1. Initiating Coverage | Capital Goods
March 26, 2010
BGR Energy Systems BUY
CMP Rs505
Taking 'BGR' Leaps Target Price Rs641
BGR Energy (BGR) has taken several 'bigger' leaps over the years, from being a Investment Period 12 Months
mere manufacturer of a few BoP (Balance of Plant) components to executing Turnkey
Stock Info
BoP projects, and now gradually executing full-fledged EPC contracts. The company
has a healthy order book of Rs11,609cr (4.2x FY2010E sales), providing good Sector Capital Goods
revenue visibility. During FY2009-12E, we expect the company to register a Market Cap (Rs cr) 3,637
top-line and bottom-line CAGR of 41.8% each. At the current price of Rs505, the Beta 1.0
stock is quoting at 14.9x and at 11.0x its FY2011E and FY2012E EPS, respectively,
52 Week High / Low 593/135
which we believe is attractive. We Initiate Coverage on the stock, with a Buy
We
Avg. Daily Volume 100027
Target Price
recommendation and a Target Price of Rs641.
Face Value (Rs) 10
Power Sector - A Structural Growth Driver: The high power deficit in the country,
BSE Sensex 17,645
coupled with the low per capita consumption of electricity, has led to the power
generation targets being bigger than ever, translating into a huge opportunity for Nifty 5,282
the BoP players. The 75,200MW of thermal capacity planned during the Twelfth Reuters Code BGRE.BO
Plan period alone throws up a potential BoP opportunity of Rs1,35,360cr Bloomberg Code BGRL@IN
(i.e. ~Rs27,072cr of an average annual opportunity).
Turnkey BoP - BGR's Forte: BGR is one of the very few established players to offer
Forte: Shareholding Pattern (%)
complete turnkey BoP services. Besides, the company has its own set of competitive Promoters 81.3
advantages, including diverse design and engineering capabilities, in-house MF / Banks / Indian FIs 8.1
manufacturing of ~50% of its product portfolio, cost competitiveness, proven track
FII / NRIs / OCBs 5.7
record etc., to differentiate its offering in the turnkey BoP space.
Indian Public / Others 4.9
EPC Contracts - Transforming to the next level: The company has further
Transforming
scaled-up to the next level, having won two major EPC orders with a combined Abs. (%) 3m 1yr 3yr*
worth of Rs8,000cr. For both these orders, BGR would be handling the BoP package
at its own end, while the BTG (Boiler Turbine Generator) would be sourced from Sensex 1.6 76.4 (13.3)
Dongfang, China. Additionally, the company's own BTG foray is also on the anvil, BGR Energy 4.6 262.1 (44.0)
which could very well prove to be the next milestone in its metamorphosis. *Since its listing on Jan 3, 2008
Key Financials (Consolidated)
Y/E March (Rs cr) FY2009 FY2010E FY2011E FY2012E
Net Sales 1,930 2,743 4,067 5,508
% chg 27.0 42.1 48.3 35.4
Profit
Net Profit 115 172 244 329
% chg 32.2 49.0 41.9 34.9
EBITDA (%) 10.8 11.8 11.4 11.4
EPS (Rs) 16.0 23.9 33.9 45.8
P/E (x) 31.5 21.1 14.9 11.0
P/BV (x) 6.4 5.1 3.9 3.0
RoE (%) 22.2 27.0 29.9 30.9
RoCE (%) 17.0 19.8 21.3 22.7
EV/Sales (x) 1.9 1.4 1.1 0.8 Puneet Bambha
Tel: 022 - 4040 3800 Ext: 347
EV/EBITDA (x) 17.9 12.2 9.2 7.2
E-mail: puneet.bambha@angeltrade.com
Source: Company, Angel Research
Please refer to important disclosures at the end of this report
2. BGR Energy | Initiating Coverage
Investment Arguments
Power Sector - A Structural Growth Driver
High base and peak load deficits - part The Indian Power Sector has been bogged down by several chronic problems for
and parcel of the Indian power sector long, such as lower-than-targeted capacity addition in various five-year plans, a low
Plant Load Factor (PLF), high AT&C losses, woes over the financial viability of State
Electricity Boards (SEBs), a high base and peak load deficits. Notably, the base power
deficit has inched upwards over the years, to around 9.9% in FY2010 (Until February),
with the peak load deficit also hovering at around 12.6% levels.
Exhibit 1: India - A Power Deficit Country...
18.0 16.6
16.0 13.9 13.8
13.0 12.6
14.0 12.4 11.8 12.2 12.3
11.3 11.2 11.7 11.9
12.0
10.0 11.1
(%)
8.0 9.6 9.8 9.9
8.8 8.4
6.0 8.1 7.8 7.5 7.1 7.3
4.0 5.9 6.2
2.0
0.0
2009-10*
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
Base Deficit Peak Deficit
Source: Ministry of Power, Angel Research, * Till Feb 2010
Per capita electricity consumption way This, coupled with the fact that the country has a very low per capita consumption of
below the world average electricity (~704 KWh) compared to the world average (~2,750 KWh), presents a
significant potential for sustainable growth in the demand for electric power in India.
