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BGR Energy Systems (BGRL)
Industrials
Lower backlog, weak execution, and higher debt raise near-term earnings risk.
Backlog declined on lack of incremental orders in1Q. Sales dropped 19% yoy on weak
EPC execution. Higher debt (up Rs5 bn in 1Q to Rs18 bn) further raises risk to earnings.
The company is banking on 20 GW of bidding pipeline though we remain cautious
(uncertain decision and execution time and keen competition). 15% growth guidance
seems difficult led by weak sector environment and insufficient backlog. Revise TP to
Rs410 from Rs470; retain REDUCE.
Backlog declines on no significant order; company hopeful on strong bid pipeline
The company’s backlog declined to Rs75 bn from about Rs80 bn at end-FY2011 in absence of any
major order booked in 1Q (Rs400 mn orders from capital goods). The company is banking on 20
GW (Rs370 bn) of bidding pipeline. We are cautious on its pipeline on (1) uncertain execution time
(NTPC bulk tenders requirement of domestic manufacturing facilities), (2) intense competition
(BHEL has not booked single power order this quarter), (3) aggressive expectations (company
expects reasonably high market share from NTPC bulk tenders).
Aims for 15% growth target; contends target possible without incremental order; seems difficult
The company reiterated its 15% growth guidance for FY2012E topline (Rs52 bn) despite weak
macro environment and insufficient backlog. It contends that the same is possible even without
winning any incremental order. This would imply executing about 60% of its 1QFY12-end backlog
(Rs75bn) in Rem9MFY12. We have built in power execution of Rs47 bn (Rs6 bn is expected from
incremental orders). About 60% of FY2013 turnover is expected from incremental orders.
Power sales decline significantly; margin bumped on business mix; higher debt squeezing earnings
BGR Energy reported 19% decline in sales to Rs7.3 bn versus our estimate of Rs9.6 bn. EBITDA
margin expanded to 13.1% vs. 11.5% in 1QFY11 (11% estimate) on higher BoP share of power
sales (40:60 from 20:80). Higher interest expense (net of Rs180 mn, gross interest cost of Rs360
mn on higher debt of Rs18 bn) nullified positive impact of margin leading to PAT of Rs502 mn
(down 18% yoy).
Reiterate REDUCE (TP: Rs410) based on risks to near-term earnings on relatively low visibility
We revise our estimates to Rs41.1 and Rs41.7 (from Rs44.8 and Rs45.8) for FY2012E and FY2013E
on reduced topline and higher interest expense; cut TP (Rs410 from Rs470) on unchanged10X
FY2013E multiple. We retain REDUCE on (1) low revenue visibility, (2) potential disappointment on
near-term opportunities, and (3) macro issues plaguing the sector to delay much-needed inflows.
Reports disappointing revenues on weak execution of EPC backlog
BGR Energy reported a sharp decline in revenues to Rs7.3 bn in 1QFY12, down 19% yoy
and about 24% lower than our revenue estimate of Rs9.6 bn. Key reason behind the sales
underperformance was slower-than-expected execution of key large EPC orders (Kalisindh
and Mettur).
EPC segment: The company reported about Rs4 bn of EPC execution from the Rs21 bn
EPC backlog. Total order size of Rs80 bn implies 5% quarterly execution.
BoP segment: The company reported Rs2.5 bn execution from the BoP orders (from
Rs24 bn backlog. Total order size of Rs33 bn implies 7.5% quarterly execution.
Margin expansion on the back of higher contribution form BoP orders
The company’s EBITDA margin expanded about 160 bps (on a yoy basis) to 13.1% (flat
margin expected). The margin expansion was attributed to favorable revenue mix between
BoP and EPC orders under execution. The mix in power sales (90% of topline) changed to
60:40 from 80:20 in favor of EPC. The higher proportion of revenues from the BoP orders
(led by Chandrapur and Marwa orders) resulted in higher margins (reflected in lower raw
material costs as a percentage of sales). Margin expansion led to an EBITDA decline of about
7.5% yoy (versus revenue decline of 19%), 9.6% below estimates, higher interest expense.
