BGR Energy Systems Ltd. BUY CMP `199 Target Price `273 Sensex 25,031 Nifty 7,493 BSE 100 Industry 7,603 Electrical Equipment Scrip Details Mkt Cap (` cr) 1,438 BVPS (`) 178.8 O/s Shares (Cr) 7.2 Av Vol (Lacs) 1.7 52 Week H/L 243/71 Div Yield (%) 3.3 FVPS (`) 10.0 Shareholding Pattern Shareholders % Promoters 75.0 DIIs 2.5 FIIs 1.6 Public 20.9 Total 100.0 BGR vs. Sensex We initiate coverage on BGR Energy as a BUY with a Price Objective of `273, implying a potential upside of 37% over a period of 18 months. At the CMP of `199, the stock is trading at 11.2x and 9.5x its forward earnings for FY15E and FY16E, respectively. Our optimism regarding the company’s prospects is based on the following: The strategy of the company to be extremely selective in favour of Govt. / PSU sponsored projects has helped it navigate difficult times, which plagued the power sector over the last 3 years. This has ensured good health of its financials. The strong order book of ~`11,700 crore provides good revenue visibility over the next 3-4 years. Post the union budget of FY15, we expect new business opportunities to emerge, helping the sector regain its growth momentum. BGR is expected to benefit from this positive uptrend in the investment cycle. We expect revenue to grow at a CAGR of 12.7% over FY14-16E to `4,191.5 crore, while earnings are expected to grow faster at 33% CAGR over the period FY14-16E. Strategy to be favourably selective of government / PSU projects has played out well for BGR The BGR management, as a strategy, has been extremely selective in favour of PSU / government projects. And this strategy has benefitted the company vis-àvis its peers, which have been confounded by all the issues plaguing the power sector today. Key Financials (` in Cr) Net Y/E Mar EBITDA Sales 2013 3,113.3 473.4 2014 3,300.8 416.8 2015E 3,597.8 445.3 2016E 4,191.5 511.9 - 1 of 10 - PAT 162.1 93.2 128.6 151.3 EPS (`) 22.5 12.9 17.8 21.0 EPS Growth (%) -27.7 -42.5 37.9 17.7 RONW (%) 13.1 6.1 9.3 10.2 ROCE (%) 20.3 16.3 16.3 16.8 P/E (x) 8.9 15.4 11.2 9.5 EV/EBITDA (x) 7.3 8.3 7.8 6.7 rd Monday 23 June, 2014 This document is for private circulation, and must be read in conjunction with the disclaimer on the last page. STOCK POINTER Index Details FY16E PE 9.5x BGR’s Order Book is Predominantly Focused on Govt / PSU Projects Project Completed Aban Power - CCPP, Karuppur, Tamil Nadu TNEB - CCPP, Valathur (Phase II), Tamil Nadu Madras Aluminium Company Ltd Mettur TNEB - Mettur TPS, Tamil Nadu Aditya Cement CPP, Rajasthan TNEB - CCPP, Valathur (Phase I), Tamil Nadu RRVUNL - CCPP, Dholpur, Rajasthan APGENCO - Vijayawada TPS, AndhraPradesh APGENCO - Kakatiya TPS, AndhraPradesh MAHAGENCO - Khaperkheda TPS, Maharashta APGENCO-Kothagudem TPS, AndhraPradesh MW 120 92 25 600 23 95 330 500 500 500 500 Fuel Gas Gas Coal Coal Coal Gas Gas Coal Coal Coal Coal Scope EPC EPC EPC EPC BOP BOP BOP BOP BOP BOP BOP Project in Progress RRVUNL - Kalisindh TPS, Rajasthan TRN Energy Pvt. Ltd., Nawapara, Chhattisgarh Ministry of Electricity Iraq - Nasiriya MAHAGENCO - Chandrapur STPS, Maharashtra CSPGCL - Marwa TPS, Chhattisgarh TPCIL - Krishnapatnam, Andhra Pradesh. OPGC - BanaharpalliSTPP, Odisha NTPC Ltd. - Solapur TPP, Maharashtra MUVNL Ltd. - Meja TPP, Uttar Pradesh DVC Ltd. - Raghunathpur, West