june 23, 2010 bgr energy (bgrene) -...

June 23, 2010

ICICIdirect.com | Equity Research

Initiating Coverage

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 India’s 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 BGR’s share price appreciating significantly YTD (54%). We are initiating coverage on the stock with an ADD rating.

Tremendous opportunities in EPC segment

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 government’s 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 BGR’s capabilities for executing EPC projects. Consequently, we estimate robust growth of revenues and PAT at 39.5% and 37% CAGR, respectively, in FY10-12E.

Well placed to secure BOP orders

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.

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&T, respectively. With the company’s 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

Source: Company, ICICIdirect.com Research, *Standalone financials

BGR Energy (BGRENE) Rs 742

Rating Matrix Rating : Add

Target : Rs 797

Target Period : 12 months

Potential Upside : 7%

YoY Growth (%)

FY09 FY10E FY11E FY12E

Total Revenue 27.7 59.7 41.7 37.3

EBITDA 37.8 65.1 37.0 34.8

Net Profit 36.3 74.7 30.5 36.8

Current & Target Multiple (x) FY09 FY10E FY11E FY12E

PE 46.6 26.7 20.4 15.0

EV/ EBITDA 26.2 15.4 11.3 8.6

P/BV 9.6 7.6 5.9 4.4

Target P/E 36.5 20.9 16.0 11.7

Target Ev/ EBITDA 20.6 12.0 8.8 6.8

Target P/BV 7.5 6.0 4.6 3.5

Stock Metrics

Bloomberg Code BGRL:IN

Reuters Code BGRE:BO

Face Value (Rs) 10

Promoters Holding 81

Market Cap (Rs cr) 5,299

52 week H/L 672/256

Sensex 17,607

Average volumes 163,369 Price movement (Stock vs. Nifty)

0

200

400

600

800

Jan-09 May-09 Sep-09 Jan-10 May-10

(Rs)

0

1,500

3,000

4,500

6,000

(In

dex

)

BG R Nif ty - RHS

Comparable return matrix (%)

Stock return (%) 1M 3M 6M 12M

BGR Energy 24.8 44.5 46.6 107.7 BHEL 1.4 0.5 -0.6 8.1

L&T 12.7 10.2 1.4 9.0

Thermax 3.1 2.1 20.8 60.4

Cromptom Greaves 1.9 3.8 8.9 52.6

Analyst’s name Chirag Shah [email protected]

BGR Energy (BGRENE)


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 & 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).

BGR’s 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 (>95% from India).

Headquartered in Chennai, BGR has staff strength of 1,735 as of March 2010. The company operates two plants in Tamil Nadu.

Exhibit 2: Sustained topline growth in FY07-10…

0

800

1,600

2,400

3,200

F Y 07* F Y 08 F Y 09 F Y 10

(Rs

cro

re)

C onstruction & E P C C ontracts C apita l G oods

Source: Company, ICICIdirect.com Research, *FY07 was for 18 months

Exhibit 3: Order book grows 2.9x in FY09 on two large order wins

2,1663,212

9,52310,230

0

3,000

6,000

9,000

12,000

F Y 07* F Y 08 F Y 09 F Y 10

(Rs

cro

re)

Source: Company, ICICIdirect.com Research, *FY07 was for 18months

Exhibit 4: Power sector dominates order book

95.0 95.0 94.9 95.4 95.2 94.893.8

3.5 3.5 4.4 4.0 4.0 3.94.4

1.5 1.6 0.7 0.6 0.8 1.2 1.8

90.0

92.5

95.0

97.5

100.0

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 ower sector - E P C & BO P C ontracts O il & G as S ector T urnkey C ontracts

E quipment Business

Source: Company, ICICIdirect.com Research

Share holding pattern (Q4FY10)

Shareholder Holding (%)

P romoter 81.3

Institutional Investors 9.2

Others 9.5

Promoter & Institutional holding trend (%)

81.3 81.3 81.3 81.3

7.5 7.4 8.9 9.2

0

25

50

75

100

Q 1F Y 10 Q 2F Y 10 Q 3F Y 10 Q 4F Y 10

(%)

P romoter F I & MF

BGR Energy (BGRENE)


Exhibit 5: Wide portfolio of products/services provided through company’s business divisions

Business division % of revenues

(FY10)Product/Services Offered

Power Projects Turnkey EPC and BOP services for power plants (>100MW)

