BGR Energy IPO Anaysis

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BGR Energy IPO Anaysis

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<p>BGR Energy IPO A Case Study</p> <p>U408046 Shantanu Das shantanu@shantanu.in</p> <p>TABLE OF CONTENTS</p> <p>1. 2. 3. 4. 5. 6. 7. 8.</p> <p>Introduction ..................................................................................................... 3 About the Issue ................................................................................................ 4 Objective of the Issue....................................................................................... 5 Utilization of Issue Proceeds ............................................................................ 6 Share holding Pattern ....................................................................................... 6 Benefits of going Public .................................................................................... 8 Cost involved for going public......................................................................... 11 Why Investor invest in BGR Energy ................................................................ 128.1. 8.2. 8.3. Investment Rational ..........................................................................................12 Risk Factors .......................................................................................................13 Recommendation - Subscribe with a medium term view ...................................13</p> <p>9. 10. 11.</p> <p>BGR Energy Financials .................................................................................... 14 Offer price justification ................................................................................... 18 IPO Grading History in Indian Stock Market ................................................... 2311.1. 11.2. ICRA Rating for BGR Energy ..............................................................................24 ICRA Grading Perspective..................................................................................24</p> <p>12. 13.</p> <p>Post Listing performance of BGR Energy......................................................... 26 References ...................................................................................................... 29</p> <p>Page 1 of 31</p> <p>ACKNOWLEDGEMENT</p> <p>We take this opportunity to convey our sincere thanks and gratitude to all those who have directly or indirectly helped and contributed towards the completion of this project.</p> <p>First and foremost, we would like to thank Prof Soumya Guha Deb for his constant guidance and support throughout this project. During the project, we realized that the degree of relevance of the learning being imparted in the class is very high. The learning enabled us to get a better understanding of the nitty-gritty of the topic which we studied.</p> <p>We would also like to thank our batch mates for the discussions that we had with them. All these have resulted in the enrichment of our knowledge and their inputs have helped us to incorporate relevant issues into our project.</p> <p>Page 2 of 31</p> <p>1.</p> <p>Introduction</p> <p>BGR Energy was incorporated in 1985 as a JV between GEA Energietechnik GmbH and the promoter Mr. B. G. Raghupathy. At that point of time the product portfolio of the company encompassed on-line condenser tube cleaning systems, debris filters and rubber cleaning balls used in thermal and power plants. By 1993 the promoters became the sole shareholders of the company and also started expanding their product portfolio. In 2007 the company changed its name from GEA Energy Systems (India) Ltd. to BGR Energy Systems Ltd. The company carries out its business in two segments, the supply of systems and equipments and turnkey engineering project contracting. In the systems and equipments business BGR designs, engineers, manufactures sells and service a range of systems and equipment for the power, oil &amp; gas, refinery, petrochemical and process industries. BGR does turnkey contracts to supply the Balance of Plant (BOP) equipments, services and civil works for power generation projects in which they supply all the items other than boiler, turbine and generator. The company has also started focusing on Engineering, Procurement and Construction (EPC) in which the company provides all the solutions to the power projects including the boiler, turbine, generator and civil works. BGR has seven complementary businesses which include: Power projects business providing turnkey EPC and BOP services for coal-based thermal power plants and gas based combined cycle power plants typically over 100 megawatts. Captive power projects business providing turnkey EPC and BOP services for power plants typically under 100 MW which are generally designed primarily to service particular commercial facilities. Oil and gas equipment business designing and manufacturing gas conditioning and metering skids, storage tanks, pipeline pig launching &amp; receiving systems, gas processing complexes and gas compressor packages related to the oil and gas industry for companies in India and abroad. Air fin coolers business manufacturing products designed to cool process fluids and gases used in the refining, petrochemical, and oil and gas industries. Environmental engineering business manufacturing and providing deaerators and other products to treat water used in the operation of various types of power and utility plants and also provides industrial effluent treatment plants.