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BGR Energy Systems (BGRL )
Industrials
Potential disappointment in near-term opportunities increases earnings risks. We
downgrade the stock to REDUCE based on (1) potential disappointment in near-term
opportunities and (2) large dependence of near-term earnings on incremental order inflows
(1/4th and 4/5th of FY2012E and FY2013E revenues depend on incremental orders). BHEL has
been placed L1 in Rajasthan state EPC tenders and may get both orders. In the bulk tender too,
we would expect L&T to have an upper-hand based on its lead and to be more aggressive.
May lose Rajasthan tenders to BHEL; possibility of getting one exists but may be difficult
In its post-results conference call, BHEL suggested that it is L1 for both the plants of 1,320 MW in
Rajasthan. BGR is still hoping to get at least one as tender conditions allow the state utility
(RRVUNL) to distribute the order to two vendors in case BGR agrees to match the L1 price. While
possible, we believe it may be difficult for RRVUNL to place an order on BGR i.e. preferring a
private company over a public company. The lack of manufacturing in case of BGR Energy
weakens the case further. BHEL outbid BGR by about 5%. BGR may find it tough to match the L1
price considering BHEL’s lead in manufacturing and indigenization versus BGR’s Japanese sourcing.
Bulk tender is an opportunity but L&T may have an upper hand for its lead and likely aggression
BGR Energy is qualified for the bulk tender which may open on February 4. This tender, worth
roughly Rs100 bn, would have BGR Energy and L&T competing keenly (BHEL has a reserved
portion if it agrees to match the L1 price). L&T may have an upper hand based on (a) at least a
three-year lead in establishing manufacturing facilities and thus indigenization levels, (b) L&T is also
likely to be aggressive considering its loss of the turbine tender based on qualification issues and
(c) L&T has not won any third party order in FY2011 so far, apart from Karchana.
Rs105 bn backlog; 1/4th and 4/5th of FY12E and FY13E revenues depend on incremental orders
1HFY10-end backlog at Rs105 bn versus likely revenues of Rs47 bn in FY2011E. Post earnings
changes, 25% of FY2012E revenues and 80% of FY2013E revenues depend on incremental
orders.
Downgrade to REDUCE on earnings risks and potential disappointment on near-term opportunities
We downgrade the stock to REDUCE based on (1) potential disappointment on near-term
opportunities and (2) large risks to near-term earnings on back of relatively low visibility. We revise
our earnings downwards to Rs41(from Rs41.7) and Rs46.4 (from Rs53) for FY2011E and FY2012E
based on lower order inflow assumptions of Rs64 bn and Rs81 bn versus Rs95 and Rs106 bn
respectively. We reduce our target price to Rs600 (13XFY2012E earnings) from Rs860 (based on
16XFY2012E earnings) based on higher risk and likely lower growth (FY2013E may be flat).
May lose Rajasthan orders to BHEL- key negative development
In its recent conference call, BHEL indicated that it has been declared the lowest bidder for
the EPC contract for 2X660 MW each Chhabra and Suratgarh orders from Rajasthan Rajya
Vidyut Utpadan Nigam Ltd (RRVUNL). These orders have a cumulative size of about Rs122
bn. Competition was relatively limited in these orders with only BHEL, BGR Energy and
Powermachines (Russia) being the contenders for the orders.
Could get one order but the odds are many
BGR is hoping to get at least one of the orders as tender conditions allow the Rajasthan
state utility (RRVUNL) to distribute the order to two vendors in case BGR Energy agrees to
match the L1 price. This is possible but we believe it may be difficult for RRVUNL to justify
placing the order on BGR Energy i.e. preferring a private company over a public company.
The lack of manufacturing in case of BGR Energy weakens the case further. BGR was
banking on this tender but BHEL outbid BGR Energy by about 5%. BGR may also find it
challenging to match L1 price considering BHEL’s lead in manufacturing and indigenization
versus Japanese sourcing in case of BGR Energy.
We believe this is a significant negative development for the company as (1) order win was
key in achieving inflow guidance of FY2011E, (2) it reduces visibility of FY2012E revenues
and, (3) size of opportunity was large (cumulative order size of about Rs122 bn).