Bengal NTPC Ltd. - Lara TPP, Chhattisgarh 2 x 600 2 x 300 4 x 125 2 x 500 2 x 500 2 x 660 2 x 660 2 x 660 2 x 660 2 x 660 2 x 800 Coal Coal Gas Coal Coal Coal Coal Coal Coal Coal Coal EPC EPC EPC BOP BOP BOP BOP BG BG BG BTG Source: BGR Energy , Ventura Research Order book of ~`11,700 crore augurs well for revenue visibility The order backlog of ~`11,700 crore provides strong revenue visibility for 3 – 4 years. Of this order book, the BTG segment (mostly NTPC projects) accounts for 65% of the total order book, while BoP and EPC projects contribute the balance 30% and 5%, respectively. - 2 of 10 - rd Monday 23 June, 2014 This document is for private circulation, and must be read in conjunction with the disclaimer on the last page. Quarterly Order Inflow Trend 16000 ` Crore 3450 3500 4.5 4.3 4.1 3.9 3.7 3.5 3.3 3.1 2.9 2.7 2.5 12000 2770 2500 10000 2160 1890 2000 8000 1500 6000 1500 4000 Order Book Order Inflow Source: BGR Energy, Ventura Research Order Book (` Cr) Book To Bill (x) Crompton Greaves 3600 0.3 Alstom India 6470 2.5 ABB 7876 1.0 11700 3.5 BHEL 102000 2.6 Larsen & Toubro 163000 1.9 BGR Energy Systems Source: BGR Energy, Ventura Research Order book to Sales (x) RHS Source: BGR Energy, Ventura Research Book to Bill Ratio Favourable Compared to Peers Company Name 0 Q4FY14 Q4FY14 Q3FY14 Q2FY14 Q1FY14 Q4FY13 Q3FY13 Q2FY13 Q1FY13 0 2000 Q3FY14 0 Q2FY14 0 Q1FY14 90 Q4FY13 500 Q3FY13 1000 Q2FY13 3000 ` Crore 14000 Q1FY13 4000 Order Book and Book-to-Bill Trend Segment Wise Order Book Order Book Size FY14 - `11,700 Crore EPC 5% BoP 30% BTG 65% Source: BGR Energy, Ventura Research Expect order book to grow post the Union Budget as more projects are announced Marred by controversy and lack of political will to resolve issues, the capital goods business order flow had literally been reduced to a trickle. However with the new government in place and Prime Minister Modi at the helm of affairs we are confident that policy and decision making would regain traction. Most industry players are waiting for the Union Budget of FY15 to be announced, post which new projects would be initiated and the capital goods industry would get a much needed boost. - 3 of 10 - rd Monday 23 June, 2014 This document is for private circulation, and must be read in conjunction with the disclaimer on the last page. Revenues and earnings expected to resume their growth trajectory from FY15 Over the past couple of years BGR’s earnings were going downhill mainly due to the extremely competitive bidding scenario in the industry. Particularly in FY14, lower revenue booking, margin pressures and recognition of deferred taxation led to a sharply lower performance. We believe that the poor performance of the company has bottomed out and expect a gradual recovery to take place over the next couple of years. We expect sales of `4,191.5 crore in FY16E (CAGR of 12.7%) from the current `3,300.8 crore and an earnings growth of 33% CAGR to `151 crore by FY16E from `86 crore clocked in FY14. Going ahead, we expect higher BoP segment revenue bookings (which have better margins) to be billed as compared to FY14, which saw higher revenue being recognized in its EPC segment (which has comparatively lower margins). However, in our model we have assumed a marginal 25 bps contraction in EBITDA