CESC Ltd Q2 FY26: Strong Profit Growth Masks Margin Concerns

The September 2025 quarter marked a significant improvement in profitability, with consolidated net profit climbing from ₹353.00 crores in Q2 FY24. On a sequential basis, profit advanced 9.82% from ₹387.00 crores in Q1 FY26, demonstrating consistent momentum. Revenue from operations expanded to ₹5,267.00 crores, up 12.06% year-on-year and 1.25% quarter-on-quarter, driven by higher electricity demand across the company's distribution network spanning 567 square kilometres.

The operational performance reflects the seasonal nature of power consumption, with the monsoon quarter typically witnessing moderate demand. Despite this, CESC maintained its market leadership in the Kolkata region whilst expanding its generation capacity. The company's integrated model—combining generation and distribution—provides a natural hedge against volatility in power tariffs, though it also exposes the business to regulatory uncertainties.

Financial Performance: Margin Expansion Amid Rising Costs

CESC's financial metrics for Q2 FY26 revealed a mixed picture. Operating profit (PBDIT) excluding other income surged to ₹1,061.00 crores, representing a 20.14% margin—a substantial 108 basis points improvement over the 19.06% recorded in Q2 FY24. This margin expansion came despite a 19.27% year-on-year increase in employee costs to ₹396.00 crores, reflecting wage inflation and workforce expansion.

The gross profit margin stood at 15.34% in Q2 FY26, up from 13.57% in the corresponding quarter last year, indicating improved operational efficiency. However, the PAT margin of 8.45%, whilst higher than Q2 FY24's 7.94%, remains below the company's historical peak of 14.35% achieved in March 2023. This compression reflects the impact of elevated interest costs, which consumed ₹337.00 crores during the quarter.

On a half-yearly basis (H1 FY26), CESC reported consolidated net profit of ₹812.00 crores on revenue of ₹10,469.00 crores, representing year-on-year growth of 11.05% and 9.48% respectively. The consistency in performance across both quarters of H1 FY26 suggests underlying operational stability, though seasonal variations in power demand will continue to influence quarterly results.

Operational Challenges: Debt Burden Weighs on Returns

Despite the headline profit growth, CESC faces significant operational headwinds stemming from its capital-intensive business model. The company's debt-to-equity ratio stands at 1.12, with total debt of ₹15,624.00 crores as of March 2025. This elevated leverage translates into substantial interest obligations—₹337.00 crores in Q2 FY26 alone, representing 59.65% of profit before tax.

The interest coverage ratio of 1.34 times indicates adequate but not comfortable debt servicing capacity. This constraint on financial flexibility is further evident in the company's return on capital employed (ROCE) of just 5.72%, well below the cost of capital. The five-year average ROCE of 7.08% suggests this is a structural challenge rather than a temporary aberration.

Return on equity (ROE) of 11.40% in Q2 FY26, whilst higher than the sector average, reflects moderate capital efficiency. This ROE—achieved through a combination of operational performance and financial leverage—indicates that the company is generating adequate returns for shareholders, though there is room for improvement. The five-year average ROE of 12.44% suggests consistency in this metric, which is commendable given the capital-intensive nature of the power sector.

Depreciation charges of ₹311.00 crores in Q2 FY26, up 5.42% year-on-year, reflect the ongoing capital expenditure required to maintain and expand generation and distribution infrastructure. The company's fixed assets stood at ₹22,703.62 crores as of March 2025, representing the bulk of its asset base and underscoring the need for disciplined capital allocation.

Regulatory Landscape: Navigating Tariff Dynamics

CESC operates in a highly regulated environment, with electricity tariffs subject to approval by state regulatory commissions. The company's ability to pass through cost increases—particularly fuel costs—to consumers is critical for maintaining margins. Recent regulatory developments have been broadly supportive, though any adverse tariff revisions could materially impact profitability.

The power distribution business in Kolkata benefits from a relatively affluent customer base with consistent payment discipline, resulting in lower distribution losses compared to many other Indian utilities. This operational advantage provides a degree of stability to cash flows, though it also limits the potential for dramatic margin expansion.

On the generation side, CESC's thermal power plants face the twin challenges of environmental compliance and fuel cost volatility. The company has been investing in pollution control equipment and exploring cleaner energy alternatives, though the pace of transition remains gradual. The regulatory push towards renewable energy could necessitate significant capital allocation in coming years.

Peer Comparison: Valuation Discount Justified?

Relative to peers in the power generation and distribution sector, CESC trades at a meaningful valuation discount. The stock's price-to-earnings ratio of 16.81 times compares favourably with SJVN's 50.63 times and Nava's 17.01 times, though it commands a premium to NLC India's 12.80 times. This positioning suggests the market recognises CESC's integrated business model and stable Kolkata franchise, whilst remaining cautious about its leverage and margin sustainability.

CESC's price-to-book ratio of 1.93 times sits comfortably within the peer range, reflecting the market's assessment of the company's asset quality and franchise value. The book value per share of ₹90.15 provides a tangible anchor for valuation, with the current price of ₹170.45 representing a 89.05% premium. This premium is justified by the company's established market position and consistent dividend track record.