Note that the company has guided for order inflows of about Rs150-200 bn in FY2012E. We
have built in order inflows of about Rs64 bn in FY2011E comprising Rs32 bn in orders from
the BoP segment (Gayatri project order worth Rs22 bn has been won already) and EPC order
worth Rs32.5 bn. We have built in order inflows of Rs81 bn in FY2012E led by Rs16 bn from
the BoP segment and Rs65 bn in the EPC space (implies 2X660 MW EPC order).
Order inflows remain relatively sedate in FY2011E so far
BGR Energy reported order inflows to the tune of about Rs23 bn in 1HFY11, down 33% on
a yoy basis. This was primarily led by a single large Balance of Plant (BoP) order worth Rs22
bn. The company has so far won only a single large order worth Rs22 bn for BoP works for
2X660 MW Krishnapatnam power plant from Gayathri Projects.
Bulk tender — a near-term opportunity but L&T may have an upper hand
BGR Energy has qualified for boiler bulk tender (11X660 MW) which may open on February
4. This tender, worth roughly Rs100 bn, would have BGR Energy and L&T jostling to keep
each other out (BHEL has a reserved portion if it agrees to match L1 price). The decision is
still open though we believe that L&T may have an upper hand in this tender based on (1) at
least three years lead in establishing manufacturing facilities and thus likely higher
indigenization levels, (2) L&T power equipment venture is also likely to be quite aggressive
considering loss of turbine tender based on issues of qualification and (3) L&T has not won
any third party order in FY2011 so far apart from Karchana.
The second phase of the bulk tender (9X800 MW) is expected to be awarded out by end-
2QFY12E.
High dependence of FY2012E-13E revenue estimates on new order wins
In FY2012E, Rs20 bn (about a third) of total revenues (of about Rs62 bn) depends on
incremental order wins in FY2011E. Also note that about four-fifths of our FY2013E revenue
estimates are dependant on incremental orders as Mettur and Kalisindh orders would have
been completed by then.
The management expects to book revenues to the tune of about Rs65-70 bn in FY2012E.
The FY2011E-end residual portion of the orders of the current backlog would contribute to
about Rs50-52 bn of these revenues. However, in order to register a growth in FY2012E the
company would have to win a few large orders in the EPC/BoP space.
FY2011E revenues almost completely led by execution of existing backlog
We build in power revenues of about Rs44 bn in FY2011E, which are almost completely
(93%) based on execution of existing orders in the backlog. We expect the company to
execute about 35-40% of the EPC orders (Kalisindh and Mettur) in FY2011E. The Marwa
and Chandrapur BoP projects are expected to contribute about Rs10-12 bn to FY2011E
revenues.
The management has guided for very strong revenue growth of about 60% yoy in FY2011E
led by execution of the EPC projects and pick up in execution of the Marwa and Chandrapur
BoP orders.
Our expectations are significantly below management guidance
The management expects to book revenues to the tune of about Rs65-70 bn in FY2012E;
this is versus our revenue estimate of Rs61 bn in FY2012E. For FY2011E, the management
has guided for a revenue growth of about 60% implying full-year revenues of Rs49 bn
versus our estimate of Rs46.7 bn.
Significant proportion of XIIth plan ordering activity likely to be completed
We estimate that of the 120 GW, about 100 GW would be based on thermal plants—of
which orders for about 68-70 GW have already been placed. This implies that orders of only
about 30 GW are remaining to be placed for the XIIth plan period capacity additions. Based
on a detailed sector-wise analysis of likely remaining orders and assuming a reasonably
optimistic success rate for BHEL, we believe that BHEL may get additional thermal orders of
about 15-20 GW over FY2012E-13E. We believe that most of the XIIth Plan orders would be
placed by end-FY2013E as order placed in FY2014E and beyond are less likely to be
commissioned in the XIIth Plan period.
