June 23, 2010 BGR Energy (BGRENE) - power project capex, ... to the two full service EPC orders to build thermal power plants in Tamil ... Kalisindh TPP . BGR Energy (BGRENE)

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<ul><li><p>June 23, 2010 </p><p>ICICIdirect.com | Equity Research </p><p> Initiating Coverage </p><p>Opportunities abound A credible project execution track record, wide product portfolio and successful transition to full scale EPC contracting make BGR Energy an attractive play in the power sector. BGR is one of Indias leading balance of plant (BOP) suppliers with an order book of Rs 10,230 crore in March 2010 (3.3x FY10 revenues). With the government planning to add ~179 GW power generation capacity in the XI-XIIth Plans, we believe attractive growth opportunities exist for BGR. However, current valuations appear fair with BGRs share price appreciating significantly YTD (54%). We are initiating coverage on the stock with an ADD rating. </p><p>Tremendous opportunities in EPC segment </p><p>With the ongoing smooth execution of full scale power projects, we believe BGR has successfully transitioned to an EPC contractor (from primarily a BOP supplier). Furthermore, the governments large power generation capacity addition targets for the XIIth plan and requirements for local manufacturing capabilities open up a plethora of opportunities for domestic power equipment suppliers like BGR. Consequently, we expect the traction in EPC projects to continue with BGR identifying projects worth Rs 30,000 crore for bidding in FY11E. Lastly, the recent technological agreements with Hitachi and Foster Wheeler for manufacturing BTG equipment (sub-critical and supercritical) add to BGRs capabilities for executing EPC projects. Consequently, we estimate robust growth of revenues and PAT at 39.5% and 37% CAGR, respectively, in FY10-12E. </p><p>Well placed to secure BOP orders </p><p>BGR continues to remain a key player in its core BOP segment executing five projects at present. With the BOP component constituting 35-40% of total power project capex, we estimate an opportunity of Rs 132,267 crore for BOP suppliers in the XIIth plan (based on 76.6 GW thermal capacity). We believe BGR is well placed to secure additional BOP orders due to its wide product portfolio (in-house production of 40-50% of BOP equipment) and successful project execution track record. </p><p>Valuations At the CMP of Rs 742, the stock is trading at a P/E of 20.4x in FY11E and 15x in FY12E. BGR has historically traded at a 38% and 37% earnings discount to Bhel and L&amp;T, respectively. With the companys large EPC orders, technological agreements and robust topline growth, we expect the trading discount to narrow. Consequently, we have valued BGR at 16x FY12E EPS, to arrive a target price of Rs 797/share. Exhibit 1: Key Financials* (Rs Crore) FY08 FY09 FY10E FY11E FY12ETotal Revenues 1,505 1,922 3,069 4,349 5,971EBITDA 151 208 344 470 634Net Profit 84 115 201 262 359PE (x) 63.5 46.6 26.7 20.4 15.0Target PE (x) 49.7 36.5 20.9 16.0 11.7EV/EBITDA (x) 36.8 26.2 15.4 11.3 8.6P/BV (x) 11.4 9.6 7.6 5.9 4.4RoNW (x) 30.4 22.3 31.8 32.4 33.8RoCE (%) 22.5 17.9 23.0 24.9 26.8 </p><p>Source: Company, ICICIdirect.com Research, *Standalone financials </p><p>BGR Energy (BGRENE) Rs 742 </p><p>Rating Matrix Rating : Add </p><p>Target : Rs 797 </p><p>Target Period : 12 months </p><p>Potential Upside : 7% </p><p> YoY Growth (%) </p><p> FY09 FY10E FY11E FY12E</p><p>Total Revenue 27.7 59.7 41.7 37.3</p><p>EBITDA 37.8 65.1 37.0 34.8</p><p>Net Profit 36.3 74.7 30.5 36.8 </p><p>Current &amp; Target Multiple (x) FY09 FY10E FY11E FY12E </p><p>PE 46.6 26.7 20.4 15.0 </p><p>EV/ EBITDA 26.2 15.4 11.3 8.6 </p><p>P/BV 9.6 7.6 5.9 4.4 </p><p>Target P/E 36.5 20.9 16.0 11.7 </p><p>Target Ev/ EBITDA 20.6 12.0 8.8 6.8 </p><p>Target P/BV 7.5 6.0 4.6 3.5 </p><p>Stock Metrics </p><p>Bloomberg Code BGRL:IN </p><p>Reuters Code BGRE:BO </p><p>Face Value (Rs) 10 </p><p>Promoters Holding 81 </p><p>Market Cap (Rs cr) 5,299 </p><p>52 week H/L 672/256 </p><p>Sensex 17,607 </p><p>Average volumes 163,369 Price movement (Stock vs. Nifty) </p><p>0</p><p>200</p><p>400</p><p>600</p><p>800</p><p>Jan-09 May-09 Sep-09 Jan-10 May-10</p><p>(Rs)</p><p>0</p><p>1,500</p><p>3,000</p><p>4,500</p><p>6,000</p><p>(In</p><p>dex</p><p>)</p><p>BG R Nif ty - RHS </p><p>Comparable return matrix (%) </p><p>Stock return (%) 1M 3M 6M 12M </p><p>BGR Energy 24.8 44.5 46.6 107.7 BHEL 1.4 0.5 -0.6 8.1 </p><p>L&amp;T 12.7 10.2 1.4 9.0 </p><p>Thermax 3.1 2.1 20.8 60.4 </p><p>Cromptom Greaves 1.9 3.8 8.9 52.6 </p><p>Analysts name Chirag Shah shah.chirag@icicisecurities.com </p></li><li><p>BGR Energy (BGRENE) </p><p>ICICIdirect.com | Equity Research Page 2 </p><p>Company Background BGR Energy (BGR), established in 1985, is an engineering, procurement and construction (EPC) and balance of plant (BOP) contractor, serving the power and oil &amp; gas sectors. The company operates through two segments, construction and EPC contracts and capital goods with the former accounting for ~95% of revenues in FY10. Through the construction and EPC contracts segment, BGR executes turnkey contracts to supply BOP equipment, service and civil works for power generation projects. The company is also undertaking EPC contracts, supplying all equipment required for a power plant, including the boiler, turbine and generator (BTG). </p><p>BGRs order book grew 2.9x times in FY09 to Rs 9,523 crore primarily due to the two full service EPC orders to build thermal power plants in Tamil Nadu and Rajasthan. BGR is primarily a domestic-focussed company with an order book size of Rs 10,230 crore as on March 2010 (&gt;95% from India). </p><p>Headquartered in Chennai, BGR has staff strength of 1,735 as of March 2010. The company operates two plants in Tamil Nadu. </p><p>Exhibit 2: Sustained topline growth in FY07-10 </p><p>0</p><p>800</p><p>1,600</p><p>2,400</p><p>3,200</p><p>F Y 07* F Y 08 F Y 09 F Y 10</p><p>(Rs </p><p>cro</p><p>re)</p><p>C onstruction &amp; E P C C ontracts C apita l G oods </p><p> Source: Company, ICICIdirect.com Research, *FY07 was for 18 months </p><p>Exhibit 3: Order book grows 2.9x in FY09 on two large order wins </p><p>2,1663,212</p><p>9,52310,230</p><p>0</p><p>3,000</p><p>6,000</p><p>9,000</p><p>12,000</p><p>F Y 07* F Y 08 F Y 09 F Y 10</p><p>(Rs </p><p>cro</p><p>re)</p><p> Source: Company, ICICIdirect.com Research, *FY07 was for 18months </p><p>Exhibit 4: Power sector dominates order book </p><p>95.0 95.0 94.9 95.4 95.2 94.893.8</p><p>3.5 3.5 4.44.0 4.0 3.9</p><p>4.4</p><p>1.5 1.6 0.70.6 0.8 1.2 1.8</p><p>90.0</p><p>92.5</p><p>95.0</p><p>97.5</p><p>100.0</p><p>Q 2F Y 09 Q 3F Y 09 Q 4F Y 09 