</p> <p>Page 3 of 31</p> <p>Electrical projects business supplying electrical systems and equipment such as gas insulated switchgear substations, optical fiber power ground wires, extra high voltage substations and transmission lines to power stations, refineries and petrochemical plants.</p> <p>Infrastructure business capable of building roads and industrial buildings.</p> <p>2.</p> <p>About the Issue</p> <p>In December 2007 BGR Energy Systems announced its decision to go public. Under the plan the company would offer 8,636,000 shares to the public and 500,000 shares to employees. The maximum subscription amount for retail investors would be Rs 100,000. The issue would be 100% book built and the price would be in the band of Rs 425 Rs 480 per share. Upon completion of the issue the company would get listed on the National Stock Exchange and Bombay Stock Exchange. The company appointed SBI Capital Markets, Kotak Mahindra Capital, UBS Securities India and CLSA India as lead managers to the issue.</p> <p>THE ISSUEEquity Shares Offered byIssue* Of which I) Fresh Issue by the Company II) Offer for Sale by the Selling 4,320,000 Equity Shares 4,816,000 Equity Shares 9,136,000</p> <p>Shareholders Of which: Employee reservation portion* Therefore Net Issue to the Public* Of which A) Qualified Institutional Buyers (QIB) At least 5,181,600 Equity Shares(Allocation on a proportionate basis) 500,000 Equity Shares 8,636,000 Equity Shares</p> <p>portion</p> <p>Page 4 of 31</p> <p>Of which Mutual Funds Portion 259,080 Equity Shares (Allocation on a</p> <p>proportionate basis) Balance for all QIBs including Mutual Funds 4,922,520 Equity Shares (Allocation on a proportionate basis) B) Non-Institutional Portion Not less than 863,600 Equity Shares</p> <p>(Allocation on a proportionate basis) C) Retail Portion Not less than 2,590,800 Equity Shares</p> <p>(Allocation on a proportionate basis) Equity Shares outstanding prior to the Issue Equity Shares outstanding after the Issue 72,000,000 Equity Shares* 64,800,000 Equity Shares*</p> <p>Table 1* BGR Energy Company has entered into agreements dated November 6, 2007 with certain investors for a placement of 2,880,000 Equity Shares and a transfer by our Promoter of 1,440,000 Equity Shares. The Company proposes to complete the above transactions after the closing of the Bidding / Issue Period and before the Allotment of shares in the Issue to successful Bidders. (1) Allocation to QIBs is proportionate as per the terms of this Red Herring Prospectus. 5% of the QIB Portion shall be available for allocation to Mutual Funds. Mutual Funds participating in the 5% reservation in the QIB Portion will also be eligible for allocation in the remaining QIB Portion (2) Subject to valid bids being received at or above the Issue Price, under-subscription, if any, in the Non-Institutional Bidder and Retail Individual Bidder categories, would be allowed to be met with spill-over from other categories or a combination of categories, at the discretion of the Company and the Selling Shareholders, in consultation with the BRLMs</p> <p>3.</p> <p>Objective of the Issue Augment long term working capital requirements Investment in establishment of manufacturing and assembly facilities</p> <p>Page 5 of 31</p> <p>Investment in establishment of manufacturing facilities in the Mundra Special Economic Zone, Gujarat</p> <p>Investment in establishment of manufacturing facilities in Bahrain International Investment Park</p> <p>Investment in establishment of assembly facilities in China Fund expenditure for general corporate purposes. Achieve the benefits of listings on the stock exchange</p> <p>4.</p> <p>Utilization of Issue ProceedsExpenditure Items Total cost Estimated amount to be financed from Net Proceeds Estimated Proceeds utilization on March 31, 2008 1 Augment long term working capital requirements 2 Establish manufacturing and assembly facilities 3 Fund general purposes Total [] [] [] [] expenditure for [] [] [] [] 82.6 80 41.8 38.2 214.5 125 125 2009 as Net</p> <p>S. No.</p> <p>of the Issue</p> <p>corporate</p> <p>Table 2</p> <p>5.