Equipment JV: 12% RoCE implies 2.6 GW sales p.a.; not easy in a crowded
market
The equipment JVs would require a potential capital investment of about Rs44 bn (Rs30 bn
for the turbine and Rs14 bn for the boiler JV). Adding a further Rs10 bn or so (about 15% of
likely annual sales) would imply a total capital employment of about Rs54 bn for the
equipment JVs. A pre-tax return on capital employed of about 12% would require EBIT of
about Rs6 bn - implying annual sales of about Rs64 bn (assuming 12% EBITDA margin and
10% EBIT margin). At a realization of about Rs20-25 mn per MW, Rs64 bn of sales would
require MW sales of about 2.5 - 2.6 GW per annum. We believe this may not be an easy
task and would require a market share of about 14-15% in a total annual market share of
about 18-20 GW.
Revise estimates and target price to Rs600; downgrade to REDUCE
We revise our earnings downwards to Rs41(from Rs41.7) and Rs46.4 (from Rs53) for
FY2011E and FY2012E based on lower order inflow assumptions of Rs64 bn and Rs81 bn
versus Rs95 and Rs106 bn respectively. We reduce our target price to Rs600 (13X FY2012E
earnings) from Rs860 (based on 16XFY2012E earnings) based on higher risk and likely lower
growth as well. As per our current assumptions, FY2013E earnings may not grow on a yoy
basis leading to potential further de-rating of the stock.
We downgrade our rating on the company to REDUCE from BUY based on (1) potential
disappointment on near-term opportunities and (2) large dependence of near-term earnings
on incremental order inflows (1/4th and 4/5ths of FY2012E and FY2013E revenues depend
on incremental orders).
Key risks include (1) large investment requirement in equipment venture pressing earnings,
(2) rising competition could adversely impact margins, (3) relatively concentrated customer
base and (4) dependence on large projects - any delay/deferral in any of the projects could
materially impact the earnings.
Key upside risk include a positive decision on both Rajasthan as well as NTPC bulk tender
decision in favor of BGR Energy. We have not currently valued the equipment JV of BGR
Energy in absence of evidence of sufficient scale up so as to make reasonable returns.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
BGR Energy Systems (BGRL )
Industrials
Potential disappointment in near-term opportunities increases earnings risks. We
downgrade the stock to REDUCE based on (1) potential disappointment in near-term
opportunities and (2) large dependence of near-term earnings on incremental order inflows
(1/4th and 4/5th of FY2012E and FY2013E revenues depend on incremental orders). BHEL has
been placed L1 in Rajasthan state EPC tenders and may get both orders. In the bulk tender too,
we would expect L&T to have an upper-hand based on its lead and to be more aggressive.
May lose Rajasthan tenders to BHEL; possibility of getting one exists but may be difficult
In its post-results conference call, BHEL suggested that it is L1 for both the plants of 1,320 MW in
Rajasthan. BGR is still hoping to get at least one as tender conditions allow the state utility
(RRVUNL) to distribute the order to two vendors in case BGR agrees to match the L1 price. While
possible, we believe it may be difficult for RRVUNL to place an order on BGR i.e. preferring a
private company over a public company. The lack of manufacturing in case of BGR Energy
weakens the case further. BHEL outbid BGR by about 5%. BGR may find it tough to match the L1
price considering BHEL’s lead in manufacturing and indigenization versus BGR’s Japanese sourcing.
Bulk tender is an opportunity but L&T may have an upper hand for its lead and likely aggression
BGR Energy is qualified for the bulk tender which may open on February 4. This tender, worth
roughly Rs100 bn, would have BGR Energy and L&T competing keenly (BHEL has a reserved
portion if it agrees to match the L1 price). L&T may have an upper hand based on (a) at least a
three-year lead in establishing manufacturing facilities and thus indigenization levels, (b) L&T is also
likely to be aggressive considering its loss of the turbine tender based on qualification issues and
(c) L&T has not won any third party order in FY2011 so far, apart from Karchana.
Rs105 bn backlog; 1/4th and 4/5th of FY12E and FY13E revenues depend on incremental orders
1HFY10-end backlog at Rs105 bn versus likely revenues of Rs47 bn in FY2011E. Post earnings
changes, 25% of FY2012E revenues and 80% of FY2013E revenues depend on incremental
orders.