Captive Power Projects Turnkey EPC and BOP services for power plants (<100MW)

Oil and Gas Equipments 2.0Gas conditioning & metering skids, Storage tanks, Gas processing complexes, Gas compressor packages, etc

Air Fin Coolers 2.0 Air fin coolers

Environmental Engineering 1.0 Deaerators, Desalination plants, Water treatment plants, Effluent treatment plants, etc

Electrical Projects 1.0Gas insulated switchgear substations, Optical fibber power ground wires, Extra high voltage substations, Transmission lines

Infrastructure 0.0 Building roads and industrial buildings

94.0


Exhibit 6: Evolution of BGR from equipment supplier to BOP and EPC contractor


1987 1993 1994 1998 2000 2001 2003 2006 2007 2008 2009

Formed as a JV with GEA

Energietechnik GmbH, Germany

Technical collaboration

agreement with GEA Btt, France

Collaborative agreement with

Crane Environment,

Inc

Secured first EPC contract for 120 MW power plant in Tamil

Nadu

Won a large gas processing

complex from SCOP, Iraq

Technical collaboration

agreement with TME, Italy for

CPP

Company listed GEA Energietechnik divests its stake

to promoters

Power projects division

established

First BOP order for 95 MW CPP

Received first 500 MW BOP contract from APGENCO for Vijaywada TPP

Received 1x600 MW EPC contract

from TNEB for Mettur TPP

Received 2x600 MW EPC

contract from RRVUNL for

Kalisindh TPP

BGR Energy (BGRENE)


Investment Rationale

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).

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 government’s aggressive power capacity addition targets for the XI-XIIth plans and BGR’s credible project execution track record (managed projects of 23 MW-500 MW). Consequently, we estimate that BGR’s 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-à-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.

Execution of large EPC orders will drive revenue growth in

FY10-12E at 39.5% CAGR to Rs 5,971 crore

Exhibit 7: Revenue CAGR of 39.5% in FY10-12E to Rs 5,971 crore

0

1,500

3,000

4,500

6,000

FY08 FY09 FY10 FY11E FY12E

(Rs

cror

e)

.

Construcion & EPC Contracts Capital Goods


Exhibit 8: Construction, EPC contracts segment to dominate order book

0

5,000

10,000

15,000

20,000


(Rs

cror

e)

.


Source: Company , ICICIdirect.com Research

Exhibit 9: Successful transition from equipment supplier to executing full service EPC contracts Source: Company, ICICIdirect.com Research

BOP equipment supplier

Turnkey BOP contractor

Full service EPC contractor

BGR Energy (BGRENE)


Large power capacity addition targets in XI-XIIth Plans… India’s 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.

The government plans to add ~179 GW power capacity in

FY07-17, higher than the capacity added since India’s

independence

Exhibit 10: Growth of power demand at 5% CAGR in FY00-10…

0

30

60

90

120

FY00 FY02 FY04 FY06 FY08 FY10

(GW

)

.

Source: CEA, ICICIdirect.com Research

Exhibit 11: …and demand to grow at 9% CAGR till FY32E

215331

510

785

1,207

0

350

700

1,050

1,400

F Y 12E F Y 17E F Y 22E F Y 27E F Y 32E

(GW

)

Source: CEA , ICICIdirect.com Research

Exhibit 12: Peak load shortage due to capacity shortfall in India

12.4 1311.8 12.2

11.2 11.7 12.313.8

16.6

11.913.3

0.0

5.0

10.0

15.0

20.0

F Y 00 F Y 02 F Y 04 F Y 06 F Y 08 F Y 10

(%)


Exhibit 13: Aggressive capacity expansion targets for XI-XIIth Plans

132.3

178.7

0

50

100

150

200

U pto X I P lan X I-X II P lans T arget

(GW

)


BGR Energy (BGRENE)


…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).