Q 1F Y 10 Q 2F Y 10 Q 3F Y 10 Q 4F Y 10</p><p>(%)</p><p>P ower sector - E P C &amp; BO P C ontracts O il &amp; G as S ector T urnkey C ontracts </p><p>E quipment Business </p><p> Source: Company, ICICIdirect.com Research </p><p>Share holding pattern (Q4FY10) </p><p>Shareholder Holding (%)</p><p>P romoter 81.3</p><p>Institutional Investors 9.2</p><p>Others 9.5 </p><p>Promoter &amp; Institutional holding trend (%) </p><p>81.3 81.3 81.3 81.3</p><p>7.5 7.4 8.9 9.2</p><p>0</p><p>25</p><p>50</p><p>75</p><p>100</p><p>Q 1F Y 10 Q 2F Y 10 Q 3F Y 10 Q 4F Y 10</p><p>(%)</p><p>P romoter F I &amp; MF</p></li><li><p>BGR Energy (BGRENE) </p><p>ICICIdirect.com | Equity Research Page 3 </p><p>Exhibit 5: Wide portfolio of products/services provided through companys business divisions </p><p>Business division % of revenues</p><p>(FY10)Product/Services Offered </p><p>Power Projects Turnkey EPC and BOP services for power plants (&gt;100MW) </p><p>Captive Power Projects Turnkey EPC and BOP services for power plants (</p></li><li><p>BGR Energy (BGRENE) </p><p>ICICIdirect.com | Equity Research Page 4 </p><p>Investment Rationale </p><p>Strong sales visibility over next two or three years With an order book of Rs 10,230 crore in March 2010 (3.3x FY10 revenues) and positive outlook for new orders, BGR enjoys strong sales visibility over the next two or three years. Consequently, revenue growth is estimated to be robust 39.5% CAGR in FY10-12E to Rs 5,971 crore. This will be driven by the completion of the two large full service EPC orders secured in FY09 (35-40% of project value still to be executed over FY11E-FY12E). </p><p>We expect order inflows in FY11E to be strong with BGR already placing bids for four projects worth ~Rs 14,000 crore recently (including a 2x660 MW EPC power plant in Rajasthan worth Rs 12,000 crore). Results are expected in Q2FY11. Overall, BGR is likely to bid for projects worth Rs 30,000 crore during the year. We believe order book expansion in FY11E-12E will be supported by the strong traction in BOP orders (power projects of 40-45 GW currently under implementation in India), the governments aggressive power capacity addition targets for the XI-XIIth plans and BGRs credible project execution track record (managed projects of 23 MW-500 MW). Consequently, we estimate that BGRs order book will double to Rs 20,510 crore in FY12E (42% CAGR in FY10-12E). In FY10, BGR enjoyed stellar growth (growth of 60% YoY for revenues and 75% YoY for PAT) fuelled by the continued smooth execution of the two EPC contracts (Mettur in Tamil Nadu and Jhalawar in Rajasthan). With no additional EPC secured in FY10, new orders were lower at Rs 3,684 crore vis--vis Rs 8,278 crore in FY09. BGR has made a successful transition as an EPC player (from a BOP supplier earlier) with 30-35% revenue contribution from EPC projects in FY10. </p><p>Execution of large EPC orders will drive revenue growth in</p><p>FY10-12E at 39.5% CAGR to Rs 5,971 crore </p><p>Exhibit 7: Revenue CAGR of 39.5% in FY10-12E to Rs 5,971 crore </p><p>0</p><p>1,500</p><p>3,000</p><p>4,500</p><p>6,000</p><p>FY08 FY09 FY10 FY11E FY12E</p><p>(Rs </p><p>cror</p><p>e) </p><p> .</p><p>Construcion &amp; EPC Contracts Capital Goods </p><p> Source: Company, ICICIdirect.com Research </p><p>Exhibit 8: Construction, EPC contracts segment to dominate order book </p><p>0</p><p>5,000</p><p>10,000</p><p>15,000</p><p>20,000</p><p>FY08 FY09 FY10 FY11E FY12E</p><p>(Rs </p><p>cror</p><p>e) </p><p> .