margins, leaving a substantial upside risk to our estimates. Revenue & PAT Trend 5000 EBITDA & PAT Margin (%) ` Crore 350 4500 300 4000 18% 14% 3500 250 3000 200 10% 2000 150 8% 1500 100 2500 14.8% 12.8% 12.4% 6.6% 6.8% 500 0 FY10 FY11 FY12 Revenue FY13 FY14 FY15E PAT (RHS) Source: BGR Energy, Ventura Research FY16E 15.2% 12.6% 12.4% 12.2% 3.6% 3.6% FY15E FY16E 12% 6.5% 5.2% 6% 1000 - 4 of 10 - (%) 16% 2.6% 4% 50 2% 0 0% FY10 FY11 FY12 FY13 EBITDA (%) FY14 PAT (%) Source: BGR Energy, Ventura Research rd Monday 23 June, 2014 This document is for private circulation, and must be read in conjunction with the disclaimer on the last page. Major projects tentative completion schedule Projects to be completed in FY15-16 MAHAGENCO - Chandrapur STPS, Maharashtra CSPGCL - Marwa TPS, Chhattisgarh TPCIL - Krishnapatnam, Andhra Pradesh. TRN Energy Pvt. Ltd., Nawapara, Chhattisgarh OPGC - BanaharpalliSTPP, Odisha Ministry of Electricity Iraq - Nasiriya NTPC Ltd. - Solapur TPP, Maharashtra NTPC Ltd. - Lara TPP, Chhattisgarh Tentative Completion MW FY15 FY15 FY15 FY16 FY16 FY16 FY16 FY16 2 x 500 2 x 500 2 x 660 2 x 300 2 x 660 4 x 125 2 x 660 2 x 800 Rs. Cr. 1792 1833 2166 1924 1573 1525 1855 1549 Source: BGR Energy, Ventura Research Financial Performance BGR’s revenue declined by 23.6% in Q4FY14 to `812.2 crore owing to the lower execution and collections than anticipated. This was due to higher revenue being recognized in its EPC segment (completion of works at Mettur and Jhalawar), which had comparatively lower margins. EBITDA during Q4FY14 fell by 38% while the EBITDA margin dropped by 250 bps to 10.5%, led by the higher revenue share of low margin NTPC orders in the quarter. Lower execution during the quarter led to a 65% fall in PAT to `19 crore. Revenues in the quarter came from projects such as TRN Energy (Chhattisgarh), Krishnapatnam (A.P.), Chandrapur Super TPS, etc. The company commenced work for the NTPC bulk tenders I and II at Sholapur, Meja, Raghunathpur and Lara, but these have not yet contributed meaningfully to revenues. - 5 of 10 - rd Monday 23 June, 2014 This document is for private circulation, and must be read in conjunction with the disclaimer on the last page. Quarterly Financial Performance (` in crore) Particulars Net Sales Growth % Total Expenditure EBIDTA EBDITA Margin % Depreciation EBIT (EX OI) Other Income EBIT Margin % Interest Exceptional items PBT Margin % Provision for Tax PAT PAT Margin (%) Q4FY14 812.23 -23.6 726.56 85.67 10.5 4.96 80.7 0.05 80.8 9.9 48.9 0 31.8 3.9 12.73 19.1 2.4 Q4FY13 1062.88 924.66 138.22 13.0 5.7 132.5 0.04 132.6 12.5 50.13 0 82.4 7.8 29.08 53.4 5.0 FY14 3295.6 6.1 2900.4 395.2 12.0 19.6 375.7 0.5 376.2 11.4 181.7 -2.0 192.4 5.8 82.4 110.0 3.3 FY13 3107.2 2673.8 433.3 13.9 18.6 414.8 5.4 420.2 13.5 174.7 0.0 245.5 7.9 81.8 163.7 5.3 Source: BGR Energy, Ventura Research Valuation We initiate coverage on BGR Energy as a BUY with a Price Objective of `273, representing a potential upside of 37% over a period of 18 months. At the CMP of `199, the stock is trading at 11.2x and 9.5x its forward earnings for FY15E and FY16E, respectively. Historically, the company has traded at an average of 13x its forward earnings and we have assigned a similar multiple. Power being the need of the hour, we expect the