Exhibit 2: ...Coupled with low Per Capita Electricity Consumption
India
China
Brazil
Russia
United Kingdom
Germany
France
Japan
Australia
United States
Canada
0 2000 4000 6000 8000 10000 12000 14000 16000 18000
(KWh)
Source: IEA, Key World Energy Statistics 2008, Angel Research
March 26, 2010 2
3. BGR Energy | Initiating Coverage
The government, after taking cognisance of the fact that the acute power shortage in
India could turn out to be one of the biggest obstacles in our growth story, has been
taking several initiatives to turn around the fortunes of this core sector. The Electricity
Act 2003 and subsequent reforms have been undertaken to accelerate the growth of
power in the country. The scale of expansion planned across the entire value-chain is
unprecedented, opening up a plethora of opportunities for the players in the sector to
participate in the ongoing Power boom.
Generation - Scale bigger than ever…
Planned capacity addition over the next The government has embarked on an ambitious plan of promoting "Power for all by
two Plans higher than the actual capacity 2012", and increasing the per capita consumption of electricity to over 1,000 KWh by
added over the last ten plans FY2012E. To this effect, the government has planned capacity addition of 78,700MW
during the Eleventh Plan period. Assuming around a 60% achievement rate, it would
result in capacity addition of about 45-50GW - implying a phenomenal 123% growth
over the 21,180MW capacity added during the Tenth Plan period. Pertinently, the
scale gets even bigger for the Twelfth Five-Year plan, with a planned capacity addition
of over 100GW.
Exhibit 3: Huge Capacity Addition Plans
100,000
90,000 86,015
80,000 75,200
70,000
59,693
60,000
(MW)
50,000
40,000 34,654
30,000
20,000
20,000 15,627
7,761
10,000 3,900 3,380 4,800
0
Thermal Hydro Nuclear RES
Upto 10th Plan (Actual) 11th Plan (Planned) 12th Plan (Planned)
Source: CEA, Angel Research
…translating into a huge opportunity for the BoP Players
The Balance of Plants (BoP) system includes all major plants and equipment other
than those included in the main plant system (BTG). The major components of the BoP
system include a coal handling plant, ash handling plant, fuel oil handling and
unloading system, water treatment system, circulating water system and fire protection,
and a detection and alarm system etc.
P otential BoP opportunity of Although the overall BoP cost could vary widely depending on the plant configuration
Twelfth
Rs1,35,360cr during the Twelfth Plan and scope of work, typically the average BoP work constitutes about 40% of the project
period alone cost. With the planned thermal capacity at 75,200MW during the Twelfth Plan period
alone, it translates into a potential BoP opportunity of Rs1,35,360cr ( i.e. ~Rs27,072cr
of an average annual opportunity).
March 26, 2010 3
4. BGR Energy | Initiating Coverage
Exhibit 4: Potential BoP Opportunity
11th Plan 12th Plan
Thermal Capacity (MW) 59,693 75,200
Cost / MW (Rs cr) 4.5 4.5
Total Thermal Capex (Rs cr) 268,619 338,400
BoP Share (%) 40 40
Potential BoP Opportunity (Rs cr) 107,447 135,360
Source: CEA, Angel Research
Exhibit 5: Summary requirement of BoPs
BoP Component BoPs
No. of BoPs BoPs
No. of BoPs Tentative
used during required during requirement of
10th Plan 11th Plan BoPs in 12th Plan
BoPs
Coal Handling Plant (CHP) 23 68 70
Ash Handling Plant (AHP) 23 69 70
Demineralized (DM) Water Plant 32 69 70
Cooling Tower 41 145 148
Chimney 36 117 148
Fuel Oil (FO) System 22 71 70
Water Treatment Plant 36 76 70
Total 213 615 646
Source: CEA, Angel Research
Turnkey BoP - BGR's Forte
Different business models co-exist in the industry, with various power generation
companies generally opting for one out of the following three:
1. Few utilities prefer to award the entire EPC order for the complete plant (including
BoP and BTG) to one party only.
2. Several utilities, especially SEBs, opt to break the contract into two parts, i.e. the
BTG package and the turnkey BoP package.
3. NTPC generally breaks the BoP further into several individual packages.
Shortage of BoP vendors is often cited Although there are several small players catering to individual BoP packages, only a
as one of the primary reasons for delays few players (including BGR, Larsen & Toubro, Punj Lloyd, Tata Projects and Reliance
in the commissioning of power plants Infrastructure) have the capabilities to offer complete turnkey BoP services. A shortage
of vendors in the BoP space is often cited as one of the primary reasons for delays in
the commissioning of power plants. We believe that this, coupled with the sheer size of
the opportunity available, provides ample space for several players to co-exist and
grow.