</p> <p>Share holding Pattern</p> <p>The table below presents our shareholding pattern before the proposed Issue and as adjusted for the Issue, and the Offer for Sale by the Selling Shareholders:</p> <p>Page 6 of 31</p> <p>Pre-Issue No of shares Promoter Mr. B.G. Raghupathy Promoter Group Ms. Sasikala Raghupathy Swarna Leasing Private Limited Priya Securities Private Limited Vani Securities Private Limited Arjun Securities Private Limited Mr. S. K. Sridhar Sub Total 13,893,120 8,640,000 8,640,000 5,428,080 4,540,320 4,320 64,800,000 21.44 13.33 13.33 8.38 7.01 0.01 100 23,654,160 36.5 %</p> <p>Post-Issue No of shares %</p> <p>19,712,160</p> <p>27.38</p> <p>11,579,120 8,640,000 8,640,000 5,428,080 4,540,320 4,320 58,544,000</p> <p>16.08 12.00 12.00 7.54 6.30 0.01 81.31</p> <p>Pre-IPO Investors* Gautam Nayak &amp; Keshav Bhujle as trustees of: CVCIGP II Ajay Relan Trust CVCIGP II Vivek Chhachhi Trust CVCIGP II Jayanta Kumar Basu Trust CVCIGP II P R Srinivasan Trust CVCIGP II Ajay Tandon Trust CVCIGP II Vinayak Shenvi Trust Nil Nil Nil Nil Nil Nil 0.00 0.00 0.00 0.00 0.00 0.00 11,111 1,111 444 1,111 222 444 0.02 0.00 0.00 0.00 0.00 0.00</p> <p>Page 7 of 31</p> <p>CVCIGPII Client Rosehill Limited CVCIGPII Employee Rosehill Limited Reliance Capital Trustee Company Limited A/c Reliance Diversified Power Sector Fund Sub Total Public Employees Total Table 3</p> <p>Nil Nil</p> <p>0.00 0.00</p> <p>1,836,822 1,028,735</p> <p>2.55 1.43</p> <p>Nil</p> <p>0.00</p> <p>1,440,000</p> <p>2.00</p> <p>Nil Nil Nil 64,800,000</p> <p>0.00 0.00 0.00 100.00</p> <p>4,320,000 8,636,000 500,000 72,000,000</p> <p>6.00 11.99 0.70 100.00</p> <p>6.</p> <p>Benefits of going Public</p> <p>Access to capital to fund growth Public placement of shares on a stock exchange allows the company to attract capital to fund both organic growth (modernization and upgrade of production facilities, implementation of capital-intensive projects) and acquisitive expansion. It is often the case that the available sources of funding (retained earnings, owners equity, other private capital) are insufficient for implementation of serious expansion plans. Also quite often, debt funding may be unsuitable for such plans for example, interest rates could be excessively high or maturity periods could be unreasonably short. In such circumstances, an IPO becomes one of the most realistic and convenient ways to secure the continuing growth of the business. The new share capital allows the company to make time-crucial capital expenditure quickly and efficiently. IPO provides access to a massive, timeless pool of capital and boosts the investment credibility of the business. Creation of liquidity and potential exit for the current owners Formation of a public market for the companys shares at fair price creates liquidity and provides an opportunity to sell the shares promptly with minimal transactional costs. The private owners of the company can dispose of their stakes in the business both during an IPO (this route is often taken by the minority financial investors such as venture or private capital funds) and at a later stage (this is often preferred by the majority shareholders). Subsequently, the market value of Page 8 of 31</p> <p>the business achieved at the IPO and the companys public status form a stable basis for sustaining the accumulated capital and welfare of the private owners. Maximum value of the company Normally, an IPO is an offer to a large number of institutional and retail investors to become shareholders of the company. These investors have a very significant pool of combined capital, especially in such a large financial centre as London. The very multitude of large investors and their confidence in the liquidity of their investment in a public entity assure the current owners of a private company about achieving the maximum possible valuation of the business at the time of an IPO. Enhancement of the companys public profile Listing on a recognized stock exchange means that the business will receive wide media coverage, usually a very favorable one, thus increasing the companys visibility and recognition of its products and services. The companys activities will also be reflected in the reports by professional financial analysts. Such public profile supports liquidity of the shares and contributes to the expansion of the business contacts. It also helps to increase confidence among the companys business partners. Improvement in debt finance terms For domestic (Ukrainian or other CIS country-based) financial institutions used to working with the low-transparency businesses and often inadequate financial reporting a company listed on a recognized stock exchange becomes a desirable and reliable partner. Banks are often ready to extend loans to public companies in larger amounts, under smaller collateral, for longer maturities and with lower interest rates. Even the largest and most prestigious banking institutions are keen to work with public companies whose transparency and corporate governance serve as additional factors of confidence for banks and other suppliers of credit. Extra assurances for partners, suppliers and clients Partners and contractors of a public company feel more confident about its financial state and organizational capabilities as compared to those of a non-transparent private business. Partners take additional comfort in the fact that the public company has gone through rigorous legal, financial and corporate due diligences all of which are required for a successful completion of an IPO. Confidence among partners and contractors is a sound foundation for stable and predictable business relations with the public company, and allows the latter to obtain additional leverage...</p>