newly formed government’s policy reform measures to provide traction to the order inflow. - 6 of 10 - rd Monday 23 June, 2014 This document is for private circulation, and must be read in conjunction with the disclaimer on the last page. Peer Valuation (` in crore) Y/E Mar Net Revenue EBITDA PAT EPS (%) RONW (%) P/E (x) 3300.8 3597.8 4191.5 416.8 445.3 511.9 93.2 128.6 151.3 12.9 17.8 21.0 -42.5 37.9 17.7 7.2 9.3 10.2 15.5 11.2 9.5 15.5 11.2 9.5 92733.9 110446.4 137715.4 12443.6 15028.8 19243.1 5438.0 6827.0 9049.4 58.3 73.2 97.0 6.9 25.6 32.6 14.5 16.1 17.2 28.2 22.5 17.0 18.5 15.6 13.1 36354.5 37049.2 40124.5 4087.9 4215.5 4908.4 2955.8 3116.7 3404.0 12.2 12.7 13.9 -16.3 4.8 9.2 8.5 8.6 10.3 19.9 19.0 17.4 11.8 11.1 8.8 14770.7 16414.3 18439.1 955.5 1219.8 1637.7 491.3 683.3 994.6 7.8 10.9 15.9 83.1 39.4 45.2 12.6 15.8 19.3 25.1 18.0 12.4 13.9 10.7 7.2 7597.0 7934.4 8676.6 442.7 596.7 771.7 176.2 272.4 386.2 8.4 12.8 18.2 29.4 52.8 42.1 6.6 9.8 12.6 122.8 80.4 56.6 49.9 36.5 27.4 EPS EV/EBITDA (x) BGR Energy 2014 2015E 2016E L&T 2014 2015E 2016E BHEL 2014 2015E 2016E Cromption Greaves 2014 2015E 2016E ABB Ltd 2014 2015E 2016E Source: BGR Energy, Ventura Research - 7 of 10 - rd Monday 23 June, 2014 This document is for private circulation, and must be read in conjunction with the disclaimer on the last page. Company background BGR Energy Systems was incorporated in 1985 as a joint venture between GEA Energietechnik GmbH, Germany & Mr. B.G. Raghupathy. GEA later sold its stake to the promoters in 1993. It is one of the leading players in the balance of plant (BoP) and engineering, procurement and construction (EPC) segment in the power industry. Its business segments include power projects, oil and gas equipment, air fin coolers, environmental engineering and electrical projects. Organisational Structure BGR Energy Systems Limited Promoter Holding – 75% BGR Turbines Company Pvt Ltd (Total capex – Rs 184 cr) BGR-Hitachi – 74:26 BGR Boilers Pvt Ltd Sravanaa Properties Ltd (Total capex – Rs 135.6 cr) BGR-Hitachi – 70:30 (Total capex – Rs 20 lakh) BGR’s Stake – 100% Progen Systems & Technologies Ltd (Total capex – Rs 6.1 cr) BGR’s Stake – 100% Source: BGR Energy, Ventura Research - 8 of 10 - rd Monday 23 June, 2014 This document is for private circulation, and must be read in conjunction with the disclaimer on the last page. P/E 1000 900 800 700 600 500 400 300 200 100 0 Mar-08 CMP Mar-10 6.5X Mar-12 10.1X 13.6X Mar-14 17.2X 20.8X Source: BGR Energy, Ventura Research P/BV 1200 1000 800 600 400 200 0 Mar-08 Mar-10 CMP 1X Mar-12 2X 3X Mar-14 4X 5X Source: BGR Energy, Ventura Research EV/EBITDA 10000 9000 8000 7000 6000 5000 4000 3000 2000 1000 0 Mar-08 Mar-10 EV 3X Mar-12 5X 7X Mar-14 9X 11X Source: BGR Energy , Ventura Research - 9 of 10 - rd Monday 23 June, 2014 This document is for private circulation, and must be read in conjunction with the disclaimer on the last page. Financials and Projections Y/E Mar, Fig in ` Cr FY 2013 FY 2014 FY 2015E FY 2016E Profit & Loss Statement Net Sales % Chg. Total Expenditure FY 2013 FY 2014 FY 2015E FY 2016E Per Share Data (Rs) 3113.3 3300.8 3597.8 4191.5 -9.8 6.0 9.0 16.5 2639.9 2884.0 3152.5 3679.6 9.2 9.3 16.7 % Chg. EBITDA Y/E Mar, Fig in Rs. Cr EPS 22.5 12.9 17.8 21.0 Cash EPS 25.1 14.8 21.2 24.5 7.0 3.0 