Initiating Coverage-BGR Engery Systems Limited

BGR Energy Systems Ltd.

BUY

- 1 of 10 - Monday 23rd

June, 2014

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Target Price `273 CMP `199 FY16E PE 9.5x

Index Details 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-à-

vis its peers, which have been confounded by all the issues plaguing the power

sector today.

Sensex 25,031

Nifty 7,493

BSE 100 7,603

Industry 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

Key Financials (` in Cr)

Y/E Mar Net

Sales EBITDA PAT

EPS (`)

EPS Growth (%)

RONW (%)

ROCE (%)

P/E (x)

EV/EBITDA (x)

2013 3,113.3 473.4 162.1 22.5 -27.7 13.1 20.3 8.9 7.3

2014 3,300.8 416.8 93.2 12.9 -42.5 6.1 16.3 15.4 8.3

2015E 3,597.8 445.3 128.6 17.8 37.9 9.3 16.3 11.2 7.8

2016E 4,191.5 511.9 151.3 21.0 17.7 10.2 16.8 9.5 6.7


June, 2014


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.

BGR’s Order Book is Predominantly Focused on Govt / PSU Projects

Project Completed MW Fuel Scope

Aban Power - CCPP, Karuppur, Tamil Nadu 120 Gas EPC

TNEB - CCPP, Valathur (Phase II), Tamil Nadu 92 Gas EPC

Madras Aluminium Company Ltd Mettur 25 Coal EPC

TNEB - Mettur TPS, Tamil Nadu 600 Coal EPC

Aditya Cement CPP, Rajasthan 23 Coal BOP

TNEB - CCPP, Valathur (Phase I), Tamil Nadu 95 Gas BOP

RRVUNL - CCPP, Dholpur, Rajasthan 330 Gas BOP

APGENCO - Vijayawada TPS, AndhraPradesh 500 Coal BOP

APGENCO - Kakatiya TPS, AndhraPradesh 500 Coal BOP

MAHAGENCO - Khaperkheda TPS, Maharashta 500 Coal BOP

APGENCO-Kothagudem TPS, AndhraPradesh 500 Coal BOP

Project in Progress

RRVUNL - Kalisindh TPS, Rajasthan 2 x 600 Coal EPC

TRN Energy Pvt. Ltd., Nawapara, Chhattisgarh 2 x 300 Coal EPC

Ministry of Electricity Iraq - Nasiriya 4 x 125 Gas EPC

MAHAGENCO - Chandrapur STPS, Maharashtra 2 x 500 Coal BOP

CSPGCL - Marwa TPS, Chhattisgarh 2 x 500 Coal BOP

TPCIL - Krishnapatnam, Andhra Pradesh. 2 x 660 Coal BOP

OPGC - BanaharpalliSTPP, Odisha 2 x 660 Coal BOP

NTPC Ltd. - Solapur TPP, Maharashtra 2 x 660 Coal BG

MUVNL Ltd. - Meja TPP, Uttar Pradesh 2 x 660 Coal BG

DVC Ltd. - Raghunathpur, West Bengal 2 x 660 Coal BG

NTPC Ltd. - Lara TPP, Chhattisgarh 2 x 800 Coal BTG

Source: BGR Energy , Ventura Research


June, 2014


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.

Quarterly Order Inflow Trend Order Book and Book-to-Bill Trend

2770

1890

3450

0

1500

2160

90 00

500

1000

1500

2000

2500

3000

3500

4000

Q1F

Y13

Q2F

Y13

Q3F

Y13

Q4F

Y13

Q1F

Y14

Q2F

Y14

Q3F

Y14

Q4F

Y14

` Crore

Order Inflow

2.5

2.7

2.9

3.1

3.3

3.5

3.7

3.9

4.1

4.3

4.5

0

2000

4000

6000

8000

10000

12000

14000

16000

Q1F

Y13

Q2F

Y13

Q3F

Y13

Q4F

Y13

Q1F

Y14

Q2F

Y14

Q3F

Y14

Q4F

Y14

` Crore

Order Book Order book to Sales (x) RHS

Source: BGR Energy, Ventura Research


Book to Bill Ratio Favourable Compared to Peers Segment Wise Order Book

Company Name Order Book (` Cr) Book To Bill (x)

Crompton Greaves 3600 0.3

Alstom India 6470 2.5

ABB 7876 1.0

BGR Energy Systems 11700 3.5

BHEL 102000 2.6

Larsen & Toubro 163000 1.9

BTG65%

BoP30%

EPC5%

Order Book SizeFY14 - `11,700 Crore




June, 2014


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 EBITDA & PAT Margin (%)

0

50

100

150

200

250

300

350

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

FY10 FY11 FY12 FY13 FY14 FY15E FY16E

` Crore

Revenue PAT (RHS)

12.8% 12.4%

14.8% 15.2%

12.6% 12.4% 12.2%

6.6% 6.8% 6.5%

5.2%

2.6%3.6% 3.6%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

FY10 FY11 FY12 FY13 FY14 FY15E FY16E

(%)

EBITDA (%) PAT (%)




June, 2014


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.

