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Result ahead of estimates; sales catapult 98%
BGR Energy Systems’ (BGR) Q3FY11 results were ahead of our estimates. Sales
catapulted 98% Y-o-Y to INR 12.6 bn on back of strong growth in EPC and BOP
projects. EBITDA, at INR 1.5 bn, grew 110% Y-o-Y even as raw material costs
soared 204bps Y-o-Y to 80.4% of sales. Dip in employee cost (down 171bps Y-o-Y
to 3.3% of sales) and other expenses (down 99bps Y-o-Y to 4.6% of sales) helped
expand EBTIDA margin 65bps Y-o-Y to 11.7%. The margin expansion can be
attributed to higher sales mix of BOP in total sales. Reduced net interest cost and
lower tax rate helped the company record a robust PAT growth of 109% to INR
876 mn. It is important to note that the percentage growth looks magnified since
BGR’s revenues are growing on a smaller base.
Strong order backlog; absence of new orders a concern
The company’s current order backlog stands at INR 93.2 bn, implying a coverage
ratio of 3.0x (based on FY10 revenues). BGR received orders worth INR 739 mn
during the quarter. BOP and EPC order backlog stood at ~30% and ~55%
respectively of the total order book. While the recent BOP order from a private
entity for 2x660MW supercritical marks the company’s entry in both supercritical
and private sector, it is important for the company to bag new orders. With lack of
new big-ticket orders, revenue visibility for FY12 and FY13 is a concern. While the
company’s order pipeline continues to remain strong with several state SEBs and
private IPPs expected to place orders, absence of concrete new orders in hand is a
concern.
Outlook and valuations: Order accretion paramount; maintain ‘BUY’
Order accretion of INR 23.9 bn during 9mFY11 is well below our estimate of INR
85 bn for FY11. We are revising down our FY12E earnings 6.6% due to lower order
inflow till date as we cut our order inflow estimate for both FY11 and FY12. With
several projects on hand likely to be completed by FY12, we are of the opinion that
it is crucial for BGR to bag new orders during the current fiscal. On consolidated
basis, the stock is trading at 10.8x and 9.2x FY11E and FY12E earnings,
respectively. Upside risks to our estimate would emanate from finalisation of largeticket
orders. While we maintain our absolute stock recommendation at ‘BUY’, we
downgrade its relative rating from ‘Sector Outperformer’ to ‘Sector Performer’.
Goods
Project execution status
BGR, with its focus on execution, has made good progress in its existing projects. The
two large EPC projects, 2x600 MW Kalisindh TPP and 1x600 MW Mettur TPP, are
completed ~60% and ~70%, respectively. The 1x500 MW Khaperkheda TPP is in the
testing phase (~95% done) and is expected to be commissioned by the current fiscal
end (subject to the readiness of BTG). The other two BoP projects are also progressing
well, with 1x500MW Kothagudem TPP (~85% done) and 2x500MW Chandrapur TPP
(~25% done) expected to be completed by June 2011 and FY12 end, respectively. The
2x500MW Marwah TPP is in nascent stage; only ~15% of the project has been executed
and is expected to be completed by Q1FY12. For the new BOP project bagged recently,
the company is currently involved in designing and engineering work and has not yet
recorded revenue in that project.
Company Description
BGR was incorporated in 1985 as a joint venture between GEA Energietechnik (Germany)
and Mr. B.G. Raghupathy, promoter. Initially, the company manufactured products
essentially used in thermal and nuclear power plants such as on line condenser tube
cleaning systems, debris filters, and rubber cleaning balls. In 1993, the promoter and
promoter family bought GEA Energietechnik’s stake and became the sole shareholders of
the company. In 1993, the company expanded its range of products and services in the
power and oil and gas industries. Currently, it manufactures and supplies equipment and
also does turnkey engineering project contracting. In the equipment segment, the
company manufactures equipment for power, oil & gas, refinery, petrochemical, and
process industries. In the turnkey engineering project contracting business, the company
executes projects in the power and oil & gas sectors, wherein it takes turnkey
responsibility to supply a range of equipment and services, including civil and other
works for a project.