Downgrade to REDUCE on earnings risks and potential disappointment on near-term opportunities
We downgrade the stock to REDUCE based on (1) potential disappointment on near-term
opportunities and (2) large risks to near-term earnings on back of relatively low visibility. We revise
our earnings downwards to Rs41(from Rs41.7) and Rs46.4 (from Rs53) for FY2011E and FY2012E
based on lower order inflow assumptions of Rs64 bn and Rs81 bn versus Rs95 and Rs106 bn
respectively. We reduce our target price to Rs600 (13XFY2012E earnings) from Rs860 (based on
16XFY2012E earnings) based on higher risk and likely lower growth (FY2013E may be flat).
May lose Rajasthan orders to BHEL- key negative development
In its recent conference call, BHEL indicated that it has been declared the lowest bidder for
the EPC contract for 2X660 MW each Chhabra and Suratgarh orders from Rajasthan Rajya
Vidyut Utpadan Nigam Ltd (RRVUNL). These orders have a cumulative size of about Rs122
bn. Competition was relatively limited in these orders with only BHEL, BGR Energy and
Powermachines (Russia) being the contenders for the orders.
Could get one order but the odds are many
BGR is hoping to get at least one of the orders as tender conditions allow the Rajasthan
state utility (RRVUNL) to distribute the order to two vendors in case BGR Energy agrees to
match the L1 price. This is possible but we believe it may be difficult for RRVUNL to justify
placing the order on BGR Energy i.e. preferring a private company over a public company.
The lack of manufacturing in case of BGR Energy weakens the case further. BGR was
banking on this tender but BHEL outbid BGR Energy by about 5%. BGR may also find it
challenging to match L1 price considering BHEL’s lead in manufacturing and indigenization
versus Japanese sourcing in case of BGR Energy.
We believe this is a significant negative development for the company as (1) order win was
key in achieving inflow guidance of FY2011E, (2) it reduces visibility of FY2012E revenues
and, (3) size of opportunity was large (cumulative order size of about Rs122 bn).
Note that the company has guided for order inflows of about Rs150-200 bn in FY2012E. We
have built in order inflows of about Rs64 bn in FY2011E comprising Rs32 bn in orders from
the BoP segment (Gayatri project order worth Rs22 bn has been won already) and EPC order
worth Rs32.5 bn. We have built in order inflows of Rs81 bn in FY2012E led by Rs16 bn from
the BoP segment and Rs65 bn in the EPC space (implies 2X660 MW EPC order).
Order inflows remain relatively sedate in FY2011E so far
BGR Energy reported order inflows to the tune of about Rs23 bn in 1HFY11, down 33% on
a yoy basis. This was primarily led by a single large Balance of Plant (BoP) order worth Rs22
bn. The company has so far won only a single large order worth Rs22 bn for BoP works for
2X660 MW Krishnapatnam power plant from Gayathri Projects.
Bulk tender — a near-term opportunity but L&T may have an upper hand
BGR Energy has qualified for boiler bulk tender (11X660 MW) which may open on February
4. This tender, worth roughly Rs100 bn, would have BGR Energy and L&T jostling to keep
each other out (BHEL has a reserved portion if it agrees to match L1 price). The decision is
still open though we believe that L&T may have an upper hand in this tender based on (1) at
least three years lead in establishing manufacturing facilities and thus likely higher
indigenization levels, (2) L&T power equipment venture is also likely to be quite aggressive
considering loss of turbine tender based on issues of qualification and (3) L&T has not won
any third party order in FY2011 so far apart from Karchana.
The second phase of the bulk tender (9X800 MW) is expected to be awarded out by end-
2QFY12E.
High dependence of FY2012E-13E revenue estimates on new order wins
In FY2012E, Rs20 bn (about a third) of total revenues (of about Rs62 bn) depends on
incremental order wins in FY2011E. Also note that about four-fifths of our FY2013E revenue
estimates are dependant on incremental orders as Mettur and Kalisindh orders would have
been completed by then.