Exhibit 14: Total 40% of capex on power generation capacity on BOP systems… Source: Company, ICICIdirect.com Research

Exhibit 15: …but limited number of BOP suppliers operating in India at present

BOP System Major Suppliers

Coal Handling Plant L&T, Elecon, Techpro, McNally Bharat, TRF, etc

Ash Handling Plant Indure, Macawber Beekay, McNally Bharat, DCIPS, Techpro Ashtech, etc

Demineralised (DM) water Plant Driplex, Ion Exchange, Thermax, L&T, McNally Bharat, Kiloskar Brothers, BGR, etc

Cooling Tower Paharpur, Gammon, BGR, L&T, Hamon, NBCC, etc

Chimney NBCC, Simplex, Gammon, Bridge & Roof, L&T, BGR, etc

Electricals incl. C&I* ABB, BHEL, Areva, Siemens, L&T, ILK, Tata Honeywell, etc Source: CEA, ICICIdirect.com Research

Power Generation

Boiler Turbine Generator (60%)

Boiler (50%) Turbine Generator (50%)

Coal Handling Plant Ash Handling Plant

Others

Balance of Plant (40%)

Power Generation

Boiler Turbine Generator (60%)

Boiler (50%) Turbine Generator (50%)

Coal Handling Plant Ash Handling Plant

Others

Balance of Plant (40%)

BGR Energy (BGRENE)


BGR’s 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-à-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&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).

BGR will benefit from its wide product portfolio and high

share of private sector ordering in the XIIth Plan

Exhibit 16: Credible track record of executing BOP projects

Client Project cost

(Rs crore)Project detail Status

Maharashtra Generation Co. Ltd 998 1×500MW Khapharkheda Thermal Power Station Under execution

Andhra Pradesh Power Generation Ltd. 793 1x500MW Kothagudem Thermal Power station Under execution

Andhra Pradesh Power Generation Ltd. 695 1x500MW Kakatiya Thermal Power station Under execution

Maharashtra Power Generation Corp 1,632 2*500MW Chandrapur Super Thermal Power Station in

Chandrapur, MaharashtraUnder execution

Chhattisgarh State Power Generation Co. 1,633 2x500MW Marwa Thermal Power Project Under execution

Aditya Cement, Grasim Industries 44 23MW CPP in Chittorgarh, Rajasthan Completed

Tamil Nadu Electricity Board 59 95MW CCPP at Valuthur, Tamil Nadu Completed

Rajasthan Rajya Vidyut Utpadan Nigam 210 330MW CCPP at Dholpur, Rajasthan Completed

Andhra Pradesh Power Generation Corp 579 500MW TPS at Vijaywada, Andhra Pradesh Completed


BGR Energy (BGRENE)


Attractive opportunities in the EPC segment… BGR is moving up the value chain by executing full service EPC projects. Its foray in the EPC segment is bearing fruit with the company winning two large EPC contracts (Rs 8,000 crore) to build thermal power plants in Tamil Nadu and Rajasthan in FY09, fuelling growth of order book (2.96x to Rs 9,523 crore in FY09). BGR and Bhel were pre-qualified for the projects through an international competitive bidding process. We believe BGR’s success in securing such large EPC orders, despite the existence of larger competitors like Bhel, L&T, Tata Power, etc, is testament to the company’s strong technological and project execution capabilities. For these EPC orders, BGR will source the main plant package equipment (BTG) from the Chinese equipment manufacturer Dong Fang Electricals, while the BOP component will be handled in-house. For ensuring quality and timely delivery, BGR has set up a regional office in China to facilitate liasioning with BTG suppliers. The traction in EPC orders continues with BGR being one of the three bidders for the 2X660 MW power plant project for the Rajasthan SEB (project value of Rs 12,000 crore). Bhel was the other major bidder. We believe BGR is in a good position to secure the order given its success in winning/executing projects for several SEBs in the past and the shortfall on the supply side (bar on foreign equipment suppliers on bidding for government projects). Currently, Bhel and L&T are the only domestic equipment manufacturers with capabilities to manufacture BTG Systems. Lastly, BGR firmed up its power generation plans with the signing of a memorandum of understanding (MoU) with the Government of Orissa to build a 2X600 MW IPP in April 2010, worth Rs 6,287 crore.