</p><p>Construcion &amp; EPC Contracts Capital Goods </p><p> Source: Company , ICICIdirect.com Research </p><p>Exhibit 9: Successful transition from equipment supplier to executing full service EPC contracts Source: Company, ICICIdirect.com Research </p><p>BOP equipment supplier </p><p>Turnkey BOP contractor </p><p>Full service EPC contractor </p></li><li><p>BGR Energy (BGRENE) </p><p>ICICIdirect.com | Equity Research Page 5 </p><p>Large power capacity addition targets in XI-XIIth Plans Indias robust economic growth (7.2% CAGR of GDP in 2000-10), significant inflow of foreign capital and continued development of the industrial sector have fuelled power demand during the last decade (5% CAGR in FY00-10 to 118 GW). However, power shortages continue to plague the country with peak load deficit of 13.3% in FY10, due to the historic under achievement of power capacity addition targets in successive five year plans (50% underachievement in the last three Five Year Plans). With power demand expected to grow at a robust pace (16% CAGR in FY10-17E and 13% in FY10-22E) according to the Central Electricity Authority (CEA), significant investment is required to develop the power infrastructure in India. Consequently, the government has set aggressive power capacity expansion targets for the XIth Plan (FY07-12) and XIIth Plan (FY12-17), with total capacity addition of ~179 GW planned (vs. 132 GW added till the end of the Xth Plan). Majority of capacity additions will be based on thermal power (~77% in XIth and XIIth Plans), a key focus area of BGR. </p><p>The government plans to add ~179 GW power capacity in</p><p>FY07-17, higher than the capacity added since Indias</p><p>independence </p><p>Exhibit 10: Growth of power demand at 5% CAGR in FY00-10 </p><p>0</p><p>30</p><p>60</p><p>90</p><p>120</p><p>FY00 FY02 FY04 FY06 FY08 FY10</p><p>(GW</p><p>) </p><p> .</p><p>Source: CEA, ICICIdirect.com Research </p><p>Exhibit 11: and demand to grow at 9% CAGR till FY32E </p><p>215331</p><p>510</p><p>785</p><p>1,207</p><p>0</p><p>350</p><p>700</p><p>1,050</p><p>1,400</p><p>F Y 12E F Y 17E F Y 22E F Y 27E F Y 32E</p><p>(GW</p><p>)</p><p> Source: CEA , ICICIdirect.com Research </p><p>Exhibit 12: Peak load shortage due to capacity shortfall in India </p><p>12.4 13 11.8 12.2 11.2 11.712.3</p><p>13.8</p><p>16.6</p><p>11.913.3</p><p>0.0</p><p>5.0</p><p>10.0</p><p>15.0</p><p>20.0</p><p>F Y 00 F Y 02 F Y 04 F Y 06 F Y 08 F Y 10</p><p>(%)</p><p> Source: CEA, ICICIdirect.com Research </p><p>Exhibit 13: Aggressive capacity expansion targets for XI-XIIth Plans </p><p>132.3</p><p>178.7</p><p>0</p><p>50</p><p>100</p><p>150</p><p>200</p><p>U pto X I P lan X I-X II P lans T arget</p><p>(GW</p><p>)</p><p> Source: CEA, ICICIdirect.com Research </p></li><li><p>BGR Energy (BGRENE) </p><p>ICICIdirect.com | Equity Research Page 6 </p><p>translates into tremendous opportunities for BOP suppliers The large power generation capacity expansion targets open up tremendous opportunities for equipment suppliers, both BTG and BOP, with total investment of Rs 3,30,668 crore estimated by the CEA for boosting the thermal power generation capacity in the XIIth Plan. With BOP systems accounting for ~40% of total capex, we