BGR Energy (BGRE.BO, Neutral) Slow order book growth ::Goldman Sachs,

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BGR Energy (BGRE.BO, Neutral)
Slow order book growth in a tough macroeconomic environment; low growth visibility
 Low order book coverage of 2.0X is the main concern: New order flows have been slow for the past few
quarters and any new orders are likely to take at least a couple of quarters before they start to have an impact
on revenues, thereby restricting potential earnings upgrades for this year.
 An uncertain environment in terms of project approvals: Issues such as environmental clearance and
regulatory approvals now take much longer to secure then they did before. This, in our view, has increased
the lag time for placing capital equipment orders by industry participants, which has had a much greater
impact on smaller companies such as BGR.
 The risk to earnings from interest rates is modest, in our view, as the company’s net-debt/equity ratio is only
0.24X and has 4X Interest/EBITDA coverage for FY12E. We have assumed EBITDA margin contraction of 60bp
for FY12E-FY13E.
 We do not make any changes to our estimates on the company as we continue to build in Rs60bn worth of
order inflows for the company this year. This premise is largely contingent on the company successfully
negotiating an equipment order worth about Rs50bn with Rajasthan electricity board where discussions are
currently underway.
Catalyst
 (1) Pick-up in industry-wide project finalizations and awards in the power segment in FY12E, (2) order wins
from state-owned electricity boards over the next 2-3 quarters, and (3) continuing strong execution on its
existing portfolio of projects.
Valuation
 We maintain our Neutral rating on BGR because we believe its low order book has already been priced in the
stock. We lower our 12-month target price on the stock to Rs428 (from Rs520) based on a 10X P/E multiple to
our rolled forward average of FY12E-FY13E EPS (vs. 12X previously and at a 35% discount to our target
multiple on BHEL, which we lower to 15X from 17.5X).
 The stock currently trades at a 12-month forward P/E of 12X (vs. its historical median 12-month forward P/E of
12.3X), which is close to a 35% discount on our valuation of BHEL.
Key risks
 Upside: Order inflow pick-up for the EPC division.
 Downside: (1) Substantially increased price-based competition from peers, and (2) volatile commodity
prices, especially for steel.

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