March 26, 2010 4
5. BGR Energy | Initiating Coverage
Exhibit 6: Major BoP Vendors
BoP Component Key Players Vendors
No. of Vendors
Coal Handling Plant (CHP) Techpro, L&T, Elecon, TRF 8
Ash Handling Plant (AHP) Indure, Mecawber Beekay, Mcnally Bharat 9
Demineralized (DM) Water Plant Driplex Water Engg, Ion Exchange, Thermax 5
Cooling Tower Paharpur Cooling Towers, Gammon India, BGR 5
Chimney Gammon India, NBCC, Simplex 4
Fuel Oil (FO) System BHEL, Techno Electric 4
Water Treatment Plant Driplex Water Engg, Ion Exchange 5
CW System Kirloskar, Punj Lloyd, BHEL 3
Switchyards / Switchgear ABB, Areva, Siemens, BHEL 5
Source: CEA, Angel Research
Strong design and engineering team, Besides, BGR has its own set of competitive advantages to differentiate its offering in
~50% in-house manufacturing and an the turnkey BoP space. The company has a lot of in-house expertise, particularly with
established track record etc. a strong in-house design and engineering team (~53% of the total employees), which
gives control over cost, design and scheduling of projects. Besides, over the years, the
company has augmented its product portfolio through a combination of in house
developments and strategic technological tie-ups with several international players.
The company can currently manufacture about 50% of the BoP package requirements
in-house, giving it an edge both in terms of cost and lesser sub-vendor management.
Additionally, its proven track record in managing equipment and turnkey projects
helps the company to further strengthen its position against new entrants.
Exhibit 7: BoP Package - In-House Systems
1. Design & Engineering of Civil, Electrical and Mechanical Systems
2. Civil Works including
a. Chimney
b. Natural and Induced Draft Cooling Tower
3. Substation and Switchyard
4. Plant Piping System
5. Air Fin Cooler
6. Air Cooled Condenser
7. Deaerator
8. Desalination Plant including RO System
9. Condensate Polishing Plant
10. Effluent Treatment Plant
11. Demineralization Plant
12. Ash Handling System
13. Coal Handling System
14. Gas Conditioning & Metering Skid
15. Fabrication of Columns & Structures
16. Welded Finned Tubes
17. Heat Recovery Steam Generator
18. On-line Condenser Tube Cleaning System
19. Debris Filter
20. Rubber Cleaning Balls for Condenser
Source: Company, Angel Research
March 26, 2010 5
6. BGR Energy | Initiating Coverage
Exhibit 8: Technological Tie-ups
Year Partner Product Remark
1985 GEA Energietechnik, Germany Tube Cleaning & Debris Filter Partner divested in 1993
1994 GEA Btt, France Air fin coolers Agreement expired in 2003
1994 GEA Spirogills, UK Welded finned tubes Agreement expired in 2003
1996 GEA Energietechnik, Germany Dry and wet cooling systems Tie-up with GEA Cooling Tower Tech
2000 Crane Environmental Inc., USA Deaerators, Reverese Osmosis & Agreement expired in 2006
Demineralisation plant
2003 American Engineering Services, USA Waste Water treatment and Reclamation Technical know-how
2007 INIMA and Aqualia, Spain Desalination plant ont EPC/BOOT basis Strategic alliance
2008 Termomeccanica TME, Italy Condensate polishing plants Technical collaboration and licensing agreement
2010 Nooter/Eriksen Inc., USA Heat Recovery Steam Generator (HRSG) License and Technology transfer agreement
Source: Company, Angel Research
The company has already completed four turnkey BoP projects, including a large
500MW Vijayawada (in Andhra Pradesh) project. Besides, another five large turnkey
BoP projects (totaling Rs5,751cr) are currently under execution. Among the recent
major orders won by the company in the turnkey BoP space are: the 2*500MW
Chandrapur, Maharashtra order, worth Rs1,632cr, and the 2*500MW Marwa,
Chhattisgarh order worth Rs1,633cr, both of which were won in 2QFY2010.