Segmental results: Significant decline in power business
Construction and EPC segment reported a decline of 23.4% for the quarter. Of total sales of
Rs6.7 bn for the segment, EPC contributed about Rs4 bn, BoP about Rs2.5 bn with the rest
coming from Capital goods segment.
Net PAT of Rs502 bn, down 17% yoy and 20% below our estimates
Interest expense increased about 55% yoy to Rs180 mn in 1QFY12. At a gross level the
interest expense was Rs360 mn led by higher debt levels (gross debt of Rs18 bn at end-Jun-
11 versus end-FY2011 level of Rs14 bn). The company reported a net PAT of Rs502 mn in
1QFY12, down 17% yoy and about 20.5% below our estimate of Rs632 mn.
No major order inflows in 1Q though company highlights strong bid pipeline
The company has not won any major power segment (BoP and/or BTG) orders in this quarter.
We highlight that BHEL also recorded almost nil orders from power segment in this quarter.
The management cited only Rs400-500 mn of order inflows in 1QFY12 from the capital
goods space. The company reported an order backlog of Rs75 bn at end-1QFY12 with no
slippages in execution of any orders.
Banking on 20 GW bid pipeline; decision making, success rate, actual execution
uncertain
BGR Energy management is placing its bets on bidding pipeline of 19,700 MW worth about
Rs370 bn. The company pointed out about 12GW of specific projects (NTPC Bulk tenders,
Rajasthan Gujarat orders among others) where it is expecting orders with the rest 7-8 GW
coming from IPPs and other BoP projects. The management’s expectations appear aggressive
as it expects about5-6 units from 11X660 MW NTPC bulk tender and about 3 units from the
9X800 NTPC bulk tender.
While the bidding pipeline is fairly large, actual decision making and execution time lines
may be uncertain. For instance in NTPC bulk tenders, execution may be longer dated than
average as there are conditions of having domestic manufacturing facilities in the tender.
Competition would also take a fair share of its orders and among the competitors L&T and
BHEL may be on stronger footing as well. Other competitors may be Toshiba, Alstom and
Chinese players in IPP BTG contracts
Contends 15% growth possible without incremental order; seems difficult
BGR Energy is still aiming for 15% growth in turnover in FY2012E and contends that Rs52
bn turnover is possible even without winning any incremental order. We believe that it may
be difficult as that would imply that BGR Energy executes 65% of its year beginning backlog
of Rs80 bn or about 60% of its 1QFY12-end backlog in next three quarters. Such an
assumption does not conform to management guidance in execution cycle. The company
also cited 40% peak execution for BoP project (second year) and 30% peak execution for
EPC project (second/third year). We had built in about Rs44 bn of turnover in FY2012E from
existing orders and Rs9.5 bn turnover coming in from incremental orders.
We analyze the scenario of BGR executing (1) remaining portion of EPC projects (Mettur and
Kalisindh) (2) remaining portion of BoP projects (Chandrapur and Marwa) and (3) 35%
execution from the recently won Krishnapatnam BoP order. Such a scenario is unlikely
considering high level of execution left of Chandrapur (53% remaining) and Marwa (71%
remaining) orders (average execution cycle of 2.5 years for BoP, 3-4 years for EPC).
Revise estimates on increased risk to near-term earnings
We revise our estimates to Rs41.1 and Rs41.7 (from Rs44.8 and Rs45.8) for FY2012E and
FY2013E. Key changes in assumptions are (1) lower execution (7% cut in FY2012E) and (2)
higher interest expense (revised up by 15% and 30% in FY2012 and Fy2013 respectively).
We cut TP to Rs410 (from Rs470) on unchanged10X FY2013E P/E multiple. We retain
REDUCE on (1) low revenue visibility, (2) potential disappointment on near-term
opportunities, and (3) macro issues plaguing the sector may further delay much-needed
inflows
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
BGR Energy Systems (BGRL)
Industrials
Lower backlog, weak execution, and higher debt raise near-term earnings risk.
