BGR Energy---A good stock to own (updated)

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BGR Energy

Given the current order book, which stands at over 7.2 times its FY08 revenues, there is good earnings visibility for the next three to four years. With faster execution of these projects, the company’s revenues and earnings are expected to grow at a CAGR of 60 per cent over the next two years.At Rs 160, the stock is trading at 8.5 and 5 times its estimated FY09 and FY10 earnings, respectively. The faster growth, vast opportunity in the power sector and reasonable valuations make BGR a good investment. Investors can expect returns of 45-50 per cent over the next 18 months.

The company’s order book, which was about Rs 3,000 crore a couple of months ago, has now gone up significantly to Rs 11,000 crore.
This improvement is mainly on account of the order worth Rs 3,100 crore the company received from Tamil Nadu Electricity Board. And, very recently, the company bagged its biggest order ever, for EPC works, worth Rs 4,900 crore from Rajasthan Rajya Vidyut Utpadan Nigam.
Importantly, these orders, in a way, highlight the company’s capabilities, as both of them were won amid stiff competition, including from the likes of BHEL. Little wonder, the company’s share price, which had declined almost 67 per cent during the recent market correction, is now up from its low of Rs 220 to the current levels of Rs 306.
Notably, these recent order wins have not set the company resting on its laurels. BGR is now eying a significant share of the upcoming opportunities in the form of orders worth Rs 20,000 crore, which should further improve its order book in the next six to eight months.

Sizable opportunity

The growing investments in the power sector have translated into huge opportunities for many companies, directly and indirectly catering to the needs of the sector.
BGR Energy Systems is one such player generating about 90 per cent of its total revenues from the BOP (balance of plant) and EPC (engineering, procurement and construction) works undertaken for the power sector.

Typically, power generation companies and large EPC contractors outsource the ancillary systems (excluding key equipment like boilers, turbines), components, structures and services required for the completion of the power plant to the third parties, which is popularly known as BOP (balance of plant) work.

BGR provides BOP services and equipment required for the construction of power plants; mainly gas and coal based power plants. Notably, the BOP opportunity is quite significant. According to industry estimates, a major part of the total power project cost or about 40 per cent is earmarked towards BOP equipment and services.

In India, work contracts for about 16,000 mw is yet to be announced for the eleventh five year plan. Also, for the twelfth five year plan, which targets a capacity addition of about 85,000 mw, orders will start flowing from the FY10 onwards.

Considering this, the industry estimates about 50,000 mw of capacity addition over the next five years, including 35,000 mw in coal and gas based power plants. This would translate into significant opportunity in the BOP space, which is estimated at Rs 55,000 crore over the next five years. BGR, which is among the leading players in BOP segment, which contributes about 60 per cent to its total revenues, should emerge as a key beneficiary of the unfolding opportunity.

New growth avenues

In addition to this, there are equal opportunities in the EPC (excluding BOP, which forms a part of the total EPC) segment as well.

The value of EPC works (excluding BOP) as a percentage of total power project cost works out to about 40-50 per cent. Industry experts estimate this opportunity to be worth Rs 71,000 crore over the next five years based on the proposed capacity addition.
However, EPC projects require proven capability and experience, thus this segment is currently dominated by the large domestic and international players. BGR is scaling up its capabilities in this business gradually. And despite the competition from the large EPC companies such as BHEL, it has been successful in procuring large EPC projects recently.

Earlier, the company bagged a 600 mw project Tamil Nadu Electricity Board worth Rs 3,000 crore, and now, it bagged two projects of 600 mw each from the Rajasthan Rajya Vidyut Utpadan Nigam with a combined value of Rs 4,900 crore. Consequently, EPC’s share in total revenues will rise to roughly 50 per cent in FY10 as against 20 per cent in FY08.
But, despite the rising share of EPC (which typically enjoys lower margins of 9 per cent as against 11 per cent in BOP), economies of scale in the business is expected to help improve operating margins, albeit marginally, from 10.5 in FY08 to about 11 per cent. With these developments, the company is expecting its net profit margins to improve from 5.8 per cent in FY08 to about 6.5 per cent in the next two years.

SPOTLIGHT
Rs crore
FY08 FY09E FY10E
Sales 1523.00 2350.00 3900.00
Op. profit 160.00 259.00 429.00
OPM (%) 10.50 11.00 11.00
Net profit 88.30 136.30 226.20
EPS (Rs) 12.27 18.93 31.42
PE (x) 13 8.5 5

Exports boost

Besides power, the company also undertakes industrial and oil and gas projects supplying products and services, mainly to customers in the international markets.
Last year, this segment contributed about 13 per cent of the company’s total revenue; export turnover of about Rs 130 crore. However, the company is targeting an export turnover of Rs 400 crore in FY09. And, to further enhance its position in the overseas markets, BGR is setting up manufacturing and assembly facilities in Bahrain and China, which are estimated to cost Rs 55.5 crore.
These new facilities will target the opportunities in the oil and gas and power sectors in the Middle East, Europe, North Africa and South East Asia. The benefits of these moves will also accrue in the form of the company becoming eligible to bid for larger projects of Rs 300-400 crore.
POWER CAPEX
Rs crore
Utility Captive Total
Capacity (MW) 50,000 12,000 62,000
Coal/gas based (MW) 35,000 10,800 45,800
Total capex (Rs cr) 157,500 48,600 206,100
EPC capex (5 year, Rs cr) 126,000 38,880 164,880
EPC capex (1 year, Rs cr) 25,200 7,776 32,976
BOP capex (5 year, Rs cr) 55,125 17,010 72,135
BOP capex (1 year, Rs cr) 11,025 3,402 14,427
Note: These are the broader industry estimates based on planned capacity over the next five years


Investment rationale

Even as there is competition in the segments that the company operates in, there are equally large opportunities, including in the BOP space where the company is among the leading players. The benefits from its foray into the EPC business and further success in winning large projects will drive BGR’s future growth.

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