The traction in EPC projects is expected to continue due to

the scarcity of power equipment manufacturers in India

and the ban on foreign equipment suppliers bidding for

government contracts

Exhibit 17: Large EPC contracts secured in recent years

Client Project cost (Rs

crore)Project detail Status

Tamil Nadu Electricity Board 3,100 1*600MW Thermal power plant in Metthur, Tamil Nadu Under execution

Rajasthan Rajya Vidyut Updadan Nigam 4,900 2*600MW Kalisindh Thermal Power Project in Jhalawar, Rajasthan Under execution

Aban Power Company 270 120MW CCPP at Karuppur, Tamil Nadu Completed

Tamil Nadu Electricity Board 355 92MW CCPP at Valuthur, Tamil Nadu Completed Source: Company, ICICIdirect.com Research

BGR Energy (BGRENE)


…and collaboration with Hitachi further strengthens BGR’s case as an EPC contractor BGR’s ability to secure large EPC orders is further strengthened by its recent technological collaboration agreement with Hitachi Power for manufacturing 660 MW, 800 MW, 1,000 MW and 1,100 MW supercritical steam BTG equipment. The agreement comes on the back of the 20-year license agreement between BGR and Foster Wheeler North America Corp, for the design, manufacture and sale of sub-critical and supercritical coal fired steam generators. The agreement was signed in April 2009. With the agreements in place, BGR is expected to invest in a plant (4 -5 GW) for manufacturing BTG equipment on its own, thus reducing its dependence on Chinese equipment suppliers. However, we have not included the capex for this in our forecasts due to limited information on the company’s future plans. In addition, BGR has entered into joint ventures (JVs) and strategic alliances with multinational companies to access the latest technology, including Nooter/Eriksen, US (license and technology transfer agreement for heat recovery boilers), Termomeccanica Ecologia, Spain (technology transfer for condensate polishing plants), GEA Batignolles, France (Air Fin Coolers), etc.

BGR is expected to set up a BTG manufacturing plant

following its technological partnership with Hitachi, thus

reducing reliance on Chinese equipment suppliers.

BGR Energy (BGRENE)


Pick-up of industrial capex to benefit BGR’s capital goods segment We expect BGR’s capital goods segment to benefit from the pick-up of industrial capex in India as substantial investment is required to expand the nation’s oil refinery/natural gas production capabilities and rising crude oil prices. BGR provides oil & gas equipment, air cooled heat exchangers and water treatment plants through this segment, with an order book of Rs 635 crore in March 2010 (~6% of total order book). Some of the company’s clients in this segment include HPCL, IOC, Ministry of Oil (Iraq), etc. With an execution period of 12-18 months, we expect revenues of the segment to grow at 27% CAGR in FY10-12E to Rs 271 crore. Among the orders secured in FY10, the largest was from the State Company for Oil Projects (SCOP), Ministry of Iraq, for supplying equipment for the Akas and Al-Mansuria gas fields. BGR was successful in the bidding process, which also included OGI (Ireland), Petrel (UK), Snamprogetti (Italy) and Equinox (Canada). This is the fifth order secured by BGR from SCOP, including the supply of 45 hydro carbon tanks for the ‘Najaf Tank Project’ (worth US$17.9 million, completed) and 17 tanks for the ‘Aumara Tank Project’ (worth US$9.3 million, under-execution).

Strong management profile An analysis of BGR’s senior executive profile indicates rich industry experience, with the average industry experience of the management team being over 25 years. In our view, the company’s seasoned management team provides significant leverage in the areas of project management and marketing. In August 2010, the management was strengthened by the appointment of T Sankaralingam, former Chairman and Managing Director (MD) of NTPC, as BGR’s MD. Further, of the 1,735 strong employee base, 83% are engineers, ~64% of who are in the design and engineering function.

Revenues of the capital goods segment are estimated to

grow at 27% CAGR in FY10-12E to Rs 271 crore

Exhibit 18: Recent orders secured in capital goods segment

Date Client Contract Cost

(Rs crore)Details

Jul-09 Ministry of Oil, Iraq 386 Gas generators, water system plant, fire water system and

instrumentation air system in Akas and Al-Mansuria gas fields (Iraq)

Nov-09 CINDA Air heaters

Nov-09 HPCL-Mittal Energy Air-cooled heat exchangers

Nov-09 Essar Oil Limited Air-cooled heat exchangers

Jan-10 Adhunik Power & Natural Resources 16 Water treatment plant

Mar-10 Indian Oil Corp 46 Carbon steel bundles and duplex bundles

Mar-10 Jindal Steel & Power Carbon steel bundles

Mar-10 Technip KT Carbon steel bundles and stainless steel bundles

45*

16**

Source: Company, ICICIdirect.com Research, *Summation of the three contract secured in Nov 2009, **Summation of the two contract secured in Mar 2010

BGR Energy (BGRENE)


Risks and concerns Execution delays may result in lower revenues In our view, execution delays by BGR is the biggest risk to our forecasts as the company’s order book is highly concentrated on the two large EPC contacts. Any delays in execution of the same can result in lower revenue growth in FY11E-12E. Further, execution delays can adversely impact the success of the company to secure additional EPC orders in the future. According to our sensitivity analysis on changes in execution rate on BGR’s revenues, we estimate that a 10% movement on the execution rate on either side will result in revenue volatility of 9% and 8% in FY11E and FY12E, respectively, vis-à-vis our base case.