5.0 5.0 169.5 178.9 191.0 206.1 1.6 DPS Book Value 473.4 416.8 445.3 511.9 EBITDA Margin % 15.2 12.6 12.4 12.2 Debt / Equity (x) 1.8 1.6 1.5 Other Income 11.9 5.7 8.4 9.9 Current Ratio (x) 1.4 1.3 1.4 1.4 0.0 2.0 0.0 0.0 ROE (%) 13.3 7.2 9.3 10.2 485.3 420.5 453.7 521.8 ROCE (%) 20.3 16.3 16.3 16.8 20.3 21.2 24.5 25.8 Dividend Yield (%) 3.5 1.5 2.5 2.5 Interest 221.4 230.7 237.3 270.1 Valuation Ratio (x) PBT P/E (x) 8.9 15.4 11.2 9.5 P/BV (x) 1.2 1.1 1.0 1.0 EV/Sales (x) 1.1 1.0 1.0 0.8 EV/EBIDTA (x) 7.3 8.3 7.8 6.7 Exceptional items PBDIT Depreciation 243.6 168.6 191.9 225.9 Tax Provisions 82.3 82.6 63.3 74.5 Reported PAT 161.3 86.0 128.6 151.3 -0.8 -7.3 0.0 0.0 162.1 93.2 128.6 151.3 Minority Interest PAT PAT Margin (%) Employee Benefit / Sales (%) Tax Rate (%) Reserves & Surplus Minority Interest Long-Term Provisions Long-Term Borrowings Other Long-Term Liabilities Total Liabilities Gross Block Less: Acc. Depreciation Efficiency Ratio (x) 5.2 2.8 3.6 3.6 Inventory (days) 4.3 5.4 6.1 6.1 6.8% 6.2% 6.2% 6.2% Debtors (days) 319.8 317.7 317.6 317.6 33.8 49.0 33.0 33.0 Creditors (days) 169.0 160.2 165.7 168.3 72.2 72.2 72.2 72.2 243.6 168.6 191.9 225.9 1151.2 1218.7 1305.9 1415.3 20.3 21.2 24.5 25.8 90.5 83.3 83.3 83.3 -210.5 8.2 4.6 -250.5 222.3 207.1 225.7 263.0 -74.5 13.8 7.8 11.1 11.2 842.3 986.8 1089.9 1269.5 Capital Expenditure 2392.2 2575.8 2788.0 3114.5 Dividend Received 536.9 543.8 712.3 725.1 Others Balance Sheet Share Capital Capital, Liquidity, Returns Ratio Cash Flow statement Profit Before Tax Depreciation & Amortisation Working Capital Changes Direct Taxes Paid and Others Operating Cash Flow 87.0 103.6 128.1 153.9 Cash Flow from Investing Net Block 449.9 440.2 584.2 571.3 Increase/(Decrease) in Loan Fund Capital Work in Progress 125.3 157.2 0.0 0.0 Others Non-Current Investments 0.5 0.4 0.5 0.5 Interest Paid Net Current Assets 2141.0 2359.2 2732.0 3223.4 Deferred Tax Assets -420.3 -506.5 -672.6 -848.4 Other Non-Current Assets Total Assets -19.4 -42.2 -63.3 72.7 240.3 284.4 75.7 -159.9 -6.9 -168.6 -12.8 0.0 0.0 0.0 0.0 -19.8 -32.0 157.2 0.0 -179.7 -38.9 -11.4 -12.8 456.8 -189.8 48.0 338.5 -58.7 -25.2 -41.9 -41.9 -175.3 -181.8 -186.0 -216.2 Cash Flow from Financing 222.8 -396.8 -179.9 80.3 Net Change in Cash 115.8 -195.4 93.1 143.2 95.9 125.3 143.9 167.7 Opening Cash Balance 519.2 635.0 439.6 532.7 2392.2 2575.8 2788.0 3114.5 Closing Cash Balance 635.0 439.6 532.7 675.9 Ventura Securities Limited Corporate Office: C-112/116, Bldg No. 1, Kailash Industrial Complex, Park Site, Vikhroli (W), Mumbai – 400079 This report is neither an offer nor a solicitation to purchase or sell securities. The information and views expressed herein are believed to be reliable, but no responsibility (or liability) is accepted for errors of fact or opinion. Writers and contributors may be trading in or have positions in the securities mentioned in their articles. Neither Ventura Securities Limited nor any of the contributors accepts any liability arising out of the above information/articles. Reproduction in whole or in part without written permission is prohibited. This report is for private circulation. - 10 of 10 - rd Monday 23 June, 2014 This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.
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