BGR Energy Systems- Execution ramp-up buoys performance: Religare

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BGR Energy Systems Ltd
Execution ramp-up buoys performance
BGR Energy’s (BGRL) Q2FY11 results were significantly ahead of our and
consensus estimates, spurred by a sustained pick-up in execution on the critical
projects of Mettur (1x600MW) and Kalisindh (2x600MW). The company’s
revenues grew by 143% YoY while PAT rose 154% to Rs 778mn for the
quarter. While execution is likely to remain strong in Q3FY11, we expect
growth to decelerate from Q4FY11 due to the higher base effect. We roll over
to September ’11 and upgrade our target price to Rs 750 (from Rs 700),
implying a target P/E of ~15x. We believe the stock is likely to trade below
peers due to the capital-intensive nature of the business model, resulting in
stretched cash flows, and the customer concentration risk. Maintain HOLD.
Execution of critical projects drives growth: Execution in the two critical EPC
projects, i.e., Mettur (1x 600MW) from the Tamil Nadu Electricity Board (TNEB)
and Kalisindh (2x600MW) from Rajasthan Rajya Vidyut Utpadan Nigam
(RRVUNL) is ~60% complete with deliveries due in September ’11 and
January ’12 respectively. We expect the company to report strong growth in
FY11, supported by the execution profile of these two projects.
Execution in BoP projects to gather steam in subsequent quarters: In addition to
the Mettur and Kalisindh projects, BGRL has completed ~10–15% of the work on
its two Balance of Plant (BoP) projects at Marwa (2x500MW) and Chandrapur
(2x500MW). These two orders were secured from Chattisgarh State Power
Generation Company (CSPGC) and Maha Genco respectively.
Order inflows likely to miss guidance: The company’s current order backlog
stands at Rs 105bn. The only major order secured in FY11 has been the
Rs 21.7bn contract for BoP works of a 2x660MW coal-based supercritical
thermal power plant promoted by Gayatri Projects. While order flows for the
company may increase in H2FY11, we believe it is unlikely to meet its inflow
guidance of Rs 100bn–150bn in FY11.
Investment view: Even as FY11 is likely to be a good year for BGRL, we believe
consensus could downgrade estimates for FY12 as order inflows in FY11 are
unlikely to meet expectations. At our current estimates, the stock is trading at a
P/E of 20.6x/16.5x for FY11E/FY12E. While we believe that BGRL’s growth
profile would remain strong in FY11 and FY12, the capital-intensive and
high-risk nature of its business model may cap valuations at current levels.
Maintain HOLD.