BGR Energy Systems – 2QFY2011 Result Update- Angel Broking

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BGR Energy Systems – 2QFY2011 Result Update

Angel Broking maintains a Neutral  on BGR Energy Systems

BGR Energy Systems’ (BGR) 2QFY2011 results were along expected lines.

The company’s revenue increased by robust 143% yoy to `1,136cr and PAT

spiked by 154% yoy to `78cr, compared to our expectation of `1,054cr and

`76cr, respectively. During the quarter, the company finalised its JV with Hitachi

for the manufacture of supercritical boilers and turbines, enabling BGR to

participate in the NTPC rebid for the 11x660MW boiler package. We maintain

Neutral on the stock.

Strong revenue and profitability growth: Driven by faster execution of EPC projects

and low base effect, BGR reported steep 143% yoy growth in revenue to

`1,136cr. The EPC segment’s revenue grew by 154% yoy, while the capital goods

segment registered growth of 31% yoy. The company’s EBITDA surged by

122% yoy to `132cr; however, margins compressed by 108bp to 11.7%, largely

reflecting the higher raw-material cost incurred during the execution of EPC

projects. Order backlog at the end of the quarter stood at `10,532cr. Of this, the

power projects division constituted 92%.

Outlook and valuation: BGR has taken several bigger leaps over the years,

transforming itself from manufacturing few BoP components to executing turnkey

BoP projects, and is now gradually executing full-fledged EPC contracts. Order

backlog, which stood at `10,532cr (2.4x FY2011E revenue) at the end of the

quarter, provides good revenue visibility. In addition, we believe the JV with

Hitachi would enable BGR to bid for the upcoming supercritical projects in India.

At the CMP, the stock is quoting at 21.2x and at 17.1x FY2011E and FY2012E

EPS, respectively. We maintain Neutral on the stock.

Investment arguments

Power sector – A structural growth driver: The Government of India has embarked

on an ambitious plan of promoting ‘Power for all by 2012’ and increasing the

country’s per capita consumption of electricity to over 1,000KWh by FY2012E.

To this effect, the government has planned capacity addition of 78,700MW during

the Eleventh Plan period. Assuming ~60% achievement rate, it would result in

capacity addition of about 45–50GW. Pertinently, the scale gets even bigger for

the

Twelfth Plan, with a planned capacity addition of over 100GW.

The share of thermal capacity, including the Eleventh and Twelfth Plans, totals

134,893MW, thereby necessitating BoP along with boiler turbine generator (BTG)

needs. Typically, an average BoP work constitutes about 40% of the project cost. In

this way, the 75,200MW of thermal capacity planned during the Twelfth Plan

period alone throws up a potential BoP opportunity of `1,35,360cr (i.e.,

~`27,072cr of an average annual opportunity).

Turnkey BoP – BGR's forte: BGR has its own set of competitive advantages to

differentiate its offerings in the turnkey BoP space. Hence, it is one of the very few

established players to offer complete turnkey BoP services. The company has solid

in-house expertise, particularly with a strong in-house design and engineering

team (~53% of the total employees), which gives control over cost, design and

scheduling of projects. Besides, over the years, the company has augmented its

product portfolio through a combination of in-house developments and strategic

technological tie-ups with several international players. The company can currently

manufacture about 50% of BoP package requirements in house, giving it an edge

in terms of cost and lesser sub-vendor management.

Additionally, BGR’s proven track record in managing equipment and turnkey

projects helps it to further strengthen its position vis-à-vis new entrants.

EPC contracts – Transforming to the next level: BGR has scaled up to the next level,

having won two major EPC orders with combined worth of `8,000cr. For both

these orders, BGR would be handling the BoP package at its end, while BTG would

be sourced from Dongfang, China. Post operationalising the potential JV with

Hitachi, BGR would be able to fulfill the pre-qualifying criteria for NTPC’s bulk

order of supercritical boilers, thereby transforming itself into a fully integrated EPC

major with complete access to BTG equipment.

Outlook and valuation: BGR has taken several 'bigger' leaps over the years,

transforming itself from manufacturing few BoP components to executing turnkey

BoP projects, and is now gradually executing full-fledged EPC contracts. Order

backlog, which stood at `10,532cr (2.4x FY2011E revenue) at the end of the

quarter, provides good revenue visibility. In addition, we believe the JV with Hitachi

would enable BGR to bid for the upcoming supercritical projects in India. At the

CMP, the stock is quoting at 21.2x and at 17.1x FY2011E and FY2012E EPS,

respectively. We maintain Neutral on the stock.