BGR Energy Systems: Power Struck

BGR Energy’s valuations are stretched based on past performance. But its high growth prospects make it attractive for the long term

COMPANY: BGR ENERGY SYSTEMS
ISSUE SIZE: RS 388.3-438.5 CRORE
PRICE BAND: RS 425-480
DATE: DECEMBER 5-12, ’07

CHENNAI-BASED BGR Energy Systems is coming out with an IPO comprising 4.32 million new equity shares and 4.82 million equity shares of its promoters. Post-issue, shareholding of promoters will fall to 81.3%. It plans to raise Rs 207 crore from the IPO and Rs 138 crore from pre-IPO placements, at the upper price band, to fund its long-term working capital needs of Rs 125 crore and expansion plans of Rs 80 crore. It will set up manufacturing facilities in India, China and Bahrain over the next 12 months. Investors with a 12-month horizon can invest in the IPO.

BUSINESS:
BGR supplies systems and equipment to process industries and undertakes turnkey engineering projects in power, environmental engineering and infrastructure sectors. In power generation projects, it undertakes turnkey projects to supply balance of plant (BOP) or all items other than boiler, turbine and generator. It has executed 131 projects so far in 42 countries and has an order book of over Rs 3,300 crore, 75% of which is contributed by power projects, with the oil & gas industry representing 13%.

GROWTH STRATEGY:
The company is well placed to benefit from the spurt in domestic power generation industry, which may invest Rs 3 lakh crore in the next five years to add over 65,000 mw of capacity. From BOP contracts, it’s moving up the value chain to obtain main engineering, procurement and construction (EPC) contracts. Overseas manufacturing facilities and Mundra SEZ will help reduce delivery time and improve cost efficiencies.

FINANCIALS:
BGR’s financials are not comparable with its past performance due to a change in its financial year and also because it sold a part of its business in June ’07. A comparison of the performance for the 18-month period ended March ’07 against comparable adjusted figures for the year ended September ’05, shows that sales have risen 77% to Rs 786.8 crore. With improving operating margins, net profit is up 97% at around Rs 40 crore.

VALUATIONS:
Given the post-listing equity of Rs 72 crore, it demands a P/E of 49.4 at the higher price band. This is on an annualised EPS of Rs 9.7 for the June ’07 quarter. Based on annualised EPS for the 18-month period ended March ’07, P/E stands at 129.7 at the higher price band. The group of comparable listed companies from engineering/capital goods space trades at an average P/E of 61.4 based on EPS of trailing 12 months. IPO valuations are stretched based on past performance. But considering high growth potential, long-term investors can subscribe to it.

RISKS:
BGR’s move to become the main EPC contractor for power projects will put it in direct competition with players which have hitherto been its clients. Moreover, the ban imposed on it by Bhel for three years may adversely impact its business in future.