Initiating - Nirmal Bang Energy Ltd_IC_230311.pdf · Initiating Coverage ... supercritical boilers and steam turbine generators ... capacity to manufacture 5 units per annum of either

Initiating Coverage BGR Energy Systems Ltd.

Recommendation BUY Snap shot Incorporated in 1985, BGR energy system Ltd (BGR) is one of the fastest growing Engineering company in Power sector especially in BOP and EPC space. The company carries the business operation under two segments namely, supply of equipments & Turnkey Engineering Project. In August 2010, the company announced JV with Hitachi group Ltd for manufacturing of Boiler and Turbines (BTG) for super critical power plants up to the capacities of 660 MW, 800 MW and 1000 MW. BGR Energy will hold more than 70% stake in JV. With this JV, BGR will turn into full fledge integrated power equipment player.

Investment Rationale Near term hiccups in the Industry, but long term promising ‐ In

recent past, we had seen delay in getting new orders by Power Engineering companies like BGR and that is one of the key reason for the correction in the stock prices. But the sector potential is enormous, as per CRISIL, market opportunity in BOP alone is Rs 1.6 trillion in next five years. FY12 being the last financial year of 11th plan, govt & other govt related company will be clearing the backlog which will result into higher order inflow for power engineering companies

Healthy order book provides revenue visibility. BGR has healthy order book of Rs. 9317 Crs. (1.91x FY11E revenues), providing reasonable revenue visibility. BGR has bided for orders worth of Rs. 36000 crs & expect to get good share in this bid during FY12.

Transforming into Premium League of BTG. – Over the years BGR has emerged from a small BOP player to full fledged EPC player. Recently BGR has formed a JV with Hitachi group to set up a 4,000 MW of manufacturing facility each for Boiler & Turbine sets. Notably, BGR is the third player (after BHEL and L&T) to set up domestic facility for the entire BTG package.

Robust Financials: Over the past few years, the company has grown at a phenomenal pace by bagging some large ticket size orders. We believe the company is likely to continue with similar pace over next few years. Entry into the BTG space will add more fuel to growth going forward. We expect company to grow at a CAGR of 32.6% at top line & 30.9% CAGR PAT level from FY10‐12E.

The stock is trading at attractive valuation of 9.8 FY12E earnings with EPS of Rs. 47.3 We Initiate coverage on BGR Energy with a BUY rating and target price of Rs.662, which implies around 40% upside from current levels.

CMP (23/03/2011) Rs 472

Target Rs 662

Sector Engineering

Stock Details

BSE Code

NSE Code

Bloomberg Code

Market Cap (Rs. cr)

Free Float (%)

52‐ wk HI/Lo

Avg. volume (monthly)

Face Value ( Rs.)

Dividend (FY10)

Shares o/s (Nos. in cr)

532930

BGR

BGRL IN

3693

19.9%

817/434

77583

10.0

70%

7.20

Relative Performance 1 Mth 3 Mth 1 Yr

BGR ‐16.1% ‐33.2% 0.5%

Sensex ‐3.1% ‐10% 13.9%

Shareholding Pattern as on 31/12/2010

Promoters Holding 81.1%

FII, Banks & Institutions 13.1%

Corporate Bodies 0.9%

Public & others 4.8%

Anand Vyas, Research Analyst (022‐39268173) [email protected]

Year Net Sales ( Rs. Crs)

Growth (%)

EBIDTA( Rs. Crs)

Margin (%)

PAT ( Rs. Crs)

Margin (%) EPS ( Rs.) P/E (x) P/BV (x)

FY 2009 1922.1 26.4% 204.0 10.6% 111.2 5.8% 15.4 30.6 6.06

FY 2010 3,069.2 59.7% 341.9 11.1% 198.7 6.5% 27.6 17.1 4.83

FY2011E 4,788.1 56.0% 552.2 11.5% 324.9 6.8% 45.1 10.5 3.60

FY2012E 5,394.5 12.7% 605.6 11.2% 340.4 6.3% 47.3 9.9 2.83


Investment Rationale

Industry: ‐ Long term promising, but near term hiccups

India has come a long way in terms of Installed power capacity, which has increased from 1362 MW during Independence to over 165000 MW presently. However, fact remains that the annual per capita consumption of electricity in India is still one of the lowest in the world. India has experienced a peak power shortage of 16‐17% in recent times. With burgeoning economy, pushing the demand of power to all time high , the GOI has initiated for 1,00,000 MW of additional capacity by 2017 ( 12th Plan).

