BGR Energy. CMP: INR284 TP: INR296 Neutral

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1 BSE SENSEX S&P CNX 16,312 4,951 Bloomberg BGRL IN Equity Shares (m) Week Range (INR) 512/173 1,6,12 Rel. Perf. (%) -8/8/-31 M.Cap. (INR b) 20.5 M.Cap. (USD b) May QFY12 Results Update Sector: Capital Goods BGR Energy CMP: INR284 TP: INR296 Neutral 4QFY12 operating performance in-line: BGR Energy reported 4QFY12 operating performance in-line with estimates, with revenues at INR11.3b (down 22% YoY) and EBIDTA margins at 11.9% (up 46bp YoY). PAT at INR672m (down 32% YoY) was above our estimates of INR551m given lower interest costs (at INR411m v/s est INR482m) and lower tax rates (at 29.6% v/s est 36.3%). EBITDA margins hit by reversal of sales mix: 4QFY12 EBITDA margin stood at 11.9%, significantly lower than 14.6% in 9MFY12 which had favorable mix with higher contribution from BOP contracts relative to EPC contracts. BOP accounted for 40-60% of revenues during the first three quarters of FY12 against 18-20% in 4Q. Currently, EPC contracts forms around 10-11% of the order book, and going forward a large part of the incremental orders are expected on EPC route. We expect margins to contract in FY13 driven by ramp-up in project specific deliveries and increased share of EPC contract revenues. Guidance - Expect 25% YoY revenue growth in FY13; order pipeline at ~16GW: The management stated that the existing order book will contribute to INR43b revenues in FY13. Also, the NTPC bulk tender will start contributing to revenues meaningfully only in FY14. Order book as at end March 2012 stands at INR75b (INR151b including NTPC bulk tender yet to be received). Orders worth INR 122b from Rajasthan SEB for two projects of 2x660MW each (which was expected to be awarded) has been scrapped and the management expects retendering shortly. The management indicated that the bidding pipeline stands at ~16GW for FY13. Net working capital remains at elevated levels: Net working capital remains at elevated level, up to 210 days from 103 days at the end of 4QFY11. Retention money continues to be high at INR14b, up from INR12b as at the end of 3QFY12 (v/s INR 11b at the end of FY11) which is a key disappointment v/s expectations of realization of INR5b of retention money by the end of FY12. Interest cost is up 125% YoY due to rise in cost of borrowing and debt levels. Valuation and view: We have upgraded our FY13 estimate by 5% in light of increased margin assumption and have cut our FY14 earnings estimate by 22% to factor in scrapping of Rajasthan SEB's order worth INR65b and likely execution delays. We maintain Neutral with a target price of INR296, based on 10x FY14E earnings. Satyam Agarwal (AgarwalS@MotilalOswal.com) ; Deepak Narnolia (Deepak.Narnolia@MotilalOswal.com);

2 Results highlights 4QFY12 operating performance in-line; net profit above estimates driven by lower interest / lower tax rates: BGR Energy reported 4QFY12 revenues of INR11.4b (down 22% YoY) marginally above our estimates of INR11.2b. EBITDA margin stood at 11.9%, up 46bp YoY lower than our estimates of 12.4%. PAT stood at INR672m (down 32% YoY) above our estimates of INR551m. Higher than expected PAT is driven by lower interest costs at INR411m (est INR482m) and tax rates at 29.6% (est 36.3%). EBITDA margins impacted as project specific deliveries increase: EBITDA margins in 9mFY12 had improved on account of favorable mix driven by higher contribution from BOP contracts relative to EPC contracts. BOP accounted for 40-60% of revenues during the first three quarters of FY12, against 18-20% YoY. Currently, EPC contracts forms around 10-11% of the order book, and going forward a large part of the incremental orders are expected on EPC route. RM/Sales declined 267bp YoY while Employee cost increased 170bp YoY. We expect margins to contract in FY13 driven by ramp-up in project specific deliveries and increased share of EPC contract revenues. Extended slowdown in order intake disappointing: Exhausting order book remains a major concern for BGR. Order book as at March 2012 stands at around INR75b (INR80b 3QFY12 end). Orders worth INR 122b from Rajasthan SEB for two projects of 2x660MW each, in which BHEL and BGR were shortlisted, were expected to be placed by Dec-11. However, the same has been scrapped and the management expects retendering shortly. BGR is to receive orders of INR85b from NTPC bulk tender (Boilers for 660MW - INR55b and TG Sets for 800MW - INR30b), and the management expects a large part of these awards shortly. FY13 execution to be constrained given depleting order book: The company is executing two large EPC projects, in Rajasthan (2x600MW, INR49b) and Tamil Nadu (1 x 300, INR31b) both awarded in These projects are ~88-95% complete which have been driving revenue growth in recent quarters. Currently, the company is executing three major BOP projects -Mahagenco 2X500MW INR16.3b (60% complete), Chhattisgarh State Electricity Board 2x500MW INR16.3b (50% complete) and Thermal Powertech Corporation in Krishnapatnam 2x660 MW INR21.7b (15% complete). BOP order from TRN Energy 2x600MW of INR17b is yet to start revenues. The management stated that the existing order book will contribute to INR43b revenues in FY13. Also, the NTPC bulk tender will start contributing to revenues meaningfully in FY14. Working capital remains at elevated level: Net working capital remains at elevated level, up to 210 days from 103 days at the end of 4QFY11. Retention money is at INR14 up from INR12b as at the end of 3QFY12 (v/s INR 11b at the end of FY11) which is in contrast with the companies' earlier expectation of realization of INR5b of retention money by the end of FY12. Due to high debt and increased cost of borrowing, interest cost remains at a high level at INR411m, up 125% YoY. In the last quarter the company had mentioned that cost of borrowing has increased to % v/s 6-7% last year mainly on account of reduction in low-cost buyer's credit (@ LIBOR + 1.5%) due to completion of EPC projects. Currently buyer's credit forms around ~15-18%% of total debt down from 35% last year. 31 May

