive,” Rahul Modi, senior analyst at ICICI Securities, argued.

Moreover, there is expected to be a 14-15 per cent return on equity for the investment made to buy the stake. In comparison, mere cash sitting on the balance sheet of CESC would not have given more than 5-6 per cent return to the company. In short, CESC investors would earn more for the NPCL stake than idle cash on the books, analysts noted.

Since inception, NPCL’s revenue and profit after tax have grown at a CAGR (compounded annual growth rate) of 26 per cent and 22 per cent, respectively. It posted a PAT of Rs 140 crore on a revenue of Rs 1,729 crore in 2019-20.

Corporate governance

The buyout also puts to rest the concerns of a few investors on how CESC is utilising surplus cash.
Analysts said the dividend payout was not commensurate with the large free cash flow the company was making in the past. “The other concern was promoters continued to hold stake in NPCL when the company (CESC) had a majority stake. However, the higher dividend payout along with the promoters’ Noida business stake sale to CESC will allay investor concerns regarding the misuse of surplus cash,” Swarnim Maheshwari, analyst with Edelweiss Research, said.

CESC declared an interim dividend of Rs 45 a share (450 per cent), the highest in the history of the company.
Analysts say the trend could continue as CESC does not have major capex lined up in the immediate future.