Mumbai, Oct. 26: Investors pounded the CESC stock today amid rising concern over the power utility’s sudden decision to acquire Firstsource Solutions for a total consideration of up to Rs 640 crore
On the BSE, the CESC stock sank to close 15.32 per cent lower at Rs 281.15 as investors reacted negatively to its unrelated diversification even as some brokerages downgraded the stock.
Under the terms of the deal announced on Thursday, CESC will have a 49.4 per cent stake in Firstsource, the BPO company. The latter will issue over 22.6 crore shares at Rs 12.10 per share on a preferential basis to Spen Liq Pvt Ltd, a wholly owned subsidiary of CESC. Later, Spen Liq will come out with an open offer.
CESC has justified the acquisition of Firstsouce on the ground that it was likely to generate “favourable returns” with the added benefit of locking into a new growth segment. Analysts said the company’s diversification in the past, notably in organised retailing, had not been very successful.
``The acquisition would increase standalone parent leverage which could depress profits. Further, CESC is spending around 15 per cent of its current market capitalisation on this unrelated diversification,” analysts at Citi said in a note. The brokerage downgraded the stock to a sell.
The Citi analysts went on to add that the merger of Spencer’s Retail led to the issuance of 3.1 crore shares in 2007-08 which amounted to a 37 per cent dilution of shares. Further, Spencer’s Retail booked losses of Rs 980 crore over 2008-12 and other subsidiaries of Spencer’s retail like Au Bon Pain Café and Music World have contributed Rs 66.4 crore worth of losses over the same period.
“This acquisition is unrelated and its past track record of unrelated retail diversification has been poor. Though the BPO business should not guzzle cash like the retail business, it could lead to higher leverage in the power business as it has its own needs,” the brokerage added.
Kotak Institutional Equities also downgraded the CESC stock to ‘reduce’ from ‘buy’. According to the brokerage, Firstsource is primarily focused on voice BPO services which is at the lower end of the profitability spectrum.
Firstsource derives a large portion of its revenue from the US healthcare vertical that is characterised by difficulty in scaling up and in taking work to more profitable offshore locations. Moreover, competition from Philippines-based BPO service providers has badly crimped the company’s margins.
“While we like CESC’s core distribution business at Calcutta, we are not as optimistic about a potential turnaround of the retail business and fuel availability for the Chandrapur project. Our downgrade is prompted by the unwarranted diversification into voice-based BPO business,” the analysts said in their note.