13 January 2011

NTPC tendering details for 11X660MW BTG equipment: Kotak Securities

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BGR ENERGY SYSTEMS
PRICE: RS.653
RECOMMENDATION: BUY
TARGET PRICE: RS.836
FY12E P/E: 12.5X

q BGR Energy has been asked to submit the price bids for NTPC
11X660MW boiler tender.
q Price bids may be invited for RRUVNL project in next 7-10 days
q Despite competition, company is quite positive about the expected order inflow
q We continue to maintain BUY on the stock with a price target of Rs.836
on FY12 estimates.

We spoke to the company management about the status of existing bids as well as
future order inflow scenario and present below the key highlights about the same -
NTPC tendering details for 11X660MW BTG equipment
NTPC had invited bids for 11X660MW BTG equipment and bids for turbine and
generator have already been finalized while boiler bids are yet to be finalized.
Bharat forge-Alstom JV had emerged as the lowest bidder for super critical turbine
and generator for 11X660 MW NTPC-DVC project. Thus, Bharat Forge-Alstom JV
got five units from this package while BHEL was asked to match the L1 bid and got
four units while the remaining two units went to the L3 bidder JSW-Toshiba JV.
L&T was disqualified on technical grounds from these bids.
However, for 11X660MW super critical boiler, BHEL-Alstom and L&T-MHI JV were
the only two bidders so the boiler package was retendered and BGR-Hitachi JV also
participated in that. BGR-Hitachi JV cleared the technical round and has now been
asked to submit the price bids.
Recent news reports suggested that only BHEL-Alstom and L&TMHI are in the final race for NTPC bulk tender, company has denied this
Recent media news reported that only BHEL-Alstom and L&T-MHI JV are in the final
race for NTPC bulk tender while BGR energy has categorically denied it. It has received the communication from NTPC on 5th Jan, 2011 to submit the price bids for
11X660MW super critical boiler units at Mauda (2X660MW), Solapur (2X660MW),
Nabinagar (3X660MW), Meja (2X660MW) and Raghunathpur (2X660MW) along
with the extension of validity period for bank guarantee towards bid security.
These bids are required to be submitted by 20th Jan, 2011 and will be opened on
the same day.  Thus, there is a competition between BGR energy-Hitachi JV and
L&T-MHI since the tender states that the lowest bidder will get six units of boiler
package and BHEL would be asked to match the L1 bid for the remaining five units
in case if its not the L1. Thus these three cases can emerge on opening of bids -
n Case 1 - If BHEL-Alstom JV emerges as L1, six units would be awarded to BHELAlstom JV while remaining five units would be awarded to the lowest bidder
between L&T-MHI and BGR-Hitachi.
n Case 2 - If L&T-MHI emerges as L1, it would get six units and BHEL-Alstom JV
would be asked to match the price quoted by L&T and correspondingly would
be awarded remaining five units.
n Case 3 - If BGR energy-Hitachi JV emerges L1, it would get six units and BHELAlstom JV would be asked to match the price quoted by BGR and correspondingly would be awarded remaining five units.


Thus, we believe that competition is quite intense between BGR and L&T and given
the fact that L&T could not get super critical turbine and generator package, it may
go in aggressively for boiler package. Along with this, BGR-Hitachi JV can also bid
in aggressively since these awards would enhance the overall market share of the
company in the BTG space.
Heightened competition
Competition has intensified significantly in the BTG space with many players having
their capacity base and couple of them setting up the manufacturing base. Following table highlights the upcoming BTG or turbine capacity by several players


Along with this, a lot of companies are sourcing BTG equipment from Chinese
manufacturers such as Dong Feng, Shanghai electric etc which are offering BTG
equipments at much lower rates.
RRUVNL project status
BGR energy has already submitted bids for 2X660MW EPC projects in Suratgarh
and Chabbra from RRUVNL. Price bid submission is expected in next 7-10 days. This
project has witnessed a lot of delay but company is quite confident of getting
atleast one these projects. It is also bidding for projects from other independent
power producers and was awarded a BOP project worth Rs.21.6 bn for 2X660MW
coal based super critical thermal power project in AP from Thermal Powertech Corporation India Ltd promoted by Gayatri projects and Semcorp, Singapore.
Q3FY11 result expectation
We expect revenues to witness a growth of 89% YoY and 6% QoQ for Q3FY11.
This growth is expected to be led by execution ramp up in Mettur (600MW) and
Kalisindh (2X600MW) EPC projects and Chandrapur and Marwa BOP projects. Operating margins are likely to remain at around 11.5% despite commodity price
hikes due to existing inventories. We thus expect net profits to grow by 93% YoY
and 4% QoQ.


Financial outlook
n Company has a current order book of Rs 105 bn and it expects an order inflow
of Rs.120-150 bn for FY11.
n We continue to maintain our estimates and expect revenues to grow at a CAGR
of 40% between FY10-FY12.
n We expect operating margins to range near 11% going forward due to higher
proportion of EPC project execution as compared to BOP projects.
n Net profits are expected to grow at a CAGR of 37% between FY10-FY12.

Valuation and recommendation
n BGR is currently trading at very attractive valuations of 15.6x and 12.5x on FY11
and FY12 estimates respectively.
n We continue to remain positive on the company and maintain BUY with a price
target of Rs 836 based on 16x one year forward estimated earnings.
n Key risk to our recommendation would come from delay in award of large sized
projects which would impact overall execution going forward.

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