Exhibit 9: BoP Project Portfolio
Project Specification Fuel Contract Status
(MW) Value (Rs cr)
CSPGCL, Marwa TPS Chhattisgarh 2 X 500 Coal 1,633 Under Execution
MAHAGENCO, Chandrapur TPS, Maharashtra 2 X 500 Coal 1,632 Under Execution
APGENCO, Kothagudam TPS, Khammam, AP 1 X 500 Coal 793 Under Execution
MAHAGENCO, Kaperkheda TPS, Maharashtra 1 X 500 Coal 998 Under Execution
APGENCO, Kakatiya TPS, Khammam, AP 1 X 500 Coal 695 Under Execution
Grasim Industries-CPP Chittorgarh, Rajasthan
, 23 Coal 44.4 Completed
TNEB-CCPP Valathur (Phase I), Tamil Nadu 95 Gas 59.4 Completed
RRVUNL-CCPP Dholpur, Rajasthan
, 330 Gas 210 Completed
APGENCO-Vijayawada TPS, Andhra Pradesh 1 X 500 Coal 579 Completed
Source: Company, Angel Research
EPC Contracts - Transforming to the next level
Has transformed itself over the years BGR has transformed itself over the years from being a mere manufacturer of a few
from being a mere manufacturer of a BoP components to executing Turnkey BoP projects, and now gradually executing
few BoP components to executing full-fledged EPC contracts. FY2009 proved to be a landmark year for the company,
Turnkey BoP projects, and now gradually when it won two major orders for the EPC of power plants. One of the contracts is for
executing full-fledged EPC contracts the 1*600MW EPC of a power plant at Mettur, Tamil Nadu, worth Rs3,100cr, and the
second for the 2*600MW EPC of a power plant at Jhalawar, Rajasthan, worth Rs4,900cr.
For both these orders, BGR would be handling the BoP package at its own level, while
the BTG would be sourced from Dongfang, China. Both the projects are progressing
well, with the company already having booked ~19% of the revenues from these EPC
projects. In fact, the company has recently completed the lifting and erection of the
boiler drum for the Mettur project as well.
March 26, 2010 6
7. BGR Energy | Initiating Coverage
Exhibit 10: EPC Project Portfolio
Project Specification Fuel Contract Status
(MW) Value (Rs cr)
RRUVNL, Kalisindh TPS, Jhalawar, Rajasthan 2 X 600 Coal 4,900 Under Execution
TNEB, Mettur Thermal Power plant 1 X 600 Coal 3,100 Under Execution
Aban Power- CCPP Karuppur, Tamil Nadu
, 120 Gas 270 Completed
TNEB-CCPP Valathur (Phase II), Tamil Nadu 92.2 Gas 355 Completed
Source: Company, Angel Research
BTG manufacturing on the anvil
Further integration through a planned The company is further scaling-up its capabilities, with a BTG manufacturing foray on
foray into BTG manufacturing the anvil. To this effect, in April 2009, BGR entered into a 20-year license agreement
with Foster Wheeler to manufacture both sub-critical and super-critical boilers
(100 - 1,000MW) for Indian market. BGR plans to set up 4,000-5,000MW capacity at
a projected capex of around Rs500cr for this foray. Notably, this is only a licensing
agreement and not a JV, so it does not involve an investment component from Foster
Wheeler. However, BGR is trying to negotiate with the partner to convert the same into
a JV.
Additionally, BGR is also in talks with several global players for a joint venture into the
Turbine Generator (TG) space as well. We believe that the successful scaling-up of the
company into the BTG space would augur well in the long run. However, we have not
factored for the same into our estimates, and will await further clarity.
Mitigating Concerns
All the necessary approvals for both the EPC projects are in place, with working
capital needs having been tied-up and supplies of equipment having already started.
Besides, BGR has set up a team in China to co-ordinate the quality aspect of the
equipment and to manage the timely schedule of projects.
Although the overall responsibility of the EPC contract lies with BGR, the company
has covered itself with a back-to-back guarantee from Dongfang. The court of law for
any dispute is also Singapore, and not China.
Scaling up its management bandwidth, BGR has been scaling up its management bandwidth, with several senior
ex-
with several senior ex-employees from ex-employees from reputed organisations joining the company. Notably, Mr. T.
reputed organisations joining the Sankaralingam, the former Chairman and Managing Director of NTPC, joined as a
company Managing Director of BGR from September, 2009. He has over 34 years of experience
in different capacities at NTPC, along with his experience at BHEL and the Tamil Nadu
Electricity Board (TNEB).
To ensure smooth payment from SEBs, the company does not participate in all
state utilities tenders, and is generally active only with a few state utilities, including
Andhra Pradesh, Tamil Nadu, Rajasthan and Maharashtra.
March 26, 2010 7
8. BGR Energy | Initiating Coverage
Healthy Order Book provides good revenue visibility
BGR has a healthy order book of Rs11,609cr (4.2x FY2010E sales) which provides
good revenue visibility to the company. Power constitutes ~95% of the order book,
thanks to the two large-sized EPC projects (Mettur and Jhalawar), while the capital
goods segment contributes ~5% of the order backlog. International contracts comprise
a mere 4% of the order book, majorly due to the contracts being executed by the oil
and gas equipment division in Iraq.
