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Big Ticket Orders In The Pipeline
BGR Energy Systems (BGR) is an established player in the turnkey
balance of plant (BoP) space. In spite of 30% outperformance v/s the
Sensex in CY10, we believe there is room for further upside with the
Rajasthan orders (Suratgarh and Chhabra, with a cumulative value of
Rs120-130bn) serving as the short term catalyst. The likelihood of BGR
bagging at least one of the stated orders is high due to: (a) only two
bidders (BHEL, BGR) are in the fray for the two orders; (b) Rajasthan
being a repeat client for BGR (the company has already executed the
Dholpur turnkey BoP order and is also executing Jhalawar EPC for the
same client); and (c) given the sheer size of each order (Rs60-65bn),
the probability of one order going to each bidder is high.
Key Investment Drivers
Robust order pipeline: The company has a healthy order book of
~Rs102bn (2.1x its FY2011E revenues) providing strong revenue visibility
until FY2012. Besides, the order pipeline too is robust with several nearterm
opportunities (Suratgarh, Chhabra, NTPC bulk tender etc.) in the
offing. Assuming BGR wins at least one of the Rajasthan orders, the order
book would swell to ~Rs165bn, further improving revenue visibility (~3.5x
its FY11E revenues). We are confident of the company’s ability to bag new
orders and have factored into our estimates fresh orders to the tune of
Rs82.3bn (~125% YoY growth) for FY11E and Rs109.8bn for FY12E.
Notably, management continues to maintain its higher order intake
guidance of Rs120-150bn for the current financial year.
Integrated player - foray into BTG manufacturing: Over the last
decade, BGR has climbed up the value chain — from a mere BoP package
manufacturer to a full-fledged EPC contractor. We believe that the recent
foray into the supercritical Boiler, Turbine & Generator (BTG)
manufacturing space (JV with Hitachi), augurs well for the company in the
long run, de-risking the business model and completing the final leg of its
transformation. Notably, this also positions BGR as a complete solutions
provider making it only the third player (trailing BHEL and L&T) to set up a
domestic manufacturing facility for the entire BTG value chain.
Debt-free company: BGR is a debt-free company with FY10
consolidated net debt to equity of -0.1x. This positions the company well to
raise debt and achieve financial closure for its BTG foray (JV with Hitachi).
Valuation, Recommendation and Outlook
Currently, the stock is trading at an attractive valuation of 12.6x its FY12E EPS.
Since listing, BGR has traded at an average 1-yr forward P/E of ~14.6x. We
believe the stock deserves a premium to its historic trading band given the
evolution of the company into a fully integrated player and ascribe a target
P/E of 18x. Our target multiple is also well supported by the strong growth
phase for the company; corresponding to an EPS CAGR of 37.7% over FY10-
12E and stellar RoEs north of 34%. We maintain BUY with a TP of Rs950.
Company Background
BGR Energy Systems, incorporated in 1985, has over
the last decade diversified its presence and scaled up
from being a mere manufacturer of a few BoP (balance
of plant) packages to executing turnkey BoP projects
followed by implementation of full-fledged EPC
contracts. Now, the company has also forayed into the
supercritical BTG (boiler, turbine and generator)
manufacturing space via a JV with Hitachi. Mr T.
Sankaralingam (previously chairman and managing
director of NTPC) has joined BGR as managing director
in September 2009.
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