Lower margin on significant rise in commodity prices With the recovery of the global economy, a significant rise in commodity prices can adversely impact BGR’s operating margin. Although BGR is insulated to an extent in FY11E-12E due to the two fixed cost EPC orders in its order book, a higher-than-expected rise in commodity prices could result in margin contraction. According to our sensitivity analysis on changes in raw material/sales (RM/sales) ratio on BGR’s EPS, we estimate that a 100 bps movement on the RM/sales ratio on either side will result in an EPS volatility of 10% each in FY11E and FY12E, respectively, vis-à-vis our base case.

Exhibit 19: Execution rates slower by 10% result in 9% lower revenue in FY11E (vs. base case)

FY11E FY12E

Base case Revenue 4,349 5,971

EPS 36.4 49.8

+10% our estimates Revenue 5,175 6,748

EPS 46.9 60.5

-10% our estimates Revenue 4,279 5,768

EPS 37.3 50.3 Source: Company, ICICIdirect.com Research

Exhibit 20: RM/sales ratio 100 bps higher results in 10% lower EPS in FY11E (vs. base case)

FY11E FY12E

Base case EBITDA 470.5 634.0

EPS 36.4 49.8

RM/Sales +100bp our estimates EBITDA 464.1 602.7

EPS 37.8 49.8

RM/Sales -100bp our estimates EBITDA 559.2 728.8

EPS 46.5 61.3 Source: Company, ICICIdirect.com Research

BGR Energy (BGRENE)


Increased competition may result in lower profitability BGR’s entry in the EPC space coincides with the growing competition in the sector, with capacity expansion planned by Bhel (15-20 GW) and L&T (4-6 GW) during the next one or two years. Further, competition is heating up with JVs formed between domestic players and foreign partners, including Bharat Forge-Alstom, JSW-Toshiba, GB Engineering-Ansaldo, etc. The increased competition is likely to result in aggressive bidding for power orders (and lower margin).

Highly working capital intensive business BGR’s business is highly working capital intensive. This is further accentuated by the large proportion of contracts with government agencies (back payment and high proportion of retention money). Working capital requirements are met by the company through internal accruals and borrowings. This contributes to the company being fairly leveraged with total borrowings of Rs 708 crore in FY09 and debt-to-equity ratio of 1.3x. Thus, a higher interest rate environment can adversely impact BGR’s earnings growth.

Exhibit 21: Solid equipment manufacturing capacity addition over next three to four years

Current Capacity (GW) Planned Capacity (GW)

BHEL 15.0 20.0

L&T-MHI 4.0 6.0

Bharat Forge-Alst - 5.0

JSW-Toshiba - 3.0

GB Engg-Ansaldo - 2.0

Thermax - Babcoc - 3.0

Cethar Vessels - R - 8.0

BGR Energy - Fos - 5.0 Source: CEA, ICICIdirect.com Research

BGR Energy (BGRENE)


Financials Revenues to grow at a ~40% CAGR in FY10-12E BGR’s order book (Rs 10,230 crore in March 2010) is 3.3x FY10 revenues. Consequently, we expect revenues to grow strongly at a ~40% CAGR to Rs 5,971 crore fuelled by the execution of the two EPC contracts secured in FY09 and the 30 months average execution period of its order book. Topline growth will be driven by the construction and EPC contracts segment, which is estimated to grow at 40.2% CAGR to Rs 5,701 crore in FY10-12E. In FY10, BGR’s revenues grew at 60% YoY to Rs 3,069 crore fuelled by the strong growth of the construction & EPC contracts segment (69% YoY to Rs 2,901 crore).

Exhibit 22: Construction & EPC contracts segment continues to dominate revenues in FY10-12E

1,2951,721

2,901

4,113

5,701

210 201 168 236 271

0

1,500

3,000

4,500

6,000


(Rs

cror

e)

.



