BGR ENERGY SYSTEMS Strong execution continues:: Edelweiss

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BGR ENERGY SYSTEMS
Strong execution continues



􀂄 Numbers beat estimates; sales jump 144% to INR 11 bn
BGR Energy Systems’ (BGR) Q2FY11 results were ahead of our estimates. Sales
catapulted 144% Y-o-Y to INR 11.4 bn on the back of strong growth in EPC
projects. EBITDA, at INR 1.3 bn, grew 131% Y-o-Y even as raw material costs and
other expenses increased 132bps and 149bps Y-o-Y to 81.8% and 3.6% of sales,
respectively. EBITDA margin slipped 65bps Y-o-Y to 11.4% as decrease in
employee cost (down 215bps Y-o-Y to 3.0% of sales) curbed further dip in EBITDA
margin. The dip can be attributed to higher sales mix of EPC in total sales.
Reduced net interest cost helped the company record a robust PAT growth of
154% to INR 778 mn. It is important to note that the percentage growth looks
magnified since BGR’s revenues are growing on a smaller base. However, this does
not take away the credit for continuing strong execution.
􀂄 Strong order backlog; visibility improves
The company’s current order backlog stands at INR 105 bn, implying a coverage
ratio of 3.4x (based on FY10 revenues). Order backlog includes the recently
bagged INR 22 bn BoP order from Gayatri Projects’ entity for 2x660MW
supercritical power project at Krishnapatnam (Andhra Pradesh). This order marks
BGR’s entry into the lucrative private sector market, which is expected to form a
large part of capacity addition going forward. Further, it is pertinent to note that
BGR’s entry into BoP is the first step towards bagging larger EPC orders going
forward. Also, with the Hitachi JV in place, the company is strategically progressing
in the right direction, in our view.
􀂄 Outlook and valuations: Order accretion crucial; maintain ‘BUY’
With most projects on hand likely to be completed by FY12, we are of the opinion
that it is crucial for BGR to bag new orders during the current fiscal. We expect the
company to face competition in the EPC space with many new entities vying for
orders. Management is confident of bagging at least one of the two EPC orders
from Rajasthan SEB worth INR 60-65 bn each. Moreover, the JV with Hitachi
assures superior quality of equipment. With a strong order backlog, along with inhouse
manufacturing of various BoP components and in-house design engineering,
BGR seems to have a competitive edge over peers. On a consolidated basis, the
stock is trading at 19.0x and 14.5x its FY11E and FY12E earnings, respectively. We
maintain ‘BUY/ Sector Outperformer’ recommendation/rating on the stock.