Exhibit 11: Order Backlog (as on Dec 31, 2009) (Rs cr)
Power constitutes ~95% of the order Division Domestic International Total
book, while the capital goods segment
Power Projects 10,974 0 10,974
contributes ~5%
Electrical Projects 33 0 33
Oil & Gas Equipment 4 452 456
Air Fin cooler 107 4 111
Environmental Engineering 34 0 34
Total 11,153 456 11,609
Source: Company, Angel Research
The management expects tender opportunities worth Rs20,000cr to be in the market
over the coming year. A few of the projects in the immediate pipeline include a
2*660MW EPC order from the Rajasthan Rajya Vidyut Utpadan Nigam Ltd (RRVUNL)
at Chhabra, and another 2*660MW EPC order from the same board at Suratgarh.
However, our discussion with the management suggests that the Cuddalore and
Konaseema gas power project orders continue to be in limbo, as of now.
Exhibit 12: Key Orders under Execution (Excluding Power Projects)
Division Project
Client / Project Specification Contract Work
Nature of Work
Value (Rs cr)
Oil & Gas Equipment SCOP Iraq
, Gas Gathering station 386 Design, Engineering and Supply
Oil & Gas Equipment SCOP Iraq
, Oil Products Storage Tank 45 Design, Engineering, Manufacture & Supply
Oil & Gas Equipment SCOP Iraq
, Oil Storage Tank 98 Design, Engineering and Supply
Oil & Gas Equipment SCOP Iraq
, Oil Storage Tank 41 Engineering and Supply
Electrical Projects VA Tech Hydro India Hydro Electric Project 35 Design, Manufacture, Supply , Erection
Electrical Projects NPCIL, Kalpakkam Power Distribution System 27 Design, Manufacture, Supply , Erection
Electrical Projects NPCIL, Kalpakkam Power Distribution System 26 Design, Manufacture, Supply , Erection
Electrical Projects Karnataka Power Substation and Associated 21 Supply & Erection on partial Turnkey Basis
Transmission Corporation Transmission Lines
Source: Company, Angel Research
March 26, 2010 8
9. BGR Energy | Initiating Coverage
Financial Overview
Strong Top-line growth
We estimate the company to post a During FY2005-09, BGR posted a strong top-line CAGR of 72.0%, primarily driven by
CAGR
strong revenue CAGR of 41.8% over the surge in the order Book of the company, on the back of its scaling-up into turnkey
FY2009-12E BoP and EPC projects. Currently, BGR has a healthy order book of Rs11,609cr, with
an average execution period of 36 months, providing the company with a strong
revenue visibility over the next couple of years. Going ahead, we estimate the company
to post a strong revenue CAGR of 41.8% over FY2009-12E.
Exhibit 13: Strong Revenue Growth
6,000 200
172.3
180
5,000
160
140
4,000
(Rs cr)
120
93.3
(%)
3,000 100
80
2,000 48.3
42.1 60
35.4
27.0 40
1,000
20
0 0
FY2007* FY2008 FY2009 FY2010E FY2011E FY2012E
Net Sales (LHS) Growth (RHS)
Source: Company, Angel Research, Note: *18 months period
Power Projects segment to be a key
Projects The Power Projects segment would continue to be a key revenue driver, contributing
driver,
revenue driver, contributing around around 93-94% of the total revenues (as against ~85% in FY2009). We estimate
93-94% of the total revenues power projects to post a revenue CAGR of 46.3% over FY2009-12E, primarily led by
the significant revenue booking on account of four major projects (Mettur and Jhalawar
EPC, along with Chandrapur and Marwa BoP).
Exhibit 14: Power Projects - Key Revenue Driver
6,000 300
5,000 244.1 250
4,000 200
(Rs cr)
(%)
3,000 150
135.6
2,000 77.7 100
52.1 50.8
1,000 50
36.4
0 0
FY2007* FY2008 FY2009 FY2010E FY2011E FY2012E
Net Sales (LHS) Growth (RHS)
Source: Company, Angel Research, Note: *18 months period
March 26, 2010 9
10. BGR Energy | Initiating Coverage
Operating Margins to improve
BGR witnessed a compression in its operating margins in the last few years, owing to
higher commodity prices (historically most of the company's contracts have been won
on a fixed price basis), coupled with the ramp-up in the projects' business of the
company.
Operating margins to improve on However, going ahead, we expect operating margins to improve from 10.8% in FY2009
account of input price benefits in the to 11.8% in FY2010E, on account of input price benefits, especially in the Mettur and
Mettur and Jhalawar EPC projects Jhalawar EPC projects. Notably, both these large-sized orders (fixed price contracts)
were won by the company when commodity prices were at a high, and with the
subsequent cooling off of commodities, the company tends to gain, having already
locked ~70% of the raw material supply. The net profit margins are expected to stabilise
at around 6.0%, consequently leading to a net profit CAGR of 41.8% during
FY2009-12E.
