BSE SENSEX S&P CNX 19,509 5,857 Target price: Rs958 Update SECTOR: ENGINEERING BGR Energy Buy Large EPC order expected in FY11; order-book to double to Rs200b Bloomberg BGRL IN Reuters BGRE.BO Equity Shares (m) 72.0 52-Week Range (Rs) 871/438 1,6,12 Rel. Perf. (%) -7/-12/27 M.Cap. (Rs b) 49.8 M.Cap. (US$ b) 1.1 Y/E March 2010 2011E 2012E Sales (Rs b) 30.8 47.1 64.7 EBITDA (Rs b) 3.5 5.4 7.1 Net Profit (Rs b) 2.0 3.0 3.8 EPS (Rs) 28.0 41.0 53.2 EPS Gr. (%) 74.2 46.6 29.6 BV/Share (Rs) 98.1 133.3 180.6 P/E (x) 24.7 16.9 13.0 P/BV (x) 7.1 5.2 3.8 EV/EBITDA (x) 14.0 9.1 6.9 EV/ Sales (x) 1.6 1.0 0.8 RoE (%) 31.7 35.5 33.9 RoCE (%) 22.8 25.3 25.8 Shareholding pattern % (Sep-10) Others, 5.3 Foreign, 7.6 Domestic Inst, 6.0 Promoter 81.2 Stock performance (1 year) 900 775 650 525 400 Dec-09 Mar-10 BGR Energy Sensex - Rebased Jun-10 Sep-10 Dec-10 In meetings with investors at a road-show in Mumbai, hosted by Motilal Oswal Securities, BGR Energy reiterated its strong growth outlook over FY11-13. The company said FY11 order inflows would exceed Rs120b, providing strong earnings visibility for FY12 and FY13. BGR is well placed in NTPC bulk tenders and may potentially win five boiler units. Expects large EPC contract in FY11; order-book expected to double: BGR is technically qualified for two super-critical projects of the Rajasthan Electricity Board, each with 2x 660MW configuration, and an order value of Rs65b. BGR expects to win at least one of them. There has been a delay in price bid submission for the projects (it was expected in September 2010). However, the management expects bid-opening will be completed in December. Success in the project will ensure order inflow of Rs120b, almost 3.5x FY10 order intake, providing significant earnings visibility for FY12 and FY13. The company also expects bids to be invited for a 600MW power project in Tamil Nadu. BGR is executing a 600MW power project in the state and has bid for the boiler package of NTPC bulk tender (11x 660MW). We expect BGR's orderbook to double to Rs200b, by the end of FY11 from Rs105b at the end of 2QFY11. Aggressively targeting the IPP market: BGR is aggressively targeting the IPP (Independent Power Producers) market in the EPC and BoP space, given its limited presence in that space. The company is in talks with six IPPs for EPC and BoP contracts. The management hopes to close at least one order in the next couple of quarters. BGR recently received an order worth Rs21.68b for BoP work for 2 x 660MW super-critical projects in Andhra Pradesh from Gayatri Projects (Andhra Pradesh) and Sembcorp (Singapore) consortium. BGR's scope of work in the projects includes the design/epc for the BoP of 2 x 660MW projects in Krishnapatnam. It is BGR's single largest BoP order. Construction for BTG plant to begin by April 2011: BGR recently formed two JVs with Hitachi to make BTG for power plants and will invest Rs44b to build power units with over 4,000MW capacity. In a turbine-generator (TG) JV, named BGR Turbines Company (P) Ltd, BGR will have 74% stake and in the boiler JV, BGR Boilers Pvt. Ltd, it will have 70% stake. BGR has acquired land near Chennai for the boiler plant and is acquiring land for the TG plant. The JV's debt/equity structure is 70:30 and BGR's equity commitment is Rs9.5b, which it expects to meet internally. Execution on track, earnings CAGR 37% over FY10-12; maintain Buy: The company is in an advanced stage of execution of two power projects, a 1,200MW project in Rajasthan and a 600MW project in Tamil Nadu and has booked nearly 55% of revenue. We expect strong 45% revenue CAGR over FY10-12, driven mainly by the two projects. We expect BGR to post earnings of 37% CAGR over FY10-12. The stock trades at 13x FY12E earnings. We maintain a Buy recommendation on the stock, with a target price of Rs958, based on 18x FY12E earnings. We have not factored-in value of the JVs. Dhirendra Tiwari (Dhirendra.Tiwari@MotilalOswal.com); Tel: +91 22 3982 5127 Navneet Iyengar (Navneet.Iyengar@MotilalOswal.com); Tel: +91 22 3029 5126
