CESC's Sanjeev Goenka

On a summer evening in 1989, a young man in his 20s was leisurely sipping a cup of tea and possibly eating meringues with cream with his friends at Flury's, one of Kolkata's heritage tea joints on Park Street, watching the world go by. Suddenly, all the lights and fans went off. They stayed off for hours. Flury's patrons, including members of his friends' circle, pointed fingers at the young man, holding him responsible for the long power cut, which was not unusual in those days in the city. The man in the unenviable spotlight (well, just figuratively)? Sanjeev Goenka, now 44, and Vice Chairman, RPG Enterprises, which has been running CESC since acquiring it in 1989. "Just the other day, I got a call from my 14-year-old son, who was very annoyed and upset. 'This is just not done Chachu (Goenka's son, incidentally, calls him Chachu). How do you run the company? We had six minutes of power cut at the science lab today,' my son told me," Goenka says, driving home how people's expectations have gone up with the power utility's improved performances over the years. Still, the incident at Flury's will always be etched in Goenka's memory.

It is of course a distant memory, what with Kolkata no longer a victim of long-drawn blackouts. That's because CESC plants are now operating at a plant load factor (PLF) of 98.5 per cent (which simply means that the plants are utilising 98.5 per cent of their capacity to produce power). Transmission & distribution (T&D) losses have come down from 24.8 per cent in 2000-01 to 15.8 per cent in October 2005, which is the second best in the country. CESC is also the first power utility to have started exporting power to the National Power Grid. The beleaguered power utility has also come out of the red; it earned profits of Rs 147.20 crore and Rs 70.55 crore in 2004-05 and 2003-04, respectively, after incurring a loss of Rs 5.23 crore the previous fiscal.

Emboldened by this turnaround, CESC is now in expansion mode. It plans to set up four new projects over the next five to six years with a total capacity of 3,250 mw and a capital outlay of Rs 13,000 crore. The new plants will come up in Budge Budge (250 mw), Haldia (1,000 mw), Jharkhand (1,000 mw), and Orissa, in two phases of 1000 mw each. The proposed investment numbers may look astronomical, but Goenka has it all figured out. The company has a free cash flow of Rs 600-700 crore, which can translate into a funds base of Rs 3,000-3,500 crore in five years. Then power utilities are allowed a debt-equity ratio of 1:2.3, which means the company can raise debt of close to Rs 8,000 crore against this free cash. CESC can mobilise another Rs 400 crore through a marginal dilution of promoters' equity. And on the new capital base, the company, which has a debt-equity ratio of 0:85:1, can raise over Rs 800 crore. "If you sum them up, you arrive at the required figure. Isn't it simple?" grins Goenka.

Along with expansions, CESC is also gearing up to undertake distribution assignments "as and when they present themselves," says Goenka. He also has plans to foray into coal mining in a big way. The company has applied for mining leases for a number of coal mines, he says, but refuses to divulge details.

Power sector analysts are also bullish about the company. Says R.K. Agarwal, Director at accountancy firm Ernst & Young, who was once appointed by the Tariff Commission to audit CESC: "The crisis seems to be over now. The company is on the path of recovery. And this is the right time to get into expansion mode. Power trading is also allowed now. Financial institutions are comfortable with the company. So it's time to look beyond Bengal." According to Agarwal, one of CESC's biggest achievements has been its ability to cut down costs, and pass on those benefits to the consumer as the management cannot retain profits beyond a certain level (just like any other company in the electricity sector).

Brokerage houses too are bullish on CESC. As CLSA Asia Pacific Markets notes in its corporate research report of September 9: "We believe the company is now well positioned to protect its monopoly in the licence area and is also likely to earn significant efficiency incentives from fy07 (2006-07) onwards. The proposed expansion programme should improve CESC's cost competitiveness." Motilal Oswal Securities says in its detailed report on the Power Sector: "CESC has an integrated utility business model with a presence in generation, mining and distribution. The integration gives CESC a definite cost advantage, besides ensuring fuel linkages and providing payment security."

If CESC was in the doldrums till recently, it was mainly due to three factors: One, there were no tariff revisions; this resulted in losses piling up. Two, high transmission & distribution (T&D) losses, as CESC was not allowed to close down its bleeding Mulajor station. And three, creditors and suppliers were baying for the management's blood. Explains Goenka: "In the initial years, the West Bengal State Electricity Board (WBSEB), which happens to be our competitor, was also our regulator. So there was a fundamental mismatch and inbuilt conflict. We had to fight it out. We were denied revision of tariff for five long years. Later, the Calcutta High Court and Supreme Court upheld our demands as legitimate ones. (CESC was the first company to have moved court against the state.)" Another upshot of stagnant tariffs was that the debt-equity ratio of CESC went as high as 5.6:1. "The external environment kept us busy fire fighting and did not allow us to focus on efficiency and operations," adds Goenka.

So is it all smooth sailing today? Not exactly, as CESC now has to benchmark itself against the best in the country. And such comparisons don't look too charitable. According to a June 23 report of BRICS Securities, "In fy05 (2004-05), CESC incurred a cost of Rs 3.01/unit on energy purchase, while its own generation cost was Rs 1.93/unit. In comparison, the cost of energy from NTPC's (National Thermal Power Corporation's) new pithead plants would be less than Rs 1.8/unit. CESC will become more competitive only if its new plants can match NTPC's cost. This will minimise the risk of market share losses from any new licensees in its area post-fy08 (2007-08)." The good news, though, is CESC has in place an integrated model-with a presence in generation, mining and distribution, which should yield further cost advantages in the days ahead.