Exhibit 15: Profitability Trend
700 14
11.8 11.4 11.4
600 11.2 12
10.8
10.2
500 10
(Rs cr)
400 8
6.3
(%)
5.7 6.0 6.0 6.0
300 5.3 6
200 4
100 2
0 0
FY2007* FY2008 FY2009 FY2010E FY2011E FY2012E
EBITDA (LHS) Net Profit (LHS) EBITDA% (RHS) PAT% (RHS)
Source: Company, Angel Research, Note: *18 months period
Capex Plans
The company has a very high fixed asset turnover ratio, hovering ~20x (due to the
business model, which focuses on project management); hence, it does not require a
large amount of capex. The company plans to incur ~Rs50cr capex for the current
financial year, which would majorly be used towards the acquisition of construction
equipment. For FY2011E, the management expects to incur capex of around Rs50cr
(normal capex), along with Rs30-40cr towards investment in heat recovery steam
generators, taking the total capex to Rs80-100cr. Notably, we have not factored the
capex for the planned BTG foray into our estimates.
The major funding requirement for the company, however, stems from the working
capital requirement, as the industry it operates in is highly working capital intensive,
with ~33-34% of the sales being tied-up in the net working capital requirement.
Going ahead, we expect the debt/equity ratio to hover at ~1.5x.
March 26, 2010 10
11. BGR Energy | Initiating Coverage
Exhibit 16: Debt / Equity Ratio
3.5
3.0
3.0
2.5
2.0
1.5
1.4 1.4
1.5 1.3
1.1
1.0
0.5
0.0
FY2007* FY2008 FY2009 FY2010E FY2011E FY2012E
Source: Company, Angel Research, Note: *18 months period
Healthy Return Ratios
The company raised ~Rs337cr through a combination of private placement and an
initial public offering during 2007-08, leading to the depressed return ratios in the
past few years. However, going ahead, we expect the return ratios to bounce back to
healthy levels, primarily owing to the higher asset turnover ratio, on the back of strong
sales growth for the company.
Exhibit 17: Return Ratios
70.0 63.1
60.0
50.0
40.0
31.4
(%)
29.9 30.9
27.0
30.0 34.0 22.2
20.0
22.3 21.3 22.7
19.8
10.0 17.0
0.0
FY2007* FY2008 FY2009 FY2010E FY2011E FY2012E
ROE ROCE
Source: Company, Angel Research, Note: *18 months period
Exhibit 18: Du Pont Analysis
RoE to bounce back to ~29-30% levels FY07* FY08 FY09 FY10E FY11E FY12E
Net Profit / Sales (%) 5.3 5.7 6.0 6.3 6.0 6.0
Sales / Avg. Assets 3.4 2.3 1.6 1.7 1.9 2.1
Avg. Assets / Avg. Equity 3.6 2.4 2.3 2.5 2.6 2.5
RoE (%) 63.1 31.4 22.2 27.0 29.9 30.9
Source: Company, Angel Research, Note: *18 months period
March 26, 2010 11
12. BGR Energy | Initiating Coverage
Key Downside Risks
Execution Delays
The biggest challenge for BGR is the timely and effective management of projects in
hand. The scale of projects being undertaken by company is bigger than ever, with the
two EPC contracts (Mettur and Jhalawar) alone contributing a major chunk of the
order book. Although the company has reasonably managed the execution so far,
any major hiccups or delays in the execution timeline could adversely impact our
estimates.
High Working Capital requirement
BGR operates in a highly working capital intensive industry, involving long payment
cycles and retention money by clients. Hence, a sharp spike in the interest rates,
resulting in a higher cost of borrowing for the company, could adversely impact the
overall profitability and would pose a downside risk to our estimates.
Other risks
Besides, the company is exposed to other broader risks, including a sharp spike in
raw material prices, manpower constraints and increasing competition.
March 26, 2010 12
13. BGR Energy | Initiating Coverage
Outlook and Valuation
The government's thrust to the core power sector of the economy has led to power
generation targets being bigger than ever, translating into a huge opportunity for BoP
players. We believe that BGR Energy, being one of the very few established players to
offer complete turnkey BoP services, would tend to be a key beneficiary of the same.
Besides, the company's entry into executing full-fledged EPC contracts (bagging the
Mettur and Jhalawar projects, with a combined worth of Rs8,000cr), has provided a
fillip to its growth plans. Additionally, its successful foray into the BTG space could very
well prove to be the next milestone in the metamorphosis of the company.
Exhibit 19: One-year Forward Rolling P/E Band
1,000
900
25x
800
700 20x
Share Price (Rs)
600
500 15x
400
10x
300
200
5x
100
0
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Apr-08
Apr-09
Oct-08
Oct-09
Source: C-line, Angel Research
BGR has a healthy order book at Rs11,609cr (4.2x FY2010E sales), which provides
good revenue visibility to the company. During FY2009-12E, we expect the company
to register a top-line and bottom-line CAGR of 41.8% each. Since its listing in January
2008, the company has traded in a wide forward P/E-band range, with its average
P/E hovering at ~14x (excluding the initial, post-issue exuberance). At the current
price of Rs505, the stock is quoting at 14.9x and at 11.0x its FY2011E and FY2012E
EPS, respectively, which we believe is attractive. We Initiate Coverage on the stock,
Target Price
with a Buy recommendation and a Target Price of Rs641.
