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MTECHTIPS:-CESC tanks 14% on Firstsource deal; hit by brokerage downgrades
NEW DELHI: CESC LtdBSE -13.98 % slipped over 14 per cent in trade on Friday after Sanjiv the Goenka-promoted company agreed to pay around Rs 400 crore for a 49.5 per cent holding in Firstsource. CESC will acquire 34.5 per cent in Firstsource through a preferential allotment and a further 15 per cent from the existing investors.Most brokerages are of the view that the CESC deal with Firstsource is unrelated and the past track record has shown that any unrelated diversification has been poor.At 09:28 am, CESC was trading 14 per cent lower at Rs 293.80. Firstsource Solutions LtdBSE -11.66 % was down 2.1 per cent at Rs 13.00. Citi downgraded CESC to 'sell' and slashed its target price from Rs 345 earlier to Rs 300. The brokerage firm sees the deal as unrelated and it would increase standalone parent leverage which could depress profits. Further, CESC is spending 15 per cent of its current market capitalization on this unrelated diversification. "Although the BPO business should not guzzle cash like the retail business, but it could lead to higher leverage in the power business as it has its own needs," Citi added. The money raised from fresh issue of shares - about $50 million -and cash reserves of about $140 million will help Firstsource pay its bondholders as about $237 million worth of foreign currency convertible bonds are coming up for redemption in December. "Firstsource, which gets a majority of its revenues from healthcare, telecom and media clients in the US, had revenues of Rs 2,255 crore in the year ended March 2012, and a net profit of Rs 62 crore," ET reported. However, management has cited difficult growth environment in power sector and attractive valuations to justify the deal. "There is scepticism around business justification for the deal since last key diversification into retail has not worked out in favour of CESC," Macquarie said in a report. "There is no clarity on any synergies, potential improvement in business fundamentals. This puts in spanner into a strong emerging story around power business and reduction in retail losses," said the Macquarie report. CESC is likely to fund the acquisition with 70 per cent debt, or Rs420 crore, while the remaining will be funded through internal accruals. CESC has cash on books close to Rs700 crore on consolidated basis, IDFC said in a report. IDFC is of the view that CESC has acquired an unrelated business in which it has no expertise and which cannot add strategic value. Cashflows could have been utilized for acquisition of potential power assets.The brokerage firm downgrades the stock to 'neutral' and also cuts its target price from Rs 363 earlier to Rs 333. "While we like CESC's core power business (one of the most efficient power distribution companies in India), unrelated investments in areas like retail and BPO are dilutive for minority shareholders," IDFC said in a report.
NEW DELHI: CESC LtdBSE -13.98 % slipped over 14 per cent in trade on Friday after Sanjiv the Goenka-promoted company agreed to pay around Rs 400 crore for a 49.5 per cent holding in Firstsource. CESC will acquire 34.5 per cent in Firstsource through a preferential allotment and a further 15 per cent from the existing investors.Most brokerages are of the view that the CESC deal with Firstsource is unrelated and the past track record has shown that any unrelated diversification has been poor.At 09:28 am, CESC was trading 14 per cent lower at Rs 293.80. Firstsource Solutions LtdBSE -11.66 % was down 2.1 per cent at Rs 13.00. Citi downgraded CESC to 'sell' and slashed its target price from Rs 345 earlier to Rs 300. The brokerage firm sees the deal as unrelated and it would increase standalone parent leverage which could depress profits. Further, CESC is spending 15 per cent of its current market capitalization on this unrelated diversification. "Although the BPO business should not guzzle cash like the retail business, but it could lead to higher leverage in the power business as it has its own needs," Citi added. The money raised from fresh issue of shares - about $50 million -and cash reserves of about $140 million will help Firstsource pay its bondholders as about $237 million worth of foreign currency convertible bonds are coming up for redemption in December. "Firstsource, which gets a majority of its revenues from healthcare, telecom and media clients in the US, had revenues of Rs 2,255 crore in the year ended March 2012, and a net profit of Rs 62 crore," ET reported. However, management has cited difficult growth environment in power sector and attractive valuations to justify the deal. "There is scepticism around business justification for the deal since last key diversification into retail has not worked out in favour of CESC," Macquarie said in a report. "There is no clarity on any synergies, potential improvement in business fundamentals. This puts in spanner into a strong emerging story around power business and reduction in retail losses," said the Macquarie report. CESC is likely to fund the acquisition with 70 per cent debt, or Rs420 crore, while the remaining will be funded through internal accruals. CESC has cash on books close to Rs700 crore on consolidated basis, IDFC said in a report. IDFC is of the view that CESC has acquired an unrelated business in which it has no expertise and which cannot add strategic value. Cashflows could have been utilized for acquisition of potential power assets.The brokerage firm downgrades the stock to 'neutral' and also cuts its target price from Rs 363 earlier to Rs 333. "While we like CESC's core power business (one of the most efficient power distribution companies in India), unrelated investments in areas like retail and BPO are dilutive for minority shareholders," IDFC said in a report.
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