As per CRISIL, around 66 GW of power generation capacity is expected to be added in next fiive year ( 2009‐10‐2013‐14), an average of 13.2 GW per year. BOP (Balance of Plant) accounts for around 40% of total project cost. Over the next 5 years (2010‐11 to 2014‐15), CRISIL Research estimates the BoP segment to accounts for Rs 1.6 trillion; this translates to a CAGR of almost 15 per cent.

. Opportunity in BOP Over Next 5 years.

Sources:‐ Industry, CRISIL, Nirmal Bang Research

Although power sector gives immense opportunity for next five years, but, near term, there are few hiccups like:‐ (1) Rising Interest rate which will result into delay in orders from IPP’s (2) Lack of funds with SEB’s (3) Environmental Clearance for projects, (4) Shortage of Coal, etc . All the above factors have resulted into lack orders inflow for the Industry. However, above factored are short term and we expect Industry to witness huge order inflow going forward.

According to CRISIL, 66000 MW of capacity addition is planned by 2014E.

BOP (Balance of Plant) accounts for 40% of total capex of Power Plant.


Jv with Hitachi‐ takes BGR to Premium League In August 2010, BGR formed a Joint Venture with Hitachi Group for both supercritical boilers and steam turbine generators, thereby completing the final leg of value chain in power plant. . With this JV, BGR is the only company (after BHEL and Larsen & Turbo) to set up a domestic manufacturing facility for the entire BTG (Boilers & Turbine Generators sets) package. The JV with Hitachi will provide BGR credible support for its EPC bidding, eventually establishing itself as integrated power equipment player

Third Indian player to manufacturer entire BTG package

Sources:‐ Industry, Nirmal Bang Research

JV details:- BGR has signed two JV with Hitachi group one each for super critical boilers and turbines. For boilers its has sign with Hitachi Power Europe (HTE) Germany, and for turbine & generators sets it has signed with Hitachi , Japan. BGR would hold majority of stake in both the JV’s with 70% & 74% share in boilers and turbine respectively. Capacity & Capex:‐ Both JV’s will have capacity of 4000 MW each and will have capacity to manufacture 5 units per annum of either 660MW, 800MW and 1000MW. Total capex for entire JV is around Rs. 4400 Crs (Rs. 3000 Crs for Boilers and Rs. 1400 Crs for turbine). BGR plans to fund this capex in the ratio of 70:30 (debt/equity), which results in BGR’s equity contribution for total JV to be around Rs. 950 crs. For JV BGR, has already taken principal approval from banks to funds its debt. It has already identified the land near Chennai for manufacturing facility of boilers and is likely to proceed for land acquisition shortly for turbine sets space.

Indian Companies

International Players

JV Ratio Boilers ( MW)

Turbines (MW)

Capex(Rs. In Crs)

Expected Commissioning

Location

L&T Mitsubishi 49:51 4000 4000 3600 FY11‐12 Hazira

BHEL NA NA 150005000

150005000 3000

Existing FY13

At Current Facilities

BGR Hitachi 74:26 4000 4000 4400 FY12‐FY13 Chennai

JSW Toshiba 24:76 ‐ 3000 1200 FY12‐13 Tamil Nadu

Bharat Forge Alstom 49:51 ‐ 5000 2400 FY12‐13 Mundra

Gammon Ansaldo 15:85 2000 1000 NA Trichy

Thermax Babcock

51:49 3000 3000 FY12‐13 Pune

BTG accounts for 60% of Power plant Capex

JV will lead BGR to full fledge Power equipment supply (after BHEL & Larsen)


Robust order book gives revenue visibility BGR has healthy order book of Rs. 9,371 Crs (1.91x FY1E revenues) providing near term revenue visibility to the company. Though company operates in five business verticals, power projects is its core revenue contributor and accounts for 93‐95% of total order backlog. The growth in order inflow has been robust for BGR in past 2‐3 years as company has been able grab large ticket size orders.

