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BGR Energy Systems (BGRE.BO)
Sell: 2Q12 Results Conference Call Takeaways
Maintain Sell (3H) — Given: (1) even if orders rebound, we expect margins to decline
structurally and BGR, with its weak BS, could find the going tough; (2) structurally
declining RoEs FY11 - 39% to FY14E – 16%; (3) EPS decline of 10% over FY11-14E
v/s 55% growth over FY08-11 and (4) we expect negative operating CF over the next
three years. Increase our target price to Rs272 to factor in our EPS increase.
Reason for lower sales — (1) Materials delayed by clients and consultant approval
delays in Kalisindh; (2) engineering issues in Marwa (sorted out now) and (3) severe
monsoons. Reason for higher margins — (1) Captive orders had good margins and
(2) Chandrapur and Marwa projects had a price-variation clause.
Reason for increased working capital — Increase in receivables from Rajasthan and
TN because of some certification issues (resolved now), payments should start soon
and receivables days will improve. Expect to receive retention money on Kakatiya and
one more projects by 1Q13 and retention money on Vijayawada will be released
gradually from Nov11 to Mar11.
Sales guidance down - But still aggressive — Sales growth guidance to 2% from
15%. We feel guidance continues to be and factor in sales of Rs40.5bn (15% decline
YoY). Management expect sales of >Rs10bn in 3Q12 (v/s CIRA at Rs10.5bn) and
Rs20bn in 4Q12 (v/s CIRA at Rs15bn).
Expects Rs55-60bn of orders in FY12E — Won Rs10.1bn of orders 1H12. In the
results concall mentioned had visibility for another Rs45-50bn before Mar12 which
include: (1) 2X300MW TRN Energy EPC of Rs16.9bn announced post 2Q12 (2)
Rs29bn for 4X800MW turbines from NTPC by the Dec11.
Update on BTG JV — Invested Rs2.05bn so far and expect to invest Rs2.5 by FY12E
and another Rs3bn in FY13E. Will start recognizing revenues from FY14E.
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
We rate BGR Energy Sell/High Risk. 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. Even if orders rebound we expect margins to decline structurally
going forward and BGRL with its weak balance sheet could find the going tough.
Valuation
Our Rs272 target price is based on a target P/E multiple of 8x Mar13E 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 16% by FY14E (2) EPS decline of 10% over FY11-14E v/s 55%
growth over FY08-11 and (3) similar to FY11 we expect the operating cash flows to
be negative over the next 3 years.
Risks
We rate BGR Energy High Risk due to increasing competitive intensity in the
industry and concerns about future order inflows.
Key upside risks to our target price include: (1) Better-than-expected order inflows;
(2) Better-than-expected 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)
Sell: 2Q12 Results Conference Call Takeaways
Maintain Sell (3H) — Given: (1) even if orders rebound, we expect margins to decline
structurally and BGR, with its weak BS, could find the going tough; (2) structurally
declining RoEs FY11 - 39% to FY14E – 16%; (3) EPS decline of 10% over FY11-14E
v/s 55% growth over FY08-11 and (4) we expect negative operating CF over the next
three years. Increase our target price to Rs272 to factor in our EPS increase.
Reason for lower sales — (1) Materials delayed by clients and consultant approval
delays in Kalisindh; (2) engineering issues in Marwa (sorted out now) and (3) severe
monsoons. Reason for higher margins — (1) Captive orders had good margins and
(2) Chandrapur and Marwa projects had a price-variation clause.
Reason for increased working capital — Increase in receivables from Rajasthan and
TN because of some certification issues (resolved now), payments should start soon
and receivables days will improve. Expect to receive retention money on Kakatiya and
one more projects by 1Q13 and retention money on Vijayawada will be released
gradually from Nov11 to Mar11.
Sales guidance down - But still aggressive — Sales growth guidance to 2% from
15%. We feel guidance continues to be and factor in sales of Rs40.5bn (15% decline
YoY). Management expect sales of >Rs10bn in 3Q12 (v/s CIRA at Rs10.5bn) and
Rs20bn in 4Q12 (v/s CIRA at Rs15bn).
Expects Rs55-60bn of orders in FY12E — Won Rs10.1bn of orders 1H12. In the
results concall mentioned had visibility for another Rs45-50bn before Mar12 which
include: (1) 2X300MW TRN Energy EPC of Rs16.9bn announced post 2Q12 (2)
Rs29bn for 4X800MW turbines from NTPC by the Dec11.
Update on BTG JV — Invested Rs2.05bn so far and expect to invest Rs2.5 by FY12E
and another Rs3bn in FY13E. Will start recognizing revenues from FY14E.
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
We rate BGR Energy Sell/High Risk. 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. Even if orders rebound we expect margins to decline structurally
going forward and BGRL with its weak balance sheet could find the going tough.
Valuation
Our Rs272 target price is based on a target P/E multiple of 8x Mar13E 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 16% by FY14E (2) EPS decline of 10% over FY11-14E v/s 55%
growth over FY08-11 and (3) similar to FY11 we expect the operating cash flows to
be negative over the next 3 years.
Risks
We rate BGR Energy High Risk due to increasing competitive intensity in the
industry and concerns about future order inflows.
Key upside risks to our target price include: (1) Better-than-expected order inflows;
(2) Better-than-expected margins; (3) Better-than-expected execution.
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