3 Cutting FY14 earnings estimate by 22%; maintain Neutral: We have upgraded our FY13 estimate by 5% in light of increased margin assumption and have cut our FY14 earnings estimate by 22% to factor in scrapping of Rajsthan SEB's order worth INR65b, likely execution delay and poor order intake. We believe that the Indian power equipment market is going through a tough phase, with slowing demand and rising costs. Lack of coal linkages, volatile spot prices and several other hurdles like land availability have adversely impacted new project awards in the past one year. We believe it will be challenging for BGR to secure new orders in the foreseeable future without resorting to aggressive pricing. We maintain Neutral rating on the stock with a target price of INR296, based on 10x FY14E earnings. BGR: Revised estimates (INR m) Revised Old Change (%) FY13E FY14E FY13E FY14E FY13E FY14E Sales 39,282 54,608 38,959 65, (16.1) Growth (%) EBITDA 4,571 5,248 4,418 6, (14.9) Growth (%) bp 80bp PAT 1,975 2,139 1,874 2, (22.2) Growth (%) (6.6) 8.3 (11.4) (11.4) EPS (INR) (22.2) Source: MOSL BTB ratio - slight uptrend as execution remains constrained Revenue growth declining Margins to trend lower as EPC share is rising PAT declines 32% YoY in 4QFY12 impacted by higher interest cost Source: Company, MOSL 31 May

4 BGR Energy: an investment profile Company description BGR Energy Systems (BGRL) is one of the India's growing engineering companies in the power sector. BGRL carries the business in two segments namely the supply of systems and equipment and turnkey engineering project contracting. The company has entered into a JV with Hitachi to manufacture boilers and turbines. Key investment arguments BGRL, a strong BOP contractor, entered the power plant EPC business over the past two years. It is wellplaced to capitalize on a growing shortage of power plant contractors in India. BGRL has a JV with Hitachi to make boilers and turbine-generators, which could be a huge long-term growth driver. The company has bagged meaningful orders in NTPC bulk tender which would drive strong revenue growth in next 3-4 years. Success in one or two EPC projects will drive strong earnings growth beyond FY12. Key investment risks Margin compression is possible due to the entry into the super-critical BTG due to high initial import content (18-20%). Also the company has resorted to aggressive pricing in NTPC bulk tender which is likely to be a strain on profitability. Comparative valuations BGR BHEL L&T P/E (x) FY13E FY14E P/BV (x) FY13E FY14E EV/Sales (x) FY13E FY14E EV/EBITDA (x) FY13E FY14E Higher working capital days due to a large share of EPC projects in the revenue mix going forward can compress return ratios and cash flows. Recent developments BGR turned out to be L1 in the boiler package of NTPC bulk tender 1 (11x660 MW) and in the turbine package of bulk tender 2 (9x800 MW) in which it is expected to receive orders worth INR 96b. The Rajasthan SEB scrapped its tender worth INR 120b in which BHEL was L1 and BGR L2. BGR was expected to receive orders worth INR60b if it matched L1 price. Valuation and view We have upgraded our FY13 estimate by 5% in light of increased margin assumption and have cut our FY14 earnings estimate by 22% to factor in scrapping of Rajsthan SEB's order worth INR65b, likely execution delay and poor order intake. We maintain Neutral rating on the stock with a target price of INR296, based on 10x FY14E earnings. Sector view We are Neutral about the sector. EPS: MOSL forecast v/s consensus (INR) MOSL Consensus Variation Forecast Forecast (%) FY FY Target price and recommendation Current Target Upside Reco. Price (INR) Price (INR) (%) Neutral Stock performance (1 year) Shareholding pattern (%) Mar-12 Dec-11 Mar-11 Promoter Domestic Inst Foreign Others May

5 Financials and Valuation 31 May

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