Exhibit 20: BGR Forward Rolling P/E v/s Others
70
60
50
40
30
20
10
0
Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10
BGR P/E Sensex P/E BHEL P/E
Source: C-line, Angel Research
March 26, 2010 13
15. BGR Energy | Initiating Coverage
Company Background
BGR Energy Systems, originally incorporated in 1985 as a joint venture between GEA
Energietechnik GmbH, Germany and the promoter, Mr. B.G. Raghupathy, is one of
the leading players in the Balance of Plant (BoP) and Engineering, Procurement and
Construction (EPC) spaces of the Power sector. The company has taken several big
leaps over the year - from being a mere manufacturer of a few BoP components, to
executing Turnkey BoP projects and now gradually executing full-fledged EPC contracts.
Exhibit 23: Key Milestones
Received first 500 MW
BOP contract from
Received APGENCO for
power trading Vijayawada TPP
license
Power
Projects
Division
established
2009
Technical
2008 collaboration
GEA agreement with
TME, Italy
Energietechnik
First BOP 2007 for CPP
divested its stake
Technical order for a
to promoters
collaboration 95 MW CCPP 2006 Company
agreement with Listed
GEA Btt, France
2003
2001 Received 1x600 MW
EPC contract from
TNEB for Mettur
2000 Won a contract
TPP
for large gas
Incorporated as processing
a JV with GEA
1998 complex from Received 2x600 MW
Energietechnik SCOP Iraq
, EPC contract from
GmbH, Germany 1994 Secured first EPC RRVUNL for Kalisindh
contract for 120 MW TPP
1993 power plant
in Tamil Nadu
Collaboration
1987 agreement with
Crane Environment
Inc, USA
Source: Company, Angel Research
Business Segments
Offers its solutions through six primary BGR offers its solution through six primary business divisions; Power Projects, Captive
Power
business segments, with Power projects Power Projects, Oil and Gas Equipment, Air Fin Coolers, Electrical projects, and
being the major contributor Environmental Engineering. The Power projects division continues to be the major
revenue driver for the company, accounting for around 86% of its FY2009 revenues,
with the balance being contributed by the remaining segments. Going forward as
well, the Power Segment is expected to continue its dominance, with around 93-94%
share in the total revenue pie of the company.
Exhibit 24: FY2009 Segmental Revenue Share (%)
Source: Company, Angel Research
March 26, 2010 15
16. BGR Energy | Initiating Coverage
Power Projects
The Power Projects division provides turnkey EPC and BOP services, for coal-based
thermal power plants and gas-based combined cycle power plants (typically over
100MW).
Captive Power Projects
The captive Power division has been carved out of the power project division to provide
turnkey EPC and BOP services for power plants typically under 150MW. It caters to the
captive power need of various industries and can build coal based power plants,
combined cycle power plants, biomass power plants etc.
Oil and Gas Equipment
The Oil and Gas Equipment division designs and manufactures gas conditioning and
metering skids, storage tanks, pipeline pig launching and 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
The Air Fin Coolers division supplies air-cooled heat exchangers for oil and gas
processes, and power sector industries. The company has turnkey capabilities in the
design, manufacture, supply, erection and commissioning of air fin coolers / tube
bundles / finned tubes.
Electrical Projects
The Electrical Projects business designs and supplies 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.
Environmental Engineering
The Environmental Engineering division manufactures and provides deaerators, effluent
treatment and recycling plants, desalination plants, water treatment plants, which
have applications in power and in other industrial purposes.