Investment Theme
Power generation EPC: Huge growth in addressable market likely
We believe, in the Eleventh Plan alone, India is expected to add ~50-55 GW generation
capacity, which is more than what was added in the past fifteen years. This target is
achievable, as most of the capacity is under construction in various stages. Further, with
government expected to add 100 GW of capacity in the Twelfth Plan, which implies
doubling of India’s power generation capacity from the present. BGR has expertise to
cater to EPC and BoP segments of power plants, which implies a substantial increase in
the potential addressable market over the Eleventh Plan period. Further, due to lack of
pre-qualified and experienced EPC players, the company’s market share is also likely to
increase, lending additional visibility to revenue growth over the long term.
Strong revenue visibility; coverage at 3.0x FY10
BGR’s order intake increased significantly in FY09. The jump was driven by two large
projects worth INR 31 bn from Tamil Nadu Electricity Board (TNEB) and INR 49 bn from
Rajasthan Rajya Vidyut Utpadan Nigam (RRVUNL). These two orders resulted in the
company’s order backlog increasing 3.5x in FY09 over FY08. While this does imply that
the company’s order book is not sufficiently diversified, successful execution of these
projects can result in accelerated scale up for BGR. The company demonstrated strong
execution capability during FY10.
Key Risks
High working capital requirements
BGR’s business model has high working capital requirements. Significant amounts of
working capital is required to finance the purchase of materials, contract initiation costs,
and the performance of engineering, construction and other work on projects before
progress payments, are received from clients. High working capital negatively impacts
return ratios and cash flows of the company. Consequently, we believe, to meet working
capital requirements there could be risk of dilution or higher indebtedness in the long
term.
Highly concentrated order backlog
The company’s order backlog currently is at INR 105 bn. Of this, 2x600 MW, the
Kalisindh thermal power plant at Jalawar (Rajasthan) has an order value of INR 49 bn,
while the TNEB 1x600 MW thermal power plant has an order value of INR 31 b
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Result ahead of estimates; sales catapult 98%
BGR Energy Systems’ (BGR) Q3FY11 results were ahead of our estimates. Sales
catapulted 98% Y-o-Y to INR 12.6 bn on back of strong growth in EPC and BOP
projects. EBITDA, at INR 1.5 bn, grew 110% Y-o-Y even as raw material costs
soared 204bps Y-o-Y to 80.4% of sales. Dip in employee cost (down 171bps Y-o-Y
to 3.3% of sales) and other expenses (down 99bps Y-o-Y to 4.6% of sales) helped
expand EBTIDA margin 65bps Y-o-Y to 11.7%. The margin expansion can be
attributed to higher sales mix of BOP in total sales. Reduced net interest cost and
lower tax rate helped the company record a robust PAT growth of 109% to INR
876 mn. It is important to note that the percentage growth looks magnified since
BGR’s revenues are growing on a smaller base.
Strong order backlog; absence of new orders a concern
The company’s current order backlog stands at INR 93.2 bn, implying a coverage
ratio of 3.0x (based on FY10 revenues). BGR received orders worth INR 739 mn
during the quarter. BOP and EPC order backlog stood at ~30% and ~55%
respectively of the total order book. While the recent BOP order from a private
entity for 2x660MW supercritical marks the company’s entry in both supercritical
and private sector, it is important for the company to bag new orders. With lack of
new big-ticket orders, revenue visibility for FY12 and FY13 is a concern. While the
company’s order pipeline continues to remain strong with several state SEBs and
private IPPs expected to place orders, absence of concrete new orders in hand is a
concern.
Outlook and valuations: Order accretion paramount; maintain ‘BUY’
Order accretion of INR 23.9 bn during 9mFY11 is well below our estimate of INR
85 bn for FY11. We are revising down our FY12E earnings 6.6% due to lower order
inflow till date as we cut our order inflow estimate for both FY11 and FY12. With
several projects on hand likely to be completed by FY12, we are of the opinion that
it is crucial for BGR to bag new orders during the current fiscal. On consolidated
basis, the stock is trading at 10.8x and 9.2x FY11E and FY12E earnings,
respectively. Upside risks to our estimate would emanate from finalisation of largeticket
orders. While we maintain our absolute stock recommendation at ‘BUY’, we
downgrade its relative rating from ‘Sector Outperformer’ to ‘Sector Performer’.
