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BGR Energy Systems (BGRE.BO)
Upgrade to Hold/High Risk (2H) on Stock Underperformance
Upgrade to Hold/High Risk (2H) — BGR stock has declined 43% and has
underperformed Sensex by 23% over the past six months. As a result we upgrade to
Hold from Sell earlier.
Risk rating changed to High Risk from Medium Risk – Even if orders rebound in the
power EPC/BTG/BOP segments, we expect margins to decline structurally going
forward. BGR, with its relatively weaker balance sheet, could find the going tough (1) if
it does not win enough orders or (2) profitability on orders does not pan out as
expected.
Target price cut to Rs350 — To factor in cut in target P/E to 8x (from 9x earlier) to
reflect heightened competitive intensity in the industry and uncertain margin outlook.
BGR's L1 bid is aggressive — BGR’s L1 raw bid at Rs8.8mn/MW (NTPC evaluated
bid at Rs10.1mn/MW) is aggressive and well below past bids in the Indian market by
domestic equipment suppliers and the industry benchmark of Rs10.5mn/MW (in the
new competitive scenario) to make double-digit margins.
Meaningless to focus on company expectations of 10% PBT margins — This is a
manufacturing order with an EPC component and not an EPC order. The margins on
the order are a function of the utilization of manufacturing facility. Given that BGR is
building a facility which can handle five sets at a time and execution timelines are 3-4
years, back of the envelope calculations suggest BGR needs 15 sets to run at 100%
utilization. This implies margins on this order are a function of future order wins.
Upside risks — Lot of order wins in next six months and higher-than-expected
margins.
Downside Risk – Lower-than-expected order inflows and lower margins
BGR Energy Systems
Company description
BGRL was incorporated in 1985 as a joint venture (JV) between GEA
Energietechnik GmbH, Germany (40% stake) and Mr. B.G. Raghupathy (60%
stake). It was initially in the business of supplying condensate tube-cleaning
systems and debris filters, with a turnover of ~Rs100m. In 1993, GEA’s stake was
bought out by B.G. Raghupathy. Around FY00, BGR decided to approach clients
with an integrated power equipment offering, rather than multiple divisions of BGRL
approaching the same set of clients. BGRL then also tied up with BHEL to provide
BOP solutions to clients. It won BOP orders for 95MW Valuthur CCPP from TNEB
and for 23MW captive plant from Aditya Cements in Rajasthan. In FY01, BGRL won
the EPC contract from Aban for a 120MW gas power plant in TN. Following an IPO,
BGRL listed on the stock exchanges on January 3, 2008. The company won its first
600MW EPC contract from TNEB in FY09. BGRL has also announced collaboration
with Hitachi Power Europe GmbH, Germany (660MW, 800MW, 1,000MW and
1,100MW) for supercritical boilers and with Hitachi, Japan (660MW, 700MW,
800MW and 1,000MW) for supercritical turbines and generators.
Investment strategy
As India's Infrastructure and Industrial capex decelerated from FY09 ownwards, the
overall opportunity pie growth has not kept pace with 1) the rise of multiple new
players across subsectors; 2) influx of Koreans and Chinese in India; and 3)
companies bidding and diversifying across subsectors. Over the last year problems
have compounded in the power EPC, BTG and BOP markets on account of: 1) Coal
India's production cuts putting the power sector's growth in jeopardy; 2)
Deteriorating SEB finances leading to question marks about payment security; and
3) Since SEB finances are deteriorating, it is not picking up enough power and
resorting to load shedding. This has led to a correction in merchant prices.
Valuation
Our Rs350 target price is based on a target P/E multiple of 8x Dec12E EPS (BGRL
has traded in a P/E multiple band of 4x to 58x post listing) which is at a discount to
the historical average P/E multiple of 14x given (1) structurally declining RoEs from
39% in FY11 to 20% by FY14E (2) tepid EPS growth of 1% over FY11-14E v/s 55%
over FY08-11 and (3) similar to FY11 we expect the operating cash flows to be
negative over the next 3 years.
Risks
Our quantitative risk-rating system, which tracks 260-day historical share price
volatility, assigns a Medium Risk rating to BGRL. However we believe that a High
risk rating is more appropriate given increasing competitive intensity and dim order
inflow outlook
Key upside risks include: (1) Better-than-expected order inflows; (2) Better-thanexpected
margins; (3) Better-than-expected execution.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
BGR Energy Systems (BGRE.BO)
Upgrade to Hold/High Risk (2H) on Stock Underperformance
Upgrade to Hold/High Risk (2H) — BGR stock has declined 43% and has
underperformed Sensex by 23% over the past six months. As a result we upgrade to
Hold from Sell earlier.