estimate an opportunity of Rs 1,32,267 crore in the XIIth Plan and Rs 103,073 crore in the XIth Plan for BOP suppliers (majority of XIth Plan ordering already placed). </p><p>Exhibit 14: Total 40% of capex on power generation capacity on BOP systems Source: Company, ICICIdirect.com Research </p><p>Exhibit 15: but limited number of BOP suppliers operating in India at present BOP System Major Suppliers </p><p>Coal Handling Plant L&amp;T, Elecon, Techpro, McNally Bharat, TRF, etc </p><p>Ash Handling Plant Indure, Macawber Beekay, McNally Bharat, DCIPS, Techpro Ashtech, etc </p><p>Demineralised (DM) water Plant Driplex, Ion Exchange, Thermax, L&amp;T, McNally Bharat, Kiloskar Brothers, BGR, etc </p><p>Cooling Tower Paharpur, Gammon, BGR, L&amp;T, Hamon, NBCC, etc </p><p>Chimney NBCC, Simplex, Gammon, Bridge &amp; Roof, L&amp;T, BGR, etc </p><p>Electricals incl. C&amp;I* ABB, BHEL, Areva, Siemens, L&amp;T, ILK, Tata Honeywell, etc Source: CEA, ICICIdirect.com Research </p><p>Power Generation</p><p>Boiler Turbine Generator (60%)</p><p>Boiler (50%) Turbine Generator (50%)</p><p>Coal Handling Plant Ash Handling Plant </p><p>Others </p><p>Balance of Plant (40%)</p><p>Power Generation</p><p>Boiler Turbine Generator (60%)</p><p>Boiler (50%) Turbine Generator (50%)</p><p>Coal Handling Plant Ash Handling Plant </p><p>Others </p><p>Balance of Plant (40%)</p></li><li><p>BGR Energy (BGRENE) </p><p>ICICIdirect.com | Equity Research Page 7 </p><p>BGRs enviable position in BOP segment We believe BGR will be a key beneficiary of the BOP opportunity due to its successful track record of executing several BOP projects for government agencies and limited number of vendors in India with capabilities to offer turnkey BOP services. The company enjoys a strong order book position, with five BOP projects worth ~Rs 5,800 crore currently under execution. With 40-50% of BOP equipment produced in-house by BGR, it enjoys a natural cost advantage vis--vis competitors in the bidding process. Further, the perceptible shift towards EPC ordering in the XIIth Plan (vs. packaged based ordering) benefits BGR due to its wide manufacturing capabilities (BOP and BTG equipment). We expect the share of EPC-based ordering to increase due to the high share of the private sector in power generation capacity addition (~50% share) and limited management bandwidth in public sector entities to manage and monitor numerous vendors. In FY10, BGR secured two large BOP orders, Marwa Thermal Power Project from the Chhattisgarh State Power Generation Co (worth Rs 1,633 crore) and Chandrapur Super Thermal Power Station from the Maharashtra Power Generation Corporation (worth Rs 1,632 crore). Besides BGR, L&amp;T and Tata Power qualified for the bidding process from the seven original bidders. Other projects currently being executed by BGR for state electricity boards include the 500 MW thermal power plants in Warangal and Kothagudem (both for Andhra Pradesh Power Generation Ltd) and 500 MW Khaperkheda Expansion Project near Nagpur (another project for Maharashtra Power Generation Corporation). </p><p>BGR will benefit from its wide product portfolio and high</p><p>share of private sector ordering in the XIIth Plan </p><p>Exhibit 16: Credible track record of executing BOP projects Cli...</p></li></ul>

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