Backlog declined on lack of incremental orders in1Q. Sales dropped 19% yoy on weak
EPC execution. Higher debt (up Rs5 bn in 1Q to Rs18 bn) further raises risk to earnings.
The company is banking on 20 GW of bidding pipeline though we remain cautious
(uncertain decision and execution time and keen competition). 15% growth guidance
seems difficult led by weak sector environment and insufficient backlog. Revise TP to
Rs410 from Rs470; retain REDUCE.
Backlog declines on no significant order; company hopeful on strong bid pipeline
The company’s backlog declined to Rs75 bn from about Rs80 bn at end-FY2011 in absence of any
major order booked in 1Q (Rs400 mn orders from capital goods). The company is banking on 20
GW (Rs370 bn) of bidding pipeline. We are cautious on its pipeline on (1) uncertain execution time
(NTPC bulk tenders requirement of domestic manufacturing facilities), (2) intense competition
(BHEL has not booked single power order this quarter), (3) aggressive expectations (company
expects reasonably high market share from NTPC bulk tenders).
Aims for 15% growth target; contends target possible without incremental order; seems difficult
The company reiterated its 15% growth guidance for FY2012E topline (Rs52 bn) despite weak
macro environment and insufficient backlog. It contends that the same is possible even without
winning any incremental order. This would imply executing about 60% of its 1QFY12-end backlog
(Rs75bn) in Rem9MFY12. We have built in power execution of Rs47 bn (Rs6 bn is expected from
incremental orders). About 60% of FY2013 turnover is expected from incremental orders.
Power sales decline significantly; margin bumped on business mix; higher debt squeezing earnings
BGR Energy reported 19% decline in sales to Rs7.3 bn versus our estimate of Rs9.6 bn. EBITDA
margin expanded to 13.1% vs. 11.5% in 1QFY11 (11% estimate) on higher BoP share of power
sales (40:60 from 20:80). Higher interest expense (net of Rs180 mn, gross interest cost of Rs360
mn on higher debt of Rs18 bn) nullified positive impact of margin leading to PAT of Rs502 mn
(down 18% yoy).
Reiterate REDUCE (TP: Rs410) based on risks to near-term earnings on relatively low visibility
We revise our estimates to Rs41.1 and Rs41.7 (from Rs44.8 and Rs45.8) for FY2012E and FY2013E
on reduced topline and higher interest expense; cut TP (Rs410 from Rs470) on unchanged10X
FY2013E multiple. We retain REDUCE on (1) low revenue visibility, (2) potential disappointment on
near-term opportunities, and (3) macro issues plaguing the sector to delay much-needed inflows.
Reports disappointing revenues on weak execution of EPC backlog
BGR Energy reported a sharp decline in revenues to Rs7.3 bn in 1QFY12, down 19% yoy
and about 24% lower than our revenue estimate of Rs9.6 bn. Key reason behind the sales
underperformance was slower-than-expected execution of key large EPC orders (Kalisindh
and Mettur).
EPC segment: The company reported about Rs4 bn of EPC execution from the Rs21 bn
EPC backlog. Total order size of Rs80 bn implies 5% quarterly execution.
BoP segment: The company reported Rs2.5 bn execution from the BoP orders (from
Rs24 bn backlog. Total order size of Rs33 bn implies 7.5% quarterly execution.
Margin expansion on the back of higher contribution form BoP orders
The company’s EBITDA margin expanded about 160 bps (on a yoy basis) to 13.1% (flat
margin expected). The margin expansion was attributed to favorable revenue mix between
BoP and EPC orders under execution. The mix in power sales (90% of topline) changed to
60:40 from 80:20 in favor of EPC. The higher proportion of revenues from the BoP orders
(led by Chandrapur and Marwa orders) resulted in higher margins (reflected in lower raw
material costs as a percentage of sales). Margin expansion led to an EBITDA decline of about
7.5% yoy (versus revenue decline of 19%), 9.6% below estimates, higher interest expense.