Major projects tentative completion schedule

Projects to be completed in FY15-16Tentative

CompletionMW Rs. Cr.

MAHAGENCO - Chandrapur STPS, Maharashtra FY15 2 x 500 1792

CSPGCL - Marwa TPS, Chhattisgarh FY15 2 x 500 1833

TPCIL - Krishnapatnam, Andhra Pradesh. FY15 2 x 660 2166

TRN Energy Pvt. Ltd., Nawapara, Chhattisgarh FY16 2 x 300 1924

OPGC - BanaharpalliSTPP, Odisha FY16 2 x 660 1573

Ministry of Electricity Iraq - Nasiriya FY16 4 x 125 1525

NTPC Ltd. - Solapur TPP, Maharashtra FY16 2 x 660 1855

NTPC Ltd. - Lara TPP, Chhattisgarh FY16 2 x 800 1549



June, 2014


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.

Quarterly Financial Performance (` in crore)

Particulars Q4FY14 Q4FY13 FY14 FY13

Net Sales 812.23 1062.88 3295.6 3107.2

Growth % -23.6 6.1

Total Expenditure 726.56 924.66 2900.4 2673.8

EBIDTA 85.67 138.22 395.2 433.3

EBDITA Margin % 10.5 13.0 12.0 13.9

Depreciation 4.96 5.7 19.6 18.6

EBIT (EX OI) 80.7 132.5 375.7 414.8

Other Income 0.05 0.04 0.5 5.4

EBIT 80.8 132.6 376.2 420.2

Margin % 9.9 12.5 11.4 13.5

Interest 48.9 50.13 181.7 174.7

Exceptional items 0 0 -2.0 0.0

PBT 31.8 82.4 192.4 245.5

Margin % 3.9 7.8 5.8 7.9

Provision for Tax 12.73 29.08 82.4 81.8

PAT 19.1 53.4 110.0 163.7

PAT Margin (%) 2.4 5.0 3.3 5.3



June, 2014


Peer Valuation (` in crore)

Y/E Mar Net

Revenue EBITDA PAT EPS

EPS

(%)

RONW

(%)

P/E

(x)

EV/EBITDA

(x)

BGR Energy 2014 3300.8 416.8 93.2 12.9 -42.5 7.2 15.5 15.5

2015E 3597.8 445.3 128.6 17.8 37.9 9.3 11.2 11.2

2016E 4191.5 511.9 151.3 21.0 17.7 10.2 9.5 9.5

L&T2014 92733.9 12443.6 5438.0 58.3 6.9 14.5 28.2 18.5

2015E 110446.4 15028.8 6827.0 73.2 25.6 16.1 22.5 15.6

2016E 137715.4 19243.1 9049.4 97.0 32.6 17.2 17.0 13.1

BHEL2014 36354.5 4087.9 2955.8 12.2 -16.3 8.5 19.9 11.8

2015E 37049.2 4215.5 3116.7 12.7 4.8 8.6 19.0 11.1

2016E 40124.5 4908.4 3404.0 13.9 9.2 10.3 17.4 8.8

Cromption Greaves2014 14770.7 955.5 491.3 7.8 83.1 12.6 25.1 13.9

2015E 16414.3 1219.8 683.3 10.9 39.4 15.8 18.0 10.7

2016E 18439.1 1637.7 994.6 15.9 45.2 19.3 12.4 7.2

ABB Ltd2014 7597.0 442.7 176.2 8.4 29.4 6.6 122.8 49.9

2015E 7934.4 596.7 272.4 12.8 52.8 9.8 80.4 36.5

2016E 8676.6 771.7 386.2 18.2 42.1 12.6 56.6 27.4



June, 2014


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 LimitedPromoter Holding – 75%

BGR Turbines Company

Pvt Ltd(Total capex – Rs 184 cr)

BGR-Hitachi – 74:26

BGR Boilers Pvt Ltd(Total capex – Rs 135.6 cr)

BGR-Hitachi – 70:30

Sravanaa Properties Ltd(Total capex – Rs 20 lakh)

BGR’s Stake – 100%

Progen Systems &

Technologies Ltd(Total capex – Rs 6.1 cr)