BGR is turning into an integrated power equipment play Equipment Manufacturing BOP Power EPC JV Route Two EPC contracts, Projects Projects 1,800MW capacity, to be completed in FY11 BOP - Component Manufacturing Among most respected BOP contractors Implementing 2 x 600MW and 1 x 600MW projects JV with Hitachi - has bid for NTPC tender Growing presence across power sector The TNEB project was 60% complete and the REB project was 55% complete by the end of 1HFY11 Execution of EPC power projects on track 1 x 600MW Mettur, Tamil Nadu Electricity Board: The company received an order valued at Rs31b in June 2008, to be executed over 39 months. The contract was on an EPC basis, including a 400kV and 220kV gas insulated substation, river water in-take pump house and a pipe bridge across the river. BGR is sourcing BTG from DongFang, China. The project was 60% complete by the end of 1HFY11. 2 x 600MW Kalisindh (Jalawar), Rajasthan Electricity Board: BGR received an order worth Rs49b (US$405m + Rs32.96b) in July 2008, to be executed over 42 months. The contract was on an EPC basis. BGR is sourcing BTG from DongFang, China. The project was 55% complete by the end of 1HFY11. BGR's project execution gathers momentum from 3QFY10 Revenues (Rs b) Grow th (%, YoY) 16.6 191.1 3.1 32.0 4.2 4.7 36.5 23.4 7.2 24.1 3.1 1.4 4.7 9.7 6.4 34.4 130.7 9.1 143.3 11.3 1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 EBITDA margins expected to be maintained (%) 11.3 10.4 10.3 9.2 10.2 10.3 10.5 11.5 13.6 12.8 11.2 10.6 11.4 11.7 1QFY08 2QFY08 3QFY08 4QFY08 1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 10 December 2010 2
Ongoing projects Size Project Client Value Scope Completed (Rs m) (%) 2 x 660 MW Jalawar, Raj. Rajasthan SEB 49,000 EPC 55 1 x 600 MW Mettur, T.N. Tamil Nadu SEB 31,000 EPC 60 2 x 660 MW Krishnapatanam*, A.P. Gayatri / Sembcorp 21,680 BoP - 2 x 500 MW Marwa, Chattisgarh CSPGCL 16,330 BoP 20 2 x 500 MW Chandrapur, Maharashtra MAHAGENCO** 16,320 BoP 15 1 x 500 MW Kothagudam, A.P. APGENCO* 7,930 BoP 75 1 x 500 MW Khaperkheda, Maharashtra MAHAGENCO** 9,980 BoP 85 1 x 500 MW Kakatiya, A.P. APGENCO* 6,949 BoP Complete * Recently awarded We expect BGR's order-book to double to Rs200b, by the end of FY11 Strong outlook for new order flow BGR is technically qualified for two super-critical projects of the Rajasthan Electricity Board, each with 2 x 660MW configuration, with an order-value of Rs65b. BGR expects to bag at least one of them. There has been delay in price bid submission for the projects (it was expected in September 2010). However, the management expects the bid-opening process will be complete in December. Success in the project will ensure order-inflow of Rs120b, almost 3.5x FY10 order-intake, providing earnings visibility for FY12 and FY13. The company also expects bids to be invited for a 1 x 600MW power project in Tamil Nadu. BGR is executing a 600MW power project in the state and has bid for the boiler package of NTPC bulk tender (11 x 660MW). We expect BGR's order-book to double to Rs200b, by the end of FY11, from Rs105b at the end of 2QFY11. BGR's BTB ratio of 2x TTM will enable revenue growth in FY11, FY12 BTB to stay strong with success in EPC orders 2.1 3.9 Order Backlog (Rs b) 6.3 5.7 5.6 5.0 6.2 BTB (X,TTM) 5.4 3.3 2.6 2.4 2 Orderbook (Rs b) 7 129 BTB (xttm Sales) 4 214 5 138 280 4 32 61 106 102 95 109 122 116 102 94 105 33 4QFY08 1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 FY08 FY09 FY10 FY11E FY12E BGR has two joint ventures with Hitachi to make BTG for power plants Construction of BTG plant to start in April 2011 BGR recently formed two joint ventures with Hitachi to make BTG for power plants and will invest Rs44b to build over 4,000MW capacity: BGR Turbines Company (P) Ltd: Hitachi, Japan will have 26% stake in the JV and invest Rs30b to set up a plant in Tamil Nadu, which will start production in 2012. BGR Boilers Pvt Ltd: Hitachi Power Europe GmbH will have 30% stake in the venture and invest Rs14b to set up a plant in Tamil Nadu, which will start production 2012. 10 December 2010 3
