BGR Energy Higher execution and margins lead to a beat at operating level PhillipCapital (India) Pvt. Ltd. CAPITAL GOODS: Quarterly Update 3 June 2013

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1 BGR Energy Higher execution and margins lead to a beat at operating level PhillipCapital (India) Pvt. Ltd. CAPITAL GOODS: Quarterly Update 3 June 2013 BGR Energy Q413 results beat our and consensus estimates at the operating level helped by strong execution and higher margins. The company has guided for a 20 25% growth in revenues in FY14 while margins are expected to be at 11 12%. We cut our estimates to account for higher interest costs (on higher working capital debt) in FY14 but upgrade our rating to on rolling forward our target multiple to FY15e to get our target price of Rs 180. Q413 results highlight Sales for Q413 were at Rs 10.6bn ( 7% YoY) which was above our estimate of Rs 10.3bn. Construction and EPC contracts contributed Rs 9.9bn ( 6% YoY) while capital goods contributed Rs 0.8bn ( 9% YoY). Major orders executed during the quarter were TRN Energy worth Rs 3bn, Rs 2.8bn of Krishnapatnam, Rs 2.3bn of Marwa and Chandrapur and Rs 1.3bn of Mettur and Jalawar. EBITDA at Rs 1.4bn (2% YoY) with margins of 13% (+110bs YoY). Margin expansion was driven by a drop in raw material costs and better revenue mix higher contribution from BOP projects. PAT at INR0.54bn ( 20% YoY) was hurt by high interest costs which went up by 22% YoY to Rs0.5bn and tax rate (35.1% in Q413 against 29.5% in Q412). EPS stood at Rs7.8. Order book stood at Rs110bn (3.5x book to bill). BGR Energy is L1 in the OPGCL BOP order worth Rs15bn and this is expected to be booked in Q114. The biggest orders in the order book comprise of Rs 72bn of NTPC bulk order, Rs 13bn of TRN and Krishnapatnam, Rs 6.7bn of Marwa and Chandrapur and Rs 1.2bn of Jalawar and Mettur. Receivables at Rs34.6bn. Debtor days at 406 days remain stretched and are up from 396 days in Q413 (455 days in Q313). Net working capital at Rs38bn Gross debt at Rs22bn (D:E of 1.8x) and management expects debt to sustain at these levels. This would be done via faster collection of debtors and retention money over the next few quarters. FY13 sales stood at Rs 31bn ( 10% YoY). EBITDA at Rs 4.3bn was down 9% YoY with a margin of 13.7% (+20bps YoY). PAT was hurt by higher interest cost and stood at Rs 1.6bn. EPS at Rs 22. Given the very weak ordering environment in the power sector, we see limited opportunities for order wins for BGR Energy. The management has stated that it would be targeting more of BOP orders as there were very few BTG opportunities in the market. Valuations and Estimates: We lower our FY14 estimates by 11% to account for higher interest costs amidst a weak ordering environment in the power sector and introduce our FY15 estimates. Revival in orders from the power sector is key to a rerating in the stock. We upgrade our rating to on BGR Energy on rolling forward our target multiple to FY15E. We assign a target PE of 8x FY15EPS (at a 20% discount to BHEL) to get a target price of Rs180. BGRL IN CMP RS 170 TARGET RS 180 (+6%) Company Data O/S SHARES (MN) : 72 MARKET CAP (RSBN) : 14 MARKET CAP (USDBN) : WK HI/LO (RS) : 320 / 176 LIQUIDITY 3M (USDMN) : 0.6 FACE VALUE (RS) : 10 Share Holding Pattern, % PROMOTERS : 81.1 FII / NRI : 4.3 FI / MF : 2.1 NON PROMOTER CORP. HOLDINGS : 2.1 PUBLIC & OTHERS : 10.4 Price Performance, % 1mth 3mth 1yr ABS REL TO BSE Price Vs. Sensex (Rebased values) Jul 10 Apr 11 Jan 12 Oct 12 BGR Energy BSE Sensex Source: PhillipCapital India Research Other Key Ratios Rs mn FY12 FY13E FY14E Net Sales 31,133 35,204 40,640 EBIDTA 4,268 4,281 4,820 Net Profit 1,621 1,329 1,622 EPS, Rs PER, x EV/EBIDTA, x P/BV, x ROE, % Total debt/equity (%) Source: PhillipCapital India Research Est. Ankur Sharma ( ) asharma@phillipcapital.in Jishar Thoombath ( ) jthoombath@phillipcapital.in