Goods
Project execution status
BGR, with its focus on execution, has made good progress in its existing projects. The
two large EPC projects, 2x600 MW Kalisindh TPP and 1x600 MW Mettur TPP, are
completed ~60% and ~70%, respectively. The 1x500 MW Khaperkheda TPP is in the
testing phase (~95% done) and is expected to be commissioned by the current fiscal
end (subject to the readiness of BTG). The other two BoP projects are also progressing
well, with 1x500MW Kothagudem TPP (~85% done) and 2x500MW Chandrapur TPP
(~25% done) expected to be completed by June 2011 and FY12 end, respectively. The
2x500MW Marwah TPP is in nascent stage; only ~15% of the project has been executed
and is expected to be completed by Q1FY12. For the new BOP project bagged recently,
the company is currently involved in designing and engineering work and has not yet
recorded revenue in that project.
Company Description
BGR was incorporated in 1985 as a joint venture between GEA Energietechnik (Germany)
and Mr. B.G. Raghupathy, promoter. Initially, the company manufactured products
essentially used in thermal and nuclear power plants such as on line condenser tube
cleaning systems, debris filters, and rubber cleaning balls. In 1993, the promoter and
promoter family bought GEA Energietechnik’s stake and became the sole shareholders of
the company. In 1993, the company expanded its range of products and services in the
power and oil and gas industries. Currently, it manufactures and supplies equipment and
also does turnkey engineering project contracting. In the equipment segment, the
company manufactures equipment for power, oil & gas, refinery, petrochemical, and
process industries. In the turnkey engineering project contracting business, the company
executes projects in the power and oil & gas sectors, wherein it takes turnkey
responsibility to supply a range of equipment and services, including civil and other
works for a project.
Investment Theme
Power generation EPC: Huge growth in addressable market likely
We believe, in the Eleventh Plan alone, India is expected to add ~50-55 GW generation
capacity, which is more than what was added in the past fifteen years. This target is
achievable, as most of the capacity is under construction in various stages. Further, with
government expected to add 100 GW of capacity in the Twelfth Plan, which implies
doubling of India’s power generation capacity from the present. BGR has expertise to
cater to EPC and BoP segments of power plants, which implies a substantial increase in
the potential addressable market over the Eleventh Plan period. Further, due to lack of
pre-qualified and experienced EPC players, the company’s market share is also likely to
increase, lending additional visibility to revenue growth over the long term.
Strong revenue visibility; coverage at 3.0x FY10
BGR’s order intake increased significantly in FY09. The jump was driven by two large
projects worth INR 31 bn from Tamil Nadu Electricity Board (TNEB) and INR 49 bn from
Rajasthan Rajya Vidyut Utpadan Nigam (RRVUNL). These two orders resulted in the
company’s order backlog increasing 3.5x in FY09 over FY08. While this does imply that
the company’s order book is not sufficiently diversified, successful execution of these
projects can result in accelerated scale up for BGR. The company demonstrated strong
execution capability during FY10.
Key Risks
High working capital requirements
BGR’s business model has high working capital requirements. Significant amounts of
working capital is required to finance the purchase of materials, contract initiation costs,
and the performance of engineering, construction and other work on projects before
progress payments, are received from clients. High working capital negatively impacts
return ratios and cash flows of the company. Consequently, we believe, to meet working
capital requirements there could be risk of dilution or higher indebtedness in the long
term.
Highly concentrated order backlog
The company’s order backlog currently is at INR 105 bn. Of this, 2x600 MW, the
Kalisindh thermal power plant at Jalawar (Rajasthan) has an order value of INR 49 bn,
while the TNEB 1x600 MW thermal power plant has an order value of INR 31 b
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