BGR is expecting strong order from its pipeline as several SEBs (State Electricity Boards) and IPPS’s (Independent Power producer) are expected to roll out EPC and BOP orders cumulating Rs35000‐36000 Crs, during the next few quarters. Company has already bided for the orders & expect reasonable share in it. . The company has currently placed bids for two EPC projects of 2x660MW in Rajasthan in which, BHEL is L1 bidder & and BGR is L2. The tender had a condition to allot 1 project to L2 bidder if it matches the L1 price. The management is confident of getting at least one order worth of Rs. 6100 crs from RRVUNL. BGR is already technically qualified for NTPC 11x 660 MW bulk tenders for boilers.

Sources:‐ Company Presentation, Nirmal Bang Research

Order inflow for the company has been muted in FY10 and 9MFY11 so far on account of management focus on execution of its large project and lack of orders from Industry. Going forward, we expect BGR to witness order inflow of Rs. 2800 Crs in FY11 and Rs. 10,625 Crs in FY12E. Assumption 1:‐ We have not factored in order worth of Rs. 6000 Crs from Rajasthan in our assumption, as BHEL is L1 Bidder Assumption 2:‐As show in above chart, If BGR get order from RRVUNL worth of Rs. 6000 Crs., (as Customer has a choice to give order to L2 & BGR has already executed some projects for Rajasthan govt.) then its total order inflow will increase to Rs. 8800 Crs & order backlog will increase to Rs. 14196 Crs in FY11E and Rs. 18815 Crs in FY12E.

BGR has placed bids worth for Rs. 35000‐36000 Crs. & we expect BGR to get 25%‐30% of above orders.


Risk Concerns Slowdown in economic growth may impact business:‐ BGR’s growth is directly correlated to investment in core sector of Indian economy. Any slowdown in the Indian economy may hamper the capital expenditure plans of the core sector industries and could adversely affect the company’s business. Execution delay:‐ Timely execution of projects is the key to success for BGR. The company is undertaking execution of large scale projects, any major hiccups or delays in the execution timeline could negatively impact our revenue and profitability estimates. Order inflow:‐ BGR has done well to grab large ticket size order post 2007‐08, to scale up the operation and to become the full fledge player in EPC. Thus, to sustain the earnings growth order inflow becomes crucial. Although we are fairly confident of BGR‘s ability to bag large size order, but any failure in winning fresh order could hamper the growth.

Peer Comparison We are comparing BGR Energy with BHEL, Thermax,& Tecpro as these companies are having presence in either BOP or EPC or BOP+EPC. On forward earnings, (FY12) BGR is trading at attractive valuation of 9.9x, against average 13‐14x.

Sources: * ‐ Bloomberg consensus, ** Nirmal Bang Estimates

Companies CMP

Sales EBIDTA Margin(%) PAT PAT Margin (%) EPS P/E

FY11 FY12 FY11 FY12 FY11 FY12 FY11 FY12 FY11 FY12 FY11 FY12

BHEL 1995

40,747.50

49,477.60 19.3% 19.4%

5,541.20

6,639.80 13.6% 13.4% 113.4 138.1

17.59

14.45

Thermax 586

4,701.70

5,915.80 11.6% 11.5%

368.70

461.80 7.8% 7.8% 30.86 38.6

18.99

15.18

BGR 472

4,788.10

5,394.49 11.5% 11.2%

324.87

340.42 6.8% 6.3%

45.12

47.28

10.46

9.98

Tecpro 243

1,864.26

2,670.68 14.3% 13.8%

121.16

171.27 6.5% 6.4%

23.90

33.90

10.17

7.17


Outlook & Valuation BGR Energy (BGR) has taken several 'bigger' leaps over the years, from being a mere manufacturer of a few BOP (Balance of Plant) components to executing Turnkey BOP projects, & executing EPC contract to a integrated power equipment player The government's thrust to the core power sector of the economy has led to power generation targets being bigger than ever, translating into a huge opportunity for BOP players. We believe that BGR Energy, being one of the very few established players would be key beneficiary of the same. With its successful entry into BTG space (JV with Hitachi group) BGR has moved to last leg of value chain. BGR has an order book of Rs. 9713 Crs. (1.91xFY11E revenue), provides decent near term revenue visibility. During the FY10‐FY12E, we expect BGR to register 32.6% CAGR on top line and 30.9% on bottom line. We have not factored Order worth of Rs. 6000 Crs from RRVUNL (2x660 MW) in our assumption. However, management is confident of bagging the order in Q4FY11.

