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Removed from Asia Pacific Buy List
BGR Energy (BGRE.BO)
Equity Research
Down to Neutral: Order inflow key for earnings upgrades to resume
What happened
We downgrade BGR Energy to Neutral from Buy as we believe the stock is
fairly valued with its continued strong execution ability offset by current low
order book coverage. Order inflows for 9m FY11 (Rs24 bn) are well below
order inflows of Rs83 bn/Rs37 bn in FY09/FY10, and also significantly below
the company’s own guidance of Rs150 bn at the start of FY11–reducing
prospects of potential positive earnings surprises driven by execution over
FY12E. The stock is down 25.7% since we added it to our Buy List on June 29,
2010, vs. the Sensex up 9.1% (past 12 months, stock -4.8% vs Sensex +9.3%)
on the back of subdued order inflow and a tough macro environment.
Current view
With revenue growth of 134% yoy in 9MFY11, execution of the orderbook has been one of the key strengths of BGR—this had led to 24%
revision in consensus FY11 EPS over the period. In addition, a strong
balance sheet (net debt/equity of 0.43X FY11E) also limits the risk to
increase in interest rates, in our view.
However, low current order book coverage of 1.9X (vs BHEL’s 3.2X
forward revenues) is a key concern: In a weak macro environment,
order flow for the company has been slow for past 6 months and new
orders would take at least a couple of quarters to start impacting
revenues hence limiting potential earning surprises for FY12E.
Macro issues such as environmental clearances, regulatory approvals
etc. have started taking much longer than earlier—increasing the lag time
for placing capital equipment orders, especially impacting smaller
companies such as BGR with relatively lower order book coverage.
The stock currently trades at 13X 12-m fwd P/E, in line with its historical
median (at 15% discount to BHEL vs. 37% discount historically). We finetune our FY12E-FY13E EPS and our 12-m P/E-based TP to Rs 595 (from Rs
608 earlier) to reflect margin compression. Key risks: Upside: Early pick-up
in order inflows; Downside: Delay in implementation of JV with Hitachi.
INVESTMENT LIST MEMBERSHIP
Neutral
Coverage View: Neutral
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Removed from Asia Pacific Buy List
BGR Energy (BGRE.BO)
Equity Research
Down to Neutral: Order inflow key for earnings upgrades to resume
What happened
We downgrade BGR Energy to Neutral from Buy as we believe the stock is
fairly valued with its continued strong execution ability offset by current low
order book coverage. Order inflows for 9m FY11 (Rs24 bn) are well below
order inflows of Rs83 bn/Rs37 bn in FY09/FY10, and also significantly below
the company’s own guidance of Rs150 bn at the start of FY11–reducing
prospects of potential positive earnings surprises driven by execution over
FY12E. The stock is down 25.7% since we added it to our Buy List on June 29,
2010, vs. the Sensex up 9.1% (past 12 months, stock -4.8% vs Sensex +9.3%)
on the back of subdued order inflow and a tough macro environment.
Current view
With revenue growth of 134% yoy in 9MFY11, execution of the orderbook has been one of the key strengths of BGR—this had led to 24%
revision in consensus FY11 EPS over the period. In addition, a strong
balance sheet (net debt/equity of 0.43X FY11E) also limits the risk to
increase in interest rates, in our view.
However, low current order book coverage of 1.9X (vs BHEL’s 3.2X
forward revenues) is a key concern: In a weak macro environment,
order flow for the company has been slow for past 6 months and new
orders would take at least a couple of quarters to start impacting
revenues hence limiting potential earning surprises for FY12E.
Macro issues such as environmental clearances, regulatory approvals
etc. have started taking much longer than earlier—increasing the lag time
for placing capital equipment orders, especially impacting smaller
companies such as BGR with relatively lower order book coverage.
The stock currently trades at 13X 12-m fwd P/E, in line with its historical
median (at 15% discount to BHEL vs. 37% discount historically). We finetune our FY12E-FY13E EPS and our 12-m P/E-based TP to Rs 595 (from Rs
608 earlier) to reflect margin compression. Key risks: Upside: Early pick-up
in order inflows; Downside: Delay in implementation of JV with Hitachi.
INVESTMENT LIST MEMBERSHIP
Neutral
Coverage View: Neutral
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