March 26, 2010 16
17. BGR Energy | Initiating Coverage
Profit & Loss Statement (Consolidated) Rs crore
Y/E March FY2007* FY2008 FY2009 FY2010E FY2011E FY2012E
Net Sales 786.8 1,520.5 1,930.3 2,742.8 4,066.5 5,507.6
Other operating income - - - - - -
Total operating income 786.8 1,520.5 1,930.3 2,742.8 4,066.5 5,507.6
% chg 172.3 93.3 27.0 42.1 48.3 35.4
Total Expenditure 698.4 1,365.2 1,721.4 2,420.4 3,601.7 4,877.5
Net Raw Materials 628.3 1,279.2 1,583.8 2,173.7 3,232.9 4,392.3
Other Mfg costs 37.3 41.0 63.3 137.0 210.2 275.9
Personnel 32.8 45.0 74.4 109.7 158.6 209.3
Other - - - - - -
EBITDA
EBITDA 88.4 155.3 208.9 322.4 464.8 630.1
% chg 227.9 75.7 34.5 54.4 44.2 35.6
(% of Net Sales) 11.2 10.2 10.8 11.8 11.4 11.4
Depreciation & Amortisation 8.9 5.5 7.5 11.3 16.3 22.9
EBIT 79.5 149.8 201.4 311.1 448.6 607.2
% chg 228.6 88.3 34.4 54.5 44.2 35.4
(% of Net Sales) 10.1 9.9 10.4 11.3 11.0 11.0
Interest & other Charges 18.0 26.8 57.9 79.5 117.9 149.6
Other Income 0.3 6.6 31.7 30.6 38.5 40.4
(% of PBT) 0.5 5.1 18.1 11.7 10.4 8.1
Others - - - - - -
Recurring PBT 61.9 129.6 175.2 262.3 369.2 498.0
% chg 231.0 109.4 35.2 49.7 40.8 34.9
Extraordinary Expense/(Inc.) - - - - - -
PBT (reported) 61.9 129.6 175.2 262.3 369.2 498.0
Tax 21.1 41.1 59.6 89.2 123.7 166.8
(% of PBT) 34.0 31.7 34.0 34.0 33.5 33.5
PAT (reported) 40.8 88.5 115.6 173.1 245.5 331.2
Add: Share of earnings of assoc. - - - - - -
Less: Minority interest (MI) (0.6) 1.1 0.1 1.1 1.4 1.8
Prior period items - - - - - -
PAT after MI (reported) 41.4 87.3 115.4 172.0 244.1 329.4
PA
Adj. PAT 41.4 87.3 115.4 172.0 244.1 329.4
% chg 212.5 110.8 32.2 49.0 41.9 34.9
(% of Net Sales) 5.3 5.7 6.0 6.3 6.0 6.0
Basic EPS (Rs) 38.4 12.1 16.0 23.9 33.9 45.8
Fully Diluted EPS (Rs) 5.8 12.1 16.0 23.9 33.9 45.8
% chg 212.5 110.8 32.2 49.0 41.9 34.9
Note: *18 months period
March 26, 2010 17
21. BGR Energy
Disclaimer
This document is not for public distribution and has been furnished to you solely for your information and must not be reproduced or
redistributed to any other person. Persons into whose possession this document may come are required to observe these restrictions.
Opinion expressed is our current opinion as of the date appearing on this material only. While we endeavor to update on a reasonable
basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so.
Prospective investors and others are cautioned that any forward-looking statements are not predictions and may be subject to change
without notice. Our proprietary trading and investment businesses may make investment decisions that are inconsistent with the
recommendations expressed herein.
The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources
believed to be true and are for general guidance only. While every effort is made to ensure the accuracy and completeness of information
contained, the company takes no guarantee and assumes no liability for any errors or omissions of the information. No one can use the
information as the basis for any claim, demand or cause of action.
Recipients of this material should rely on their own investigations and take their own professional advice. Each recipient of this document
should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies
referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and
risks of such an investment. Price and value of the investments referred to in this material may go up or down. Past performance is not a
guide for future performance. Certain transactions - futures, options and other derivatives as well as non-investment grade securities -
involve substantial risks and are not suitable for all investors. Reports based on technical analysis centers on studying charts of a stock's
price movement and trading volume, as opposed to focusing on a company's fundamentals and as such, may not match with a report on
a company's fundamentals.
We do not undertake to advise you as to any change of our views expressed in this document. While we would endeavor to update the
information herein on a reasonable basis, Angel Securities, its subsidiaries and associated companies, their directors and employees are
under no obligation to update or keep the information current. Also there may be regulatory, compliance, or other reasons that may
prevent Angel Securities and affiliates from doing so. Prospective investors and others are cautioned that any forward-looking statements
are not predictions and may be subject to change without notice. Angel Securities Limited and affiliates, including the analyst who has
issued this report, may, on the date of this report, and from time to time, have long or short positions in, and buy or sell the securities of the
companies mentioned herein or engage in any other transaction involving such securities and earn brokerage or compensation or act as
advisor or have other potential conflict of interest with respect to company/ies mentioned herein or inconsistent with any recommendation
and related information and opinions.
Angel Securities Limited and affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other
advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past.
Note: Please refer important `Stock Holding Disclosure' report on Angel web-site (Research Section).
Disclosure of Interest Statement BGR Energy
1. Analyst ownership of the stock No
2. Angel and its Group companies ownership of the stock No
3. Angel and its Group companies' Directors ownership of the stock No
4. Broking relationship with company covered No
Note: We have not considered any Exposure below Rs 5 lakh for Angel, its Group companies and Directors.
Ratings (Returns) : Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%)
Reduce (-5% to -15%) Sell (< -15%)