BGR Energy (BGRENE)


EBITDA margin likely to come under pressure… In FY10, BGR’s EBITDA margin expanded to 11.2% (vs. 10.8% in FY09) due to the execution of the two EPC contracts. The fixed price orders were secured in FY09 when input costs were at their peak. However, with rising raw material prices (e.g. steel and cement), the EBITDA margin declined 84 bps QoQ and 123 bps YoY to 10.4%. We expect BGR’s EBITDA margin in FY11E to be lower at 10.8% due to: Higher input costs Future contracts likely to come with a price variation clause (e.g.

Marwa BOP order secured in August 2009). Total 30% of the present order book is with a price variation clause

High proportion of EPC contracts in the order book. The margins of EPC projects are lower than BOP projects

Nevertheless, EBITDA growth is estimated to be strong (39% CAGR in FY10-12E to Rs 666 crore) fuelled by the robust topline growth.

Improved return ratios Return ratios improved significantly in FY10 fuelled by the improved profitability and robust topline growth. We expect the continuance of this trend due to the positive outlook for topline growth in FY10-12E despite the lower operating profitability. Exhibit 24: Trend in return ratios robust

30.4

26.824.923.0

17.922.5

22.3

31.8 33.832.4

0.0

10.0

20.0

30.0

40.0


(%)

RoCE RoNW


Exhibit 23: EBITDA margin likely to have a downward bias in FY11E-12E

0

200

400

600

800


(Rs

cror

e)

.

8.0

9.0

10.0

11.0

12.0

(%)

.

EBITDA - LHS EBITDA margin - RHS


BGR Energy (BGRENE)


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&T, respectively. With the company’s large EPC orders, technological agreements and robust topline growth, we expect the trading discount to narrow. Consequently, we value BGR at 16x FY12E P/E, arriving at a target price of Rs 797/share. However, the current valuations appear fair with BGR’s share price appreciating significantly YTD (54% vs. 2.1% for the Nifty); we are initiating coverage on the stock with an ADD rating.

BGR is valued at an FY12E P/E multiple of 16x (vs. average

of 14.4x), at a premium due to its transition as an EPC

contractor, technological partnerships and stable margin

Exhibit 25: P/E band chart – BGR

0

250

500

750

1,000

Jan-

08

Apr-0

8

Jul-0

8

Oct-0

8

Jan-

09

Apr-0

9

Jul-0

9

Oct-0

9

Jan-

10

Apr-1

0

(Rs)

.

Price 15.0x 24.6x 5.4x


Exhibit 26: EV/EBITDA band chart – BGR

0

2,000

4,000

6,000

8,000

Jan-

08

Mar

-08

May

-08

Jul-0

8

Sep-

08

Nov

-08

Jan-

09

Mar

-09

May

-09

Jul-0

9

Sep-

09

Nov

-09

Jan-

10

Mar

-10

May

-10

(Rs

cror

e)

.

Market Cap 9.0x 14.6x 3.4x


BGR Energy (BGRENE)


Exhibit 28: Trend in P/E multiple of BGR vis-à-vis BHEL and L&T

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

Jan-

08

Mar

-08

May

-08

Jul-0

8

Sep-

08

Nov

-08

Jan-

09

Mar

-09

May

-09

Jul-0

9

Sep-

09

Nov

-09

Jan-

10

Mar

-10

May

-10

P/E

(x)

.

BGR BHEL L&T


Exhibit 29: Financial comparison of BGR vs. Peers.

Market cap

(Rs crore) FY11E FY12E FY11E FY12E FY11E FY12E FY11E FY12E FY11E FY12E

BGR Energy 5,364 4,349 5,971 10.8 10.6 20.4 15.0 11.3 8.6 5.9 4.4

BHEL 117,240 43,432 50,610 18.1 18.1 20.9 18.0 13.7 11.5 5.8 4.7

L&T 103,846 48,413 61,206 13.0 13.0 25.9 20.8 17.3 13.7 4.8 4.0

Thermax 8,335 4,226 5,089 11.6 11.5 26.5 20.1 15.0 11.9 6.3 5.1

Cromptom Greaves 16,364 9,957 11,367 14.0 13.9 18.4 16.1 13.2 11.7 5.2 4.1

P/B (x) Revenue (Rs cr) EBITDA Margin (%) PE (x) EV/EBITDA (x)