BGR’s Stake – 100%



June, 2014


P/E

0

100

200

300

400

500

600

700

800

900

1000

Mar-08 Mar-10 Mar-12 Mar-14

CMP 6.5X 10.1X 13.6X 17.2X 20.8X


P/BV

0

200

400

600

800

1000

1200


CMP 1X 2X 3X 4X 5X


EV/EBITDA

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000


EV 3X 5X 7X 9X 11X

Source: BGR Energy , Ventura Research


June, 2014


Financials and Projections

Y/E Mar, Fig in ` Cr FY 2013 FY 2014 FY 2015E FY 2016E Y/E Mar, Fig in Rs. Cr FY 2013 FY 2014 FY 2015E FY 2016E

Profit & Loss Statement Per Share Data (Rs)

Net Sales 3113.3 3300.8 3597.8 4191.5 EPS 22.5 12.9 17.8 21.0

% Chg. -9.8 6.0 9.0 16.5 Cash EPS 25.1 14.8 21.2 24.5

Total Expenditure 2639.9 2884.0 3152.5 3679.6 DPS 7.0 3.0 5.0 5.0

% Chg. 9.2 9.3 16.7 Book Value 169.5 178.9 191.0 206.1

EBITDA 473.4 416.8 445.3 511.9 Capital, Liquidity, Returns Ratio

EBITDA Margin % 15.2 12.6 12.4 12.2 Debt / Equity (x) 1.8 1.6 1.5 1.6

Other Income 11.9 5.7 8.4 9.9 Current Ratio (x) 1.4 1.3 1.4 1.4

Exceptional items 0.0 2.0 0.0 0.0 ROE (%) 13.3 7.2 9.3 10.2

PBDIT 485.3 420.5 453.7 521.8 ROCE (%) 20.3 16.3 16.3 16.8

Depreciation 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 243.6 168.6 191.9 225.9 P/E (x) 8.9 15.4 11.2 9.5

Tax Provisions 82.3 82.6 63.3 74.5 P/BV (x) 1.2 1.1 1.0 1.0

Reported PAT 161.3 86.0 128.6 151.3 EV/Sales (x) 1.1 1.0 1.0 0.8

Minority Interest -0.8 -7.3 0.0 0.0 EV/EBIDTA (x) 7.3 8.3 7.8 6.7

PAT 162.1 93.2 128.6 151.3 Efficiency Ratio (x)

PAT Margin (%) 5.2 2.8 3.6 3.6 Inventory (days) 4.3 5.4 6.1 6.1

Employee Benefit / Sales (%) 6.8% 6.2% 6.2% 6.2% Debtors (days) 319.8 317.7 317.6 317.6

Tax Rate (%) 33.8 49.0 33.0 33.0 Creditors (days) 169.0 160.2 165.7 168.3

Balance Sheet Cash Flow statement

Share Capital 72.2 72.2 72.2 72.2 Profit Before Tax 243.6 168.6 191.9 225.9

Reserves & Surplus 1151.2 1218.7 1305.9 1415.3 Depreciation & Amortisation 20.3 21.2 24.5 25.8

Minority Interest 90.5 83.3 83.3 83.3 Working Capital Changes -210.5 8.2 4.6 -250.5

Long-Term Provisions 222.3 207.1 225.7 263.0 Direct Taxes Paid and Others -19.4 -42.2 -63.3 -74.5

Long-Term Borrowings 13.8 7.8 11.1 11.2 Operating Cash Flow 72.7 240.3 284.4 75.7

Other Long-Term Liabilities 842.3 986.8 1089.9 1269.5 Capital Expenditure -159.9 -6.9 -168.6 -12.8

Total Liabilities 2392.2 2575.8 2788.0 3114.5 Dividend Received 0.0 0.0 0.0 0.0

Gross Block 536.9 543.8 712.3 725.1 Others -19.8 -32.0 157.2 0.0

Less: Acc. Depreciation 87.0 103.6 128.1 153.9 Cash Flow from Investing -179.7 -38.9 -11.4 -12.8

Net Block 449.9 440.2 584.2 571.3 Increase/(Decrease) in Loan Fund 456.8 -189.8 48.0 338.5

Capital Work in Progress 125.3 157.2 0.0 0.0 Others -58.7 -25.2 -41.9 -41.9

Non-Current Investments 0.5 0.4 0.5 0.5 Interest Paid -175.3 -181.8 -186.0 -216.2

Net Current Assets 2141.0 2359.2 2732.0 3223.4 Cash Flow from Financing 222.8 -396.8 -179.9 80.3

Deferred Tax Assets -420.3 -506.5 -672.6 -848.4 Net Change in Cash 115.8 -195.4 93.1 143.2

Other Non-Current Assets 95.9 125.3 143.9 167.7 Opening Cash Balance 519.2 635.0 439.6 532.7

Total Assets 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.

Initiating Coverage-BGR Engery Systems Limited

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