Particulars ( Rs. In crs) FY12E Without Rajasthan Order

FY12E , including Rajasthan Order

Revenue 5394.5 5994.4

PAT 340.4 360.1

EPS (Rs.) 47.28 50.1

Order backlog 13416 18815

Sources:, Nirmal Bang Research If BGR gets the Order, then it revenue for FY12E will increase to approximately Rs. 5994.49 Crs and PAT will increase to Rs around 360.1 Crs, which will result in EPS of Rs. 50.1 against 47.28.


1 Year Forward P/E Chat

Sources:‐ (Company Presentation, Nirmal Bang Research)

Since listing (Jan. 2008), the company has traded in wide forward P/E band range with an average P/E of 13‐14x. We are assigning the multiple of 14x, higher side on historical average due to its evolution from a small BOP contractor to a full fledge power equipment Player. At CMP, stock is trading at 9.9xFY12E earnings with an EPS of Rs. 47.28. We Initiate coverage on BGR Energy with a BUY rating and a target price of Rs. 662, which implies around 40 % upside from current levels


Business & Background

BGR was incorporated in 1985, as JV between GEA Energietechnik GmbH and Mr. B G Raghupathy (promoter) to manufacture specific boiler auxiliary and components for thermal and nuclear power plants. From a small equipment manufacturer, BGR has emerged as a prime player in BOP & EPC space. Apart from operating in BOP & EPC space, BGR also manufacturer products like air cooled condensers, de‐aerators etc, which caters to both Power & Industrial sector.

Technology Tie‐Ups

Year Partner Product

1996 GEA Energietechnik, Germany Dry & Wet Cooling System

2003 American Engineering services, USA Waste water treatment and Reclamation

2007 INIMA and Aqualia, Spain Desalination plant on EPC on EPC/BOOT Basis

2008 Termomeccanica TME, Italy Condensate Polishing Plants

2010 Nooter / Eriksen Inc, USA Heat Recovery Steam Generator ( HRSG)


Apart from Turnkey projects, BGR also manufactures about 50% of the BOP package requirements in‐house, which gives an edge both in terms of cost and lesser sub‐vendor management. Additionally, its proven track record in managing equipment and turnkey projects helps the company to further strengthen its position against new entrants.

……. Transformed into full fledge power equipment player

BGR was primarily a small BOP player. But in 2008, BGR won two large contracts on EPC & thereon it started focusing on its core skills from BOP to entire EPC package (Sourcing BTG from Chinese player). Then in Aug 2010, BGR announced JV with Hitachi group for setting up entire manufacturing facility of 4000 MW BTG.


…. Established track record

Over the years, BGR has gradually increased its expertise from a small BOP company to undertaking turnkey contracts for large sized units of 600 MW

Impressive list of List of BOP projects.


In 2008‐09, BGR marched ahead to the next level of expertise and bagged two major order full fledge EPC contract ( Rs. 8000 Crs). These contract include 1x600 MW from Mettur Power plant & 2x600 Mw from Jhalawar, Rajasthan

EPC:‐ Orders from Kalisinadh & Mettur taking BGR to next Level value chain.


The BOP portfolio of these projects is being handled by BGR itself, whereas the BTG package is being sourced from Dongfang, China. Both the EPC projects are presently on scheduled and by the end of FY11E, management expects is to complete more than 75% of RRUVNL and 90% of Mettur Project.