Exhibit 27: BGR trades at ~40% discount to FY11E earnings of Bhel and L&T

-100%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

Jan-

08

Mar

-08

May

-08

Jul-0

8

Sep-

08

Nov

-08

Jan-

09

Mar

-09

May

-09

Jul-0

9

Sep-

09

Nov

-09

Jan-

10

Mar

-10

May

-10

BHEL L&T


BGR has traded at a significant discount to Bhel and L&T in

the past. We expect the gap to narrow in the future due to

the positive outlook for the company

BGR Energy (BGRENE)


Exhibit 30: Profit & loss account* Rs Crore FY08 FY09 FY10E FY11E FY12ETotal Revenues 1,505 1,922 3,069 4,349 5,971Growth (%) 94.1 27.7 59.7 41.7 37.3Op. Expenditure 1,354 1,714 2,726 3,878 5,337EBITDA 151 208 344 470 634Growth (%) 76.2 37.8 65.1 37.0 34.8Depreciation 5 7 10 12 19EBIT 146 201 334 458 615Interest 27 58 54 95 119Other Income 6 32 25 35 48Extraordinary Item 0 0 0 0 0PBT 125 175 305 398 544Growth (%) 107.0 39.4 74.4 30.6 36.8Tax 41 60 104 135 185Rep. PAT before MI 84 115 201 262 359Minority Interest (MI) 0 0 0 0 0Rep. PAT after MI 84 115 201 262 359Adjustments 0 0 0 0 0Adj. Net Profit 84 115 201 262 359Growth (%) 115.4 36.3 74.7 30.5 36.8

Company, ICICIdirect.com Research, *Standalone financials

Exhibit 31: Balance sheet* Rs Crore FY08 FY09 FY10E FY11E FY12EEquity Capital 72 72 72 72 72Reserves & Surplus 399 489 631 844 1,136Shareholder's Fund 471 561 703 916 1,208Borrowings 501 708 933 1,133 1,340Unsecured Loans 0 0 0 0 0Deferred Tax Liability 39 78 159 159 159Source of Funds 1,012 1,347 1,795 2,208 2,707Gross Block 56 104 104 167 267Less: Acc. Depreciation 14 19 27 38 56Net Block 42 85 76 128 210Capital WIP 1 5 68 105 125Net Fixed Assets 42.64 90 145 234 336Intangible Assets 3 6 5 4 2Investments 156 5 5 5 5Cash 306 611 1,023 1,191 1,242Trade Receivables 735 1,278 1,979 2,868 3,943Loans & Advances 272 645 727 1,052 1,461Inventory 13 12 15 23 31Total Current Asset 1,335 2,565 3,764 5,162 6,718Current Liab. & Prov. 525 1,319 2,123 3,196 4,354Net Current Asset 810 1,246 1,640 1,966 2,364P&L Account 0 0 0 0 0Application of Funds 1,012 1,347 1,795 2,208 2,707


BGR Energy (BGRENE)


Exhibit 32: Cash flow statement* Rs Crore FY08 FY09 FY10E FY11E FY12ENet Profit before Tax 125 175 305 398 544Other Non Cash Exp 0 0 0 0 0Depreciation 5 7 10 12 19Direct Tax Paid 14 20 23 135 185Other Non Cash Inc 0 1 0 35 48Other Items 21 31 54 95 119CF before change in WC 137 192 345 335 449Inc./Dec. In WC -346 -198 18 -158 -347CF from Operations -209 -7 363 177 102Pur. of Fix Assets -8 -56 -63 -100 -120Pur. of Inv -151 151 0 0 0CF from Investing -153 122 -63 -65 -72Inc./(Dec.) in Debt 258 206 225 200 208Inc./(Dec.) in Net Worth 374 0 0 0 0Others -43 -83 -113 -144 -186CF from Financing 588 123 112 56 21Opening Cash Balance 91 306 611 1,023 1,191Closing Cash Balance 306 611 1,023 1,191 1,242


Exhibit 33: Key ratios*

(%)FY08 FY09 FY10E FY11E FY12E

Raw Material 84.4 82.2 81.0 81.4 81.6Employee Expenditure 2.9 3.8 4.1 4.0 4.0Effective Tax Rate 32.6 34.1 34.0 34.0 34.0