Segmental results: Significant decline in power business
Construction and EPC segment reported a decline of 23.4% for the quarter. Of total sales of
Rs6.7 bn for the segment, EPC contributed about Rs4 bn, BoP about Rs2.5 bn with the rest
coming from Capital goods segment.
Net PAT of Rs502 bn, down 17% yoy and 20% below our estimates
Interest expense increased about 55% yoy to Rs180 mn in 1QFY12. At a gross level the
interest expense was Rs360 mn led by higher debt levels (gross debt of Rs18 bn at end-Jun-
11 versus end-FY2011 level of Rs14 bn). The company reported a net PAT of Rs502 mn in
1QFY12, down 17% yoy and about 20.5% below our estimate of Rs632 mn.
No major order inflows in 1Q though company highlights strong bid pipeline
The company has not won any major power segment (BoP and/or BTG) orders in this quarter.
We highlight that BHEL also recorded almost nil orders from power segment in this quarter.
The management cited only Rs400-500 mn of order inflows in 1QFY12 from the capital
goods space. The company reported an order backlog of Rs75 bn at end-1QFY12 with no
slippages in execution of any orders.
Banking on 20 GW bid pipeline; decision making, success rate, actual execution
uncertain
BGR Energy management is placing its bets on bidding pipeline of 19,700 MW worth about
Rs370 bn. The company pointed out about 12GW of specific projects (NTPC Bulk tenders,
Rajasthan Gujarat orders among others) where it is expecting orders with the rest 7-8 GW
coming from IPPs and other BoP projects. The management’s expectations appear aggressive
as it expects about5-6 units from 11X660 MW NTPC bulk tender and about 3 units from the
9X800 NTPC bulk tender.
While the bidding pipeline is fairly large, actual decision making and execution time lines
may be uncertain. For instance in NTPC bulk tenders, execution may be longer dated than
average as there are conditions of having domestic manufacturing facilities in the tender.
Competition would also take a fair share of its orders and among the competitors L&T and
BHEL may be on stronger footing as well. Other competitors may be Toshiba, Alstom and
Chinese players in IPP BTG contracts
Contends 15% growth possible without incremental order; seems difficult
BGR Energy is still aiming for 15% growth in turnover in FY2012E and contends that Rs52
bn turnover is possible even without winning any incremental order. We believe that it may
be difficult as that would imply that BGR Energy executes 65% of its year beginning backlog
of Rs80 bn or about 60% of its 1QFY12-end backlog in next three quarters. Such an
assumption does not conform to management guidance in execution cycle. The company
also cited 40% peak execution for BoP project (second year) and 30% peak execution for
EPC project (second/third year). We had built in about Rs44 bn of turnover in FY2012E from
existing orders and Rs9.5 bn turnover coming in from incremental orders.
We analyze the scenario of BGR executing (1) remaining portion of EPC projects (Mettur and
Kalisindh) (2) remaining portion of BoP projects (Chandrapur and Marwa) and (3) 35%
execution from the recently won Krishnapatnam BoP order. Such a scenario is unlikely
considering high level of execution left of Chandrapur (53% remaining) and Marwa (71%
remaining) orders (average execution cycle of 2.5 years for BoP, 3-4 years for EPC).
Revise estimates on increased risk to near-term earnings
We revise our estimates to Rs41.1 and Rs41.7 (from Rs44.8 and Rs45.8) for FY2012E and
FY2013E. Key changes in assumptions are (1) lower execution (7% cut in FY2012E) and (2)
higher interest expense (revised up by 15% and 30% in FY2012 and Fy2013 respectively).
We cut TP to Rs410 (from Rs470) on unchanged10X FY2013E P/E multiple. We retain
REDUCE on (1) low revenue visibility, (2) potential disappointment on near-term
opportunities, and (3) macro issues plaguing the sector may further delay much-needed
inflows
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