2 BGR Energy quarterly and Fiscal results INRbn Rs mn Q413 Q412 % CHANGE FY13 Net Sales 10,629 11, % 31,051 Raw Material 8,319 9, % 23,499 % of sales 78.3% 82.3% 4.1% 75.7% Employee cost % % of sales 5.1% 4.1% 0.9% 6.3% Other Expenses % % of sales 3.7% 1.6% 2.1% 4.1% EBITDA 1,382 1, % 4,313 EBITDA margins (%) 13.0% 11.9% 1.1% 13.9% Depreciation % 186 EBIT 1,325 1, % 4,127 EBIT margins (%) 12.5% 11.5% 0.9% 13.3% Interest % 1,747 Other Income % 75 PBT % 2,455 Tax % 818 PAT % 1,637 PAT Margin (%) 5.1% 5.9% 0.9% 5.3% EPS % 23 Source: Company, PhillipCapital India Research Sales and EBIT breakup Rs mn Q413 Q412 % CHANGE FY13 Sales Capital Goods % 2,491 Construction and EPC contracts 9,845 10,512 6% 28,732 EBIT Capital Goods % 175 Construction and EPC contracts 1,265 1,206 5% 3,973 EBIT margins (%) Capital Goods 8% 12% 4% 7% Construction and EPC contracts 13% 11% 1% 14% Source: Company, PhillipCapital India Research Change in estimates Y/E Mar, Rs mn NEW estimates Old estimates % change FY13 FY14E FY15E FY14E FY14E Sales 31,133 35,204 40,640 35,100 0% EBITDA 4,268 4,281 4,820 4,070 5% Margins (%) 13.7% 12.2% 11.9% 11.7% 0% PAT 1,621 1,329 1,622 1,495 11% EPS % Source: PhillipCapital India Research Estimates 2 of 6

3 Financials Income Statement Y/E Mar, Rs mn FY12 FY13 FY14E FY15E Net sales 34,505 31,133 35,204 40,640 Growth, % Total income 34,505 31,133 35,204 40,640 Raw material expenses 26,846 23,431 27,040 31,937 Employee expenses 1,759 2,120 2,397 2,397 Other Operating expenses 1,231 1,314 1,486 1,486 EBITDA (Core) 4,669 4,268 4,281 4,820 Growth, % (13.4) (8.6) Margin, % Depreciation EBIT 4,496 4,066 4,000 4,460 Growth, % (13.8) (9.6) (1.6) 11.5 Margin, % Interest paid 1,355 1,749 2,040 1,904 Other Non Operating Income Pre tax profit 3,285 2,436 2,103 2,681 Tax provided 1, Profit after tax 2,244 1,613 1,393 1,775 Others (Minorities, Associates) Net Profit 2,244 1,621 1,329 1,622 Growth, % (30.5) (27.8) (18.0) 22.1 Net Profit (adjusted) 2,244 1,621 1,329 1,622 Unadj. shares (m) Balance Sheet Y/E Mar, Rs mn FY12 FY13 FY14E FY15E Cash & bank 9,407 9,832 8,525 4,030 Debtors 37,393 28,606 30,418 30,662 Inventory Loans & advances 7,967 7,180 8,119 9,373 Other current assets ,953 15,778 18,214 Total current assets 55,313 59,998 63,323 62,837 Investments Gross fixed assets 3,790 5,615 7,440 9,264 Less: Depreciation ,175 1,535 Add: Capital WIP 1,030 1,030 5,602 12,459 Net fixed assets 4,129 5,752 11,867 20,189 Total assets 59,454 65,755 75,195 83,031 Current liabilities 23,223 23,452 26,519 30,614 Provisions 2,701 2,926 2,926 2,926 Total current liabilities 25,924 26,378 29,445 33,540 Non current liabilities 21,442 26,239 31,439 33,439 Total liabilities 47,366 52,617 60,884 66,979 Paid up capital Reserves & surplus 10,453 11,512 12,249 13,280 Shareholders equity 12,088 13,138 14,311 16,052 Total equity & liabilities 59,454 65,755 75,195 83,031 Cash Flow Y/E Mar, Rs mn FY12 FY13 FY14E FY15E Pre tax profit 3,285 2,436 2,103 2,680 Depreciation Chg in working capital 6,855 3,807 1, Total tax paid Cash flow from operating activities 3,541 1, ,222 Capital expenditure 1,464 1,825 6,396 8,682 Cash flow from investing activities 1,464 1,819 6,396 8,682 Free cash flow 5,005 3,581 6,287 6,460 Debt raised/(repaid) 4,199 4,568 5,200 2,000 Dividend (incl. tax) Other financing activities Cash flow from financing activities 4,004 4,006 4,980 1,966 Net chg in cash 1, ,307 4,494 Valuation Ratios & Per Share Data FY12 FY13 FY14E FY15E Per Share data EPS (INR) Growth, % (30.5) (27.8) (18.0) 22.1 Book NAV/share (INR) FDEPS (INR) CEPS (INR) CFPS (INR) (51.1) (26.1) (0.5) 29.1 DPS (INR) Return ratios Return on assets (%) Return on equity (%) Return on capital employed (%) Turnover ratios Asset turnover (x) Sales/Total assets (x) Sales/Net FA (x) Working capital/sales (x) Fixed capital/sales (x) Working capital days Liquidity ratios Current ratio (x) Quick ratio (x) Interest cover (x) Dividend cover (x) Total debt/equity (%) Net debt/equity (%) Valuation PER (x) Price/Book (x) EV/Net sales (x) EV/EBITDA (x) EV/EBIT (x) Source: Company, PhillipCapital India Research Estimates 3 of 6