The management expects to book revenues to the tune of about Rs65-70 bn in FY2012E.
The FY2011E-end residual portion of the orders of the current backlog would contribute to
about Rs50-52 bn of these revenues. However, in order to register a growth in FY2012E the
company would have to win a few large orders in the EPC/BoP space.
FY2011E revenues almost completely led by execution of existing backlog
We build in power revenues of about Rs44 bn in FY2011E, which are almost completely
(93%) based on execution of existing orders in the backlog. We expect the company to
execute about 35-40% of the EPC orders (Kalisindh and Mettur) in FY2011E. The Marwa
and Chandrapur BoP projects are expected to contribute about Rs10-12 bn to FY2011E
revenues.
The management has guided for very strong revenue growth of about 60% yoy in FY2011E
led by execution of the EPC projects and pick up in execution of the Marwa and Chandrapur
BoP orders.
Our expectations are significantly below management guidance
The management expects to book revenues to the tune of about Rs65-70 bn in FY2012E;
this is versus our revenue estimate of Rs61 bn in FY2012E. For FY2011E, the management
has guided for a revenue growth of about 60% implying full-year revenues of Rs49 bn
versus our estimate of Rs46.7 bn.
Significant proportion of XIIth plan ordering activity likely to be completed
We estimate that of the 120 GW, about 100 GW would be based on thermal plants—of
which orders for about 68-70 GW have already been placed. This implies that orders of only
about 30 GW are remaining to be placed for the XIIth plan period capacity additions. Based
on a detailed sector-wise analysis of likely remaining orders and assuming a reasonably
optimistic success rate for BHEL, we believe that BHEL may get additional thermal orders of
about 15-20 GW over FY2012E-13E. We believe that most of the XIIth Plan orders would be
placed by end-FY2013E as order placed in FY2014E and beyond are less likely to be
commissioned in the XIIth Plan period.
Equipment JV: 12% RoCE implies 2.6 GW sales p.a.; not easy in a crowded
market
The equipment JVs would require a potential capital investment of about Rs44 bn (Rs30 bn
for the turbine and Rs14 bn for the boiler JV). Adding a further Rs10 bn or so (about 15% of
likely annual sales) would imply a total capital employment of about Rs54 bn for the
equipment JVs. A pre-tax return on capital employed of about 12% would require EBIT of
about Rs6 bn - implying annual sales of about Rs64 bn (assuming 12% EBITDA margin and
10% EBIT margin). At a realization of about Rs20-25 mn per MW, Rs64 bn of sales would
require MW sales of about 2.5 - 2.6 GW per annum. We believe this may not be an easy
task and would require a market share of about 14-15% in a total annual market share of
about 18-20 GW.
Revise estimates and target price to Rs600; downgrade to REDUCE
We revise our earnings downwards to Rs41(from Rs41.7) and Rs46.4 (from Rs53) for
FY2011E and FY2012E based on lower order inflow assumptions of Rs64 bn and Rs81 bn
versus Rs95 and Rs106 bn respectively. We reduce our target price to Rs600 (13X FY2012E
earnings) from Rs860 (based on 16XFY2012E earnings) based on higher risk and likely lower
growth as well. As per our current assumptions, FY2013E earnings may not grow on a yoy
basis leading to potential further de-rating of the stock.
We downgrade our rating on the company to REDUCE from BUY based on (1) potential
disappointment on near-term opportunities and (2) large dependence of near-term earnings
on incremental order inflows (1/4th and 4/5ths of FY2012E and FY2013E revenues depend
on incremental orders).
Key risks include (1) large investment requirement in equipment venture pressing earnings,
(2) rising competition could adversely impact margins, (3) relatively concentrated customer
base and (4) dependence on large projects - any delay/deferral in any of the projects could
materially impact the earnings.
Key upside risk include a positive decision on both Rajasthan as well as NTPC bulk tender
decision in favor of BGR Energy. We have not currently valued the equipment JV of BGR
Energy in absence of evidence of sufficient scale up so as to make reasonable returns.
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