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Saturday, November 02, 2013

BGR Energy System Ltd: Market missed one of greatest news in the history of overseas order 
BGR Energy System Ltd (BSE Code: 532930) is a leading EPC and Balance of Plant (BoP) engineering and contracting company for power projects in India. BGR Energy designs and manufactures over 20 high technology systems for Power project and Processes Industries contributing substantially to the growth of the Energy industry in India and abroad for over 25 years. Strategic partnership with global leaders in power equipment and capital goods enables it to manufacture and offer world class products and services to its customers. Over 2300 professionals and with deep domain expertise in product design, fabrication and construction experience spearheads cutting edge leadership in the sector. 
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BGR Energy Systems Ltd very recently entered into an Engineering, Procurement and Construction (EPC) contract for a value of USD 246 Million with Ministry of Electricity, Government of Iraq for AL Nasiriya 500MW (4x125) Gas Turbine Power Plant Project.

Now, the question is how much is $ 246 Million in Indian currency at the conversion rate of Rs.61.40 per USD? It is Rs.15, 104.4 million or Rs.1510.44 Cr. This is a huge order and have caught many analysts on the wrong foot. Inspite of some brokerage  houses like Motilal Oswal saying in their February, 8, 2013 research report: "EBITDA margin has started to show a declining trend, as expected, due to increasing weight of EPC project revenues. Currently, margins are still at higher levels due to favorable mix, which we believe will reverse as execution of EPC projects (75% of outstanding order book) increases. Management expects margins to stabilize at 11-12% in FY13/FY14", the company was able to maintain a steady NPM (Not EBITDA) of around 4.55-5.51 during the last one year. In the June, 2013 quarter we even saw a healthy growth in both top and bottomlines. 

The OPM margin also remained almost flat during one year period, hovering around 12.92 -15.27%. 

However, Deteriorating working capital and high leverage in the balance sheet continue to remain in uncomfortable zones. One silver lining seems to be in the speech of the RBI governor, who indirectly indicated that for the short term, it might have done away with the Repo hike. 

Moreover, there was no naked Repo hikes during the last two occasions of the RBI meet and these can only be called as precautionary measures to bring down inflation expectations.

The current order book of BGR Energy Systems Ltd, including the Al Nasiriya Power Project contract, stands at whooping Rs.13, 325 Cr. Given  the strong order book position, revenue growth visibility over FY14E-15E remains intact. However, besides the margin concern on NTPC bulk tender orders, a new concern stemming from exorbitant levels of debt would keep pressure on the stock; despite the fact that most of this debt continues to remain short-term working capital debt. Nevertheless, BGR Energy's operating performance could improve in the coming months led by better-than-expected margins. 

In this context, I feel it would not be an exaggeration to mention that some day back there were some media reports that, R N Nayak, CMD, Power Grid Corporation, said, "Let me clarify at the outset that PowerGrid Corporation and transmission sector in general have not at all impacted due to slow down in the economy. We are progressing as per our growth plans. For the current fiscal we have proposed capex of Rs.22,150 crore of which Rs 11,500 crore worth is already achieved". Thus power sector would continue to perform, in the days ahead; though may not be as satisfactory as one would have expected. 

On November 01, 2013, BGR Energy Systems closed at Rs 115.65. The 52-week high of the share was Rs.280.00 and the 52-week low was Rs 70.55. The company's trailing 12-month (TTM) EPS was at Rs 23.20 per share as per the quarter ended June 2013. The stock's price-to-earnings (P/E) ratio was 4.98. The latest book value of the company is Rs.169.00 per share. At current value, the price-to-book value of the company was 0.68.

Thus the scrip is still rolling at an abnormal price of Rs.115.65 and is a clear buy with a SL of Rs.110.70. CLICK HERE.