Project Size ( MW) Value status

CSPGCL, Marwa TPS, Chattisgarh 2x500 1633 Under Execution

MAHAGENCO, Chandrapur, Maharashtra 2x500 1632 Under Execution

APGENCO, Kothagudam, AP 1x500 793 Under Execution

MAHAGENCO,Kaperkheda, Maharashtra 1x500 998 Under Execution

APGENCO, kakatiya, AP 1x500 694.9 Completed

RRVUNL, Dholpur, Rajasthan 330 209.5 Completed

APGENCO, Vijaywada, AP 1x500 578.8 Completed

TNEB‐CCPP Valathur ( ohase‐I), T.N 95 59.4 Completed

Project Size ( MW) Value status

RRUVNL, Kalisinadh TPS, Jhalawar, Rajasthan 2x600 4900 Under construction

TNEB, Mettur Thermal Power plant 1x600 3100 Under construction

Aban Power ‐CCPP, Karuppur, T.N 120 269.7 Completed

TNEB‐CCPP Valathur ( Phase ‐II), Tamil nadu 92.2 355.3 Completed


Business Division:‐ BGR operates its business through five primary business division:‐

Power Division:‐ Division provides turnkey EPC and BOP services for coal based thermal power plant & Gas based combined cycle plant. The division remains the key revenue driver for the company and accounts 94% of FY10 total revenue, & 93% of total order book. Current Order book power division is around Rs. 8525 Crs. Oil & Gas Equipment Division: It designs and manufactures storage tanks, gas conditioning and metering skids, pipeline pig launching gas compressor packages, gas processing complexes etc., related to oil & gas Industry , for the company in India and abroad. Total order book of the division is Rs. 433.8 Crs. Air Fin Coolers: ‐ it supplies air cooled heat exchanger for Oil & Gas and Power Industry. BGR has turnkey capabilities in the design, manufacture, supply commissioning and erection of air fin coolers/ tube bundles/ tubes. Division accounts for Rs. 181.7 Crs of current order book Environmental Engineering: ‐ Division manufactures and provides deaerators, effluent treatment and recycling plant, desalination plant, water treatment plants, which have application in the power and in other industrial use. Total order book Environmental division is around Rs. 60.6 Crs. Electrical Project:‐ The Electrical Project division designs and supplies electrical systems and equipment such as optical fibre wires, EHVS, transmission lines, gas insulated switchgear substation s to power, refineries & petrochemical plants. Total order book of the division is Rs. 114.6 crs

Revenues Break up Order backlog break up


Power Division94%

Oil & gas2%

Air Fin Coolor3%

Electrical project division

0%

Enviornmental Engg.

1%

Oil & Gas Eq. 5%

Power Division91%

Enviromental Engg.1%

Electrical Project1%

Air Fin Coolers2%


Financials ( Standalone) Y/E ‐ March FY09 FY10 FY11E FY12E Financial Health (Rs. In FY09A FY10A FY11E FY12E

Revenues ‐ Net 1,922.1 3,069.2 4,788.1 5,394.5 Share Capital 72.0 72.0 72.0 72.0

% change 26.4% 59.7% 56.0% 12.7% Reserves & Surplus 489.1 631.2 871.9 1128.0

EBITDA 204.0 341.9 552.2 605.6 Net Worth 561.1 703.2 943.9 1200.0

% change in EBIDTA 31% 68% 62% 10% Total Loans 707.8 932.6 1440.1 1596.3

Interest 57.9 53.8 64.8 75.8 Deferred Tax Liab 78.5 158.9 158.9 158.9

EBDT 228.7 357.1 549.7 599.5 Total Liabilities 1347.4 1794.7 2542.9 2955.2

Depreciation 7.0 9.8 14.5 18.0 Net Fixed Assets 96.5 149.4 169.6 201.6

Other Income 31.7 25.0 12.0 12.0 Investments 4.8 4.8 154.8 554.8

PBT 170.8 303.3 484.9 523.7 Inventories 12.5 15.4 29.6 33.4

Tax 59.6 104.7 160.0 183.3 Debtors 1278.0 1978.7 2992.6 3371.6

PAT 111.2 198.7 324.9 340.4 Cash & Bank 610.8 1023.4 1449.2 1273.2

Equity(in Cr.) 72 72 72 72 Loans & Adv 645.4 727.0 855.4 1009.0

EPS 15.45 27.60 45.12 47.28 Other Current Assets 18.6 18.9 26.3 31.1

Cash EPS 16.42 28.95 47.13 49.79 Current Assets 2565.3 3763.5 5353.0 5718.3

Current Liabilities 1229.0 1889.8 2882.2 3244.4

Operational Ratio FY09 FY10 FY11E FY12E Provisions 90.2 233.2 252.3 275.0

EBITDA margin (%) 10.6% 11.1% 11.5% 11.2% Current liab & Prov 1319.1 2123.0 3134.5 3519.4