4 Recommendation History Recommendation Target, Rs CMP, Rs Date rd June, 2013 Sell nd Nov, th August st June, March, February November, July, April March 2011 Recommendation Chart Sell Jan 11 Apr 11 Jul 11 Oct 11 Jan 12 Apr 12 Jul 12 Oct 12 Jan 13 Source: PhillipCapital India Research 4 of 6

5 Management Vineet Bhatnagar (Managing Director) (91 22) Sajid Khalid (Head Institutional Equities) (91 22) Jignesh Shah (Head Equity Derivatives) (91 22) Research Automobiles, IT Services Deepak Jain (9122) Neha Garg (9122) Varun Vijayan (9122) Banking, NBFCs Manish Agarwalla (9122) Sachit Motwani, FRM (9122) Consumer, Media, Telecom Naveen Kulkarni, CFA, FRM (9122) Ennette Fernandes (9122) Vivekanand Subbaraman (9122) Cement Vaibhav Agarwal (9122) Sales & Distribution Kinshuk Tiwari (9122) Pawan Kakumanu (9122) Shubhangi Agrawal (9122) Dipesh Sohani (9122) Economics Anjali Verma (9122) Engineering, Capital Goods Ankur Sharma (9122) Jishar Thoombath (9122) Metals Dhawal Doshi (9122) Dharmesh Shah (9122) Infrastructure Vibhor Singhal (9122) Raheel Arathodi (9122) Oil&Gas, Fertiliser Gauri Anand (9122) Saurabh Rathi (9122) Sunil Kamath (Sales Trader) (9122) Rajesh Ashar (Sales Trader) (9122) Retail, Real Estate Abhishek Ranganathan, CFA (9122) Neha Garg (9122) Mid caps Kapil Bagaria (9122) Raheel Arathodi (9122) Technicals & Quant Neppolian Pillai (9122) Shikha Khurana (9122) Sr. Manager Equities Support Rosie Ferns (9122) Mayur Shah (Execution) (9122) Gurudatt Uchil (Execution) (9122) Contact Information (Regional Member Companies) SINGAPORE Phillip Securities Pte Ltd 250 North Bridge Road, #06 00 Raffles City Tower, Singapore Tel : (65) Fax: (65) JAPAN Phillip Securities Japan, Ltd 4 2 Nihonbashi Kabutocho, Chuo ku Tokyo Tel: (81) Fax: (81) THAILAND Phillip Securities (Thailand) Public Co. Ltd. 15th Floor, Vorawat Building, 849 Silom Road, Silom, Bangrak, Bangkok Thailand Tel (66) Fax: (66) UNITED STATES Phillip Futures Inc. 141 W Jackson Blvd Ste 3050 The Chicago Board of Trade Building Chicago, IL USA Tel (1) Fax: (1) MALAYSIA Phillip Capital Management Sdn Bhd B 3 6 Block B Level 3, Megan Avenue II, No. 12, Jalan Yap Kwan Seng, Kuala Lumpur Tel (60) Fax (60) INDONESIA PT Phillip Securities Indonesia ANZ Tower Level 23B, Jl Jend Sudirman Kav 33A, Jakarta 10220, Indonesia Tel (62) Fax: (62) FRANCE King & Shaxson Capital Ltd. 3rd Floor, 35 Rue de la Bienfaisance Paris France Tel (33) Fax : (33) AUSTRALIA PhillipCapital Australia Level 37, 530 Collins Street Melbourne, Victoria 3000, Australia Tel: (61) Fax: (61) INDIA PhillipCapital (India) Private Limited No. 1, C Block, 2 nd Floor, Modern Center, Jacob Circle, K. K. Marg, Mahalaxmi Mumbai Tel: (9122) Fax: (9122) HONG KONG Phillip Securities (HK) Ltd 11/F United Centre 95 Queensway Hong Kong Tel (852) Fax: (852) CHINA Phillip Financial Advisory (Shanghai) Co. Ltd. No 550 Yan An East Road, Ocean Tower Unit 2318 Shanghai Tel (86) Fax: (86) UNITED KINGDOM King & Shaxson Ltd. 6th Floor, Candlewick House, 120 Cannon Street London, EC4N 6AS Tel (44) Fax: (44) SRI LANKA Asha Phillip Securities Limited Level 4, Millennium House, 46/58 Navam Mawatha, Colombo 2, Sri Lanka Tel: (94) Fax: (94) of 6

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