Performance-related issues with respect to DongFang cannot be ruled Delays due to non-availability of working capital and high interest expenses may impact BGR s performance Key risks and challenges Performance failure: BGR is sourcing equipment from DongFang for 3 x 600MW units for the EPC projects on hand. DongFang had problems with equipment it supplied to Lanco and the West Bengal Electricity Board in the past. Although BGR has set up an office in China, near DongFang's plant, performance-related issues cannot be ruled out. Working capital funding issues: Despite timely receipt of advances from clients, BGR will have heavy working capital requirements during the peak execution cycle, when it gets new orders. Delays due to non-availability of working capital and high interest expenses may impact performance. Recent controversy around a bank-loan scam The Central Bureau of Investigation (CBI) recently named BGR as a company that entered into a transaction with Bank of India, whose official was taken to custody over an alleged loan scam. BGR clarified it did not have borrowings from LIC Housing Finance or links with Money Matters Financial Services, another accused intermediary. The company maintained that Bank of India acted as one of the 11 banks in a consortium that helped to fund working capital requirements for a Rs49b EPC order for the 2 x 600MW Jalawar project (Rajasthan) which was awarded in July 2008. The total fund-based limit drawn from banks for this project was Rs7b drawn in favor of 11 banks out of which Bank of India had opened a credit facility of Rs830m in January 2008. Out of this limit of Rs830m, BGR drew Rs210m. Later, Bank of India issued a statement saying BGR's dealings with the bank were satisfactory. Revenue CAGR at 45% over FY10-12 Earnings CAGR at 37% 91 Revenues (Rs b) Grow th (%) 65 95.1 PA T (Rs b) PA T Gr (%) 4 15 47 59 53 31 19 27 37 1 74.3 3 30.6 2 46.5 1 29.6 FY08 FY09 FY10 FY11E FY12E FY08 FY09 FY10 FY11E FY12E We recommend Buy with a target price of Rs958 Valuation and view We expect BGR to post earnings of 37% CAGR over FY10-12. Faster execution of EPC projects on hand and new large BoP projects can provide an upside in FY12. We believe BGR is well placed in several EPC orders, which will ensure encouraging growth beyond FY12. The stock trades at 13x FY12E earnings. Strong earnings growth, the likelihood of strong order inflows and success in some orders like NTPC bulk tenders will support valuations. We recommend Buy with a target price of Rs958, based on 18x FY12E earnings. We have not factored in the value of JVs, which are setting up boiler and turbine facilities. Delay in receipt of expected orders may result in downside to FY12 earnings. 10 December 2010 4
Financials and Valuation 10 December 2010 5
For more copies or other information, contact Institutional: Navin Agarwal. Retail: Manish Shah Phone: (91-22) 39825500 Fax: (91-22) 22885038. E-mail: reports@motilaloswal.com Motilal Oswal Securities Ltd, 3rd Floor, Hoechst House, Nariman Point, Mumbai 400 021 This report is for the personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. Motilal Oswal Securities Limited (hereinafter referred as MOSt) is not soliciting any action based upon it. This report is not for public distribution and has been furnished to you solely for your information and should not be reproduced or redistributed to any other person in any form. The report is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon such. MOSt or any of its affiliates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. MOSt or any of its affiliates or employees do not provide, at any time, any express or implied warranty of any kind, regarding any matter pertaining to this report, including without limitation the implied warranties of merchantability, fitness for a particular purpose, and non-infringement. The recipients of this report should rely on their own investigations. MOSt and/or its affiliates and/or employees may have interests/ positions, financial or otherwise in the securities mentioned in this report. To enhance transparency, MOSt has incorporated a Disclosure of Interest Statement in this document. This should, however, not be treated as endorsement of the views expressed in the report. Disclosure of Interest Statement BGR Energy 1. Analyst ownership of the stock No 2. Group/Directors ownership of the stock No 3. Broking relationship with company covered No 4. Investment Banking relationship with company covered No This information is subject to change without any prior notice. MOSt reserves the right to make modifications and alternations to this statement as may be required from time to time. Nevertheless, MOSt is committed to providing independent and transparent recommendations to its clients, and would be happy to provide information in response to specific client queries. 10 December 2010 6