Profitability Ratios (%)EBITDA Margin 10.0 10.8 11.2 10.8 10.6PAT Margin 5.6 6.0 6.5 6.0 6.0

Per Share Data (Rs)Revenue per share 209.0 267.0 426.3 604.0 829.4Book Value 65.5 77.9 97.7 127.3 167.7Cash per share 42.5 84.8 142.1 165.4 172.5EPS 11.7 16.0 27.9 36.4 49.8Cash EPS 12.4 17.0 29.3 38.2 52.5DPS 2.0 3.0 7.0 5.8 8.0


BGR Energy (BGRENE)



(%)Return Ratios FY08 FY09 FY10E FY11E FY12ERoNW 30.4 22.3 31.8 32.4 33.8ROCE 22.5 17.9 23.0 24.9 26.8ROIC 6.9 7.1 8.7 10.4 11.4Financial Health Ratio Operating CF (Rs Cr) -209 -7 363 177 102FCF (Rs Cr) -244 -106 195 77 -18Cap. Emp. (Rs Cr) 973 1,269 1,636 2,049 2,548Debt to Equity (x) 1.1 1.3 1.3 1.2 1.1Debt to Cap. Emp. (x) 0.5 0.6 0.6 0.6 0.5Interest Coverage (x) 5.5 3.5 6.2 4.8 5.2Debt to EBITDA (x) 3.3 3.4 2.7 2.4 2.1DuPont Ratio Analysis PAT/PBT 67.4 65.9 66.0 66.0 66.0PBT/EBIT 85.8 86.9 91.3 86.8 88.5EBIT/Net Sales 9.7 10.5 10.9 10.5 10.3Net Sales/Total Asset 224.4 162.9 195.4 217.3 243.0Total Asset/NW 2.1 2.4 2.6 2.4 2.2


Exhibit 35: Key ratios* Working Capital FY08 FY09 FY10E FY11E FY12EWorking Cap./Revenues (%) 53.8 64.8 53.4 45.2 39.6Inventory turnover 4.7 2.4 1.7 1.6 1.7Debtor turnover 123.5 191.1 193.6 203.4 208.2Creditor turnover 47.7 71.4 67.6 71.5 73.3Current Ratio 2.5 1.9 1.8 1.6 1.5



(Rs crore)FCF Calculation FY08 FY09 FY10E FY11E FY12EEBITDA 151 208 344 470 634Less: Tax 41 60 104 135 185NOPLAT 110 149 240 335 449Capex -8 -56 -63 -100 -120Change in working cap. -346 -198 18 -158 -347FCF -244 -106 195 77 -18



(x times)Valuation FY08 FY09 FY10E FY11E FY12EPE (x) 63.5 46.6 26.7 20.4 15.0EV/EBITDA (x) 36.8 26.2 15.4 11.3 8.6EV/Sales (x) 3.7 2.8 1.7 1.2 0.9Dividend Yield (%) 0.3 0.4 0.9 0.8 1.1Price/BV (x) 11.4 9.6 7.6 5.9 4.4


BGR Energy (BGRENE)


RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Add, Reduce, and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: 20% or more; Buy: Between 10% and 20%; Add: Up to 10%; Reduce: Up to -10% Sell: -10% or more;

Pankaj Pandey Head – Research [email protected]

ICICIdirect.com Research Desk, ICICI Securities Limited, 7th Floor, Akruti Centre Point, MIDC Main Road, Marol Naka, Andheri (East) Mumbai – 400 093

[email protected]

ANALYST CERTIFICATION We /I, Chirag Shah PGDBM research analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our personal views about any and all of the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Analysts aren't registered as research analysts by FINRA and might not be an associated person of the ICICI Securities Inc.

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The information and opinions in this report have been prepared by ICICI Securities and are subject to change without any notice. The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of ICICI Securities. While we would endeavour to update the information herein on reasonable basis, ICICI Securities, its subsidiaries and associated companies, their directors and employees (“ICICI Securities and affiliates”) are under no obligation to update or keep the information current. Also, there may be regulatory, compliance or other reasons that may prevent ICICI Securities from doing so. Non-rated securities indicate that rating on a particular security has been suspended temporarily and such suspension is in compliance with applicable regulations and/or ICICI Securities policies, in circumstances where ICICI Securities is acting in an advisory capacity to this company, or in certain other circumstances.

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june 23, 2010 bgr energy (bgrene) -...

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