PAT margin (%) 5.8% 6.5% 6.8% 6.3% Working Capital 1246.2 1640.5 2218.5 2198.9

EPS Growth (%) 25.7% 78.6% 63.5% 4.8% Total Assets 1347.4 1794.7 2542.9 2955.2

Price Earnings (x) 30.56 17.10 10.46 9.98 Cash Flow (Rs. In Cr) FY09A FY10A FY11E FY12E

Book Value (Rs.) 77.94 97.67 131.09 166.67 Operating

ROE (%) 19.8% 28.3% 34.4% 28.4% Operating Income 174.7 304.7 484.9 523.7

ROCE (%) 9.4% 12.6% 15.0% 12.4% Change in WC ‐153.9 ‐66.9 ‐137.4 ‐146.7

Debt Equity Ratio 1.26 1.33 1.53 1.33 Other Adjustment 77.9 158.7 78.7 118.9

Price / Book Value (x) 6.06 4.83 3.60 2.83 Tax Paid ‐59.6 ‐104.7 ‐160.0 ‐183.3

EV / Sales 2.29 1.51 1.07 0.98 CF from Opeartion 39.0 291.8 266.1 312.6

EV / EBIDTA 21.60 13.55 9.31 8.74 Investment

Orderbook/ Sales 5.16 3.10 1.71 2.48 Capex ‐54.3 ‐58.8 ‐45.0 ‐50.0

Qtrly Q4FY10 Q1FY11 Q2FY11 Q3FY11 Other Investment 150.9 0.0 ‐150.0 ‐400.0

Revenue 1,659.8 905.7 1,134.9 1,256.8 Total Investment 96.6 ‐58.8 ‐195.0 ‐450.0

Total Exp. 1,484.6 802.9 1,003.3 1,109.7 Financing

EBIDTA 175.2 102.8 131.6 147.1 Dividend Paid ‐14.4 ‐21.6 ‐84.2 ‐84.2

EBIDTA Margin (%) 10.6% 11.3% 11.6% 11.7% Premium / Reserve 1.4 2.3 0.0 0.0

Depreciation 3.1 3.1 3.3 3.4 Borrowing 206.2 224.8 506.5 156.2

Interest 11.8 11.6 13.8 16.8 Other Income 31.7 25.0 12.0 12.0

Other Income 3.9 2.6 2.6 1.7 Interest ‐57.7 ‐53.5 ‐79.6 ‐122.6

EBT 164.2 90.7 117.1 128.6 Total Financing 167.3 177.0 354.7 ‐38.7

Tax 55.9 31.2 31.2 40.0 Net Chg. in Cash 302.9 410.0 425.8 ‐176.0

PAT 108.3 59.5 59.5 77.1 Cash at beginning 307.9 610.8 1023.4 1449.2

EPS 15.05 8.27 8.27 10.70 Cash at end 610.8 1023.4 1449.2 1273.2


NOTE

Disclaimer This Document has been prepared by Nirmal Bang Research (A Division of Nirmal Bang Securities Pvt Ltd). The information, analysis and estimates contained herein are based on Nirmal Bang Research assessment and have been obtained from sources believed to be reliable. This document is meant for the use of the intended recipient only. This document, at best, represents Nirmal Bang Research opinion and is meant for general information only. Nirmal Bang Research, its directors, officers or employees shall not in any way be responsible for the contents stated herein. Nirmal Bang Research expressly disclaims any and all liabilities that may arise from information, errors or omissions in this connection. This document is not to be considered as an offer to sell or a solicitation to buy any securities. Nirmal Bang Research, its affiliates and their employees may from time to time hold positions in securities referred to herein. Nirmal Bang Research or its affiliates may from time to time solicit from or perform investment banking or other services for any company mentioned in this document

Initiating - Nirmal Bang Energy Ltd_IC_230311.pdf · Initiating Coverage ... supercritical boilers and steam turbine generators ... capacity to manufacture 5 units per annum of either

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