Risk rating changed to High Risk from Medium Risk – Even if orders rebound in the
power EPC/BTG/BOP segments, we expect margins to decline structurally going
forward. BGR, with its relatively weaker balance sheet, could find the going tough (1) if
it does not win enough orders or (2) profitability on orders does not pan out as
expected.
Target price cut to Rs350 — To factor in cut in target P/E to 8x (from 9x earlier) to
reflect heightened competitive intensity in the industry and uncertain margin outlook.
BGR's L1 bid is aggressive — BGR’s L1 raw bid at Rs8.8mn/MW (NTPC evaluated
bid at Rs10.1mn/MW) is aggressive and well below past bids in the Indian market by
domestic equipment suppliers and the industry benchmark of Rs10.5mn/MW (in the
new competitive scenario) to make double-digit margins.
Meaningless to focus on company expectations of 10% PBT margins — This is a
manufacturing order with an EPC component and not an EPC order. The margins on
the order are a function of the utilization of manufacturing facility. Given that BGR is
building a facility which can handle five sets at a time and execution timelines are 3-4
years, back of the envelope calculations suggest BGR needs 15 sets to run at 100%
utilization. This implies margins on this order are a function of future order wins.
Upside risks — Lot of order wins in next six months and higher-than-expected
margins.
Downside Risk – Lower-than-expected order inflows and lower margins
BGR Energy Systems
Company description
BGRL was incorporated in 1985 as a joint venture (JV) between GEA
Energietechnik GmbH, Germany (40% stake) and Mr. B.G. Raghupathy (60%
stake). It was initially in the business of supplying condensate tube-cleaning
systems and debris filters, with a turnover of ~Rs100m. In 1993, GEA’s stake was
bought out by B.G. Raghupathy. Around FY00, BGR decided to approach clients
with an integrated power equipment offering, rather than multiple divisions of BGRL
approaching the same set of clients. BGRL then also tied up with BHEL to provide
BOP solutions to clients. It won BOP orders for 95MW Valuthur CCPP from TNEB
and for 23MW captive plant from Aditya Cements in Rajasthan. In FY01, BGRL won
the EPC contract from Aban for a 120MW gas power plant in TN. Following an IPO,
BGRL listed on the stock exchanges on January 3, 2008. The company won its first
600MW EPC contract from TNEB in FY09. BGRL has also announced collaboration
with Hitachi Power Europe GmbH, Germany (660MW, 800MW, 1,000MW and
1,100MW) for supercritical boilers and with Hitachi, Japan (660MW, 700MW,
800MW and 1,000MW) for supercritical turbines and generators.
Investment strategy
As India's Infrastructure and Industrial capex decelerated from FY09 ownwards, the
overall opportunity pie growth has not kept pace with 1) the rise of multiple new
players across subsectors; 2) influx of Koreans and Chinese in India; and 3)
companies bidding and diversifying across subsectors. Over the last year problems
have compounded in the power EPC, BTG and BOP markets on account of: 1) Coal
India's production cuts putting the power sector's growth in jeopardy; 2)
Deteriorating SEB finances leading to question marks about payment security; and
3) Since SEB finances are deteriorating, it is not picking up enough power and
resorting to load shedding. This has led to a correction in merchant prices.
Valuation
Our Rs350 target price is based on a target P/E multiple of 8x Dec12E EPS (BGRL
has traded in a P/E multiple band of 4x to 58x post listing) which is at a discount to
the historical average P/E multiple of 14x given (1) structurally declining RoEs from
39% in FY11 to 20% by FY14E (2) tepid EPS growth of 1% over FY11-14E v/s 55%
over FY08-11 and (3) similar to FY11 we expect the operating cash flows to be
negative over the next 3 years.
Risks
Our quantitative risk-rating system, which tracks 260-day historical share price
volatility, assigns a Medium Risk rating to BGRL. However we believe that a High
risk rating is more appropriate given increasing competitive intensity and dim order
inflow outlook
Key upside risks include: (1) Better-than-expected order inflows; (2) Better-thanexpected
margins; (3) Better-than-expected execution.
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