The dividend yield of 2.58% stands out favourably against peers, with CESC maintaining a five-year average payout ratio of 43.56%. This commitment to shareholder returns, even in the face of elevated debt levels, demonstrates management's confidence in cash flow generation. However, the dividend policy may come under pressure if capital expenditure requirements accelerate or if operating performance deteriorates.

Valuation Analysis: Attractive Entry Point Emerges

At the current price of ₹170.45, CESC's valuation appears attractive relative to its historical trading range and fundamental metrics. The stock trades significantly below its 52-week high of ₹203.80, having corrected 16.36% from that peak. This decline has brought the valuation to levels that our analysis suggests represent good value for long-term investors.

The proprietary Mojo score of 71 out of 100 places CESC in 'Buy' territory, up from a 'Sell' rating just weeks earlier. This upgrade reflects the combination of improved quarterly results, attractive valuation multiples, and strong institutional participation. The company's valuation grade has been classified as 'Attractive' since May 2025, with the current price offering a margin of safety for patient investors.

The enterprise value-to-EBITDA multiple of 11.48 times reflects the market's assessment of CESC's earning power, adjusted for its debt burden. This metric, higher than the P/E ratio due to the company's leverage, underscores the importance of deleveraging for unlocking shareholder value. Any meaningful reduction in debt levels could result in multiple expansion and capital appreciation.

Shareholding Pattern: Institutional Confidence Building

The shareholding structure of CESC reflects a stable promoter base and growing institutional interest. Promoter holding has remained constant at 52.11% over the past five quarters, with zero pledging—a positive indicator of promoter confidence and financial stability. Rainbow Investments Limited, the primary promoter entity, holds 44.36% of the equity.

Foreign institutional investors (FIIs) have reduced their stake marginally from 12.36% in December 2024 to 10.93% in June 2025, reflecting a 143 basis point decline. This reduction could signal concerns about near-term earnings visibility or broader portfolio rebalancing by global funds. However, the absolute level of FII holding remains substantial, indicating continued interest in the story.

More encouragingly, mutual fund holdings have inched up to 17.62%, whilst insurance company participation has increased significantly from 6.13% in December 2024 to 7.76% in June 2025. This 163 basis point increase in insurance holdings suggests growing conviction amongst domestic long-term investors about CESC's prospects. The total institutional holding of 36.20% provides a stable investor base and reduces volatility.

Stock Performance: Underperformance Reflects Caution

CESC's stock price performance over the past year has been disappointing, with the shares declining 11.66% compared to the Sensex's 3.64% gain. This underperformance of 15.30 percentage points reflects investor concerns about the company's ability to sustain margin improvements and manage its debt burden effectively. Year-to-date, the stock has fallen 8.26% against the Sensex's 7.44% gain.

The longer-term picture is more encouraging, with CESC delivering 84.25% returns over two years and 119.37% over three years, significantly outperforming the Sensex in both periods. This historical outperformance demonstrates the stock's potential when fundamentals align favourably, though recent weakness suggests investors are adopting a wait-and-watch approach.

Technical indicators present a mixed picture. The stock recently turned bullish on 16 October 2025, trading above its 20-day, 50-day, 100-day, and 200-day moving averages. However, the MACD shows mildly bearish signals on a monthly basis, whilst the KST indicator remains bearish on both weekly and monthly timeframes. This technical ambiguity mirrors the fundamental narrative—improving operational performance offset by structural concerns.

The stock's beta of 1.35 indicates higher volatility than the broader market, with a 35% tendency to amplify market movements. This high-beta characteristic makes CESC suitable for investors with higher risk tolerance who can weather short-term price fluctuations. The volatility of 32.61% over the past year, compared to the Sensex's 12.54%, underscores this point.

Investment Thesis: Quality Concerns Temper Optimism

CESC's investment case rests on three pillars: its established market position in Kolkata, improving operational metrics, and attractive valuation. The company's integrated generation-distribution model provides earnings stability, whilst its monopolistic distribution franchise ensures predictable cash flows. The recent quarterly results demonstrate management's ability to navigate cost pressures and deliver profit growth.

However, these strengths are counterbalanced by persistent quality concerns. The company's quality grade has remained 'Below Average' for 13 consecutive quarters since June 2022, reflecting structural challenges including elevated leverage, modest returns on capital, and limited earnings growth. The five-year sales CAGR of 10.37% and EBIT CAGR of just 1.20% highlight the difficulty in translating revenue growth into bottom-line expansion.

The financial trend has turned positive over the past two quarters, suggesting improving momentum. Combined with bullish technical indicators and attractive valuation, this creates a favourable near-term setup. However, the sustainability of margin improvements and the company's ability to deleverage remain key uncertainties that could determine long-term returns.

Key Strengths & Risk Factors

Outlook: What to Watch

The near-term outlook for CESC hinges on its ability to sustain the margin improvements demonstrated in Q2 FY26 whilst making progress on debt reduction. The upcoming winter quarter (Q3 FY26) will be critical, as higher power demand should support revenues. Any signs of margin pressure or deteriorating cash flows would be negative for the investment thesis.

Longer term, CESC's success will depend on navigating the energy transition towards cleaner sources whilst maintaining the profitability of its thermal generation assets. The company's capital allocation decisions—particularly the balance between debt reduction, dividend payouts, and growth investments—will determine shareholder returns over the next three to five years.