bgr energy systems

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BGR ENERGY SYSTEMS

BGR was incorporated as a joint venture between GEA

Energietechnik GmbH, Germany and the Promoter, Mr.

B.G. Raghupathy, to manufacture and sell On‐line

Condenser Tube Cleaning Systems, Debris Filters and

Rubber Cleaning Balls used in Thermal and Nuclear

Power Plants.

The company executes Turnkey Contracts to supply the

Balance of Plant ("BOP") Equipment, Services and Civil

works for Power Generation projects, in which it

supply, from a single source, the Balance of the plant,

i.e. items other than the Boiler, Turbine and Generator.

Having successfully executed BOP contracts, it has

begun to focus on Engineering, Procurement and

Construction ("EPC") contracts, in which it Design,

Engineer and Supply all of the equipment required for

a Power Plant including the Boiler, Turbine and

Generator and Civil works. The Company is currently

executing BOP and EPC contracts tailored to customer

demands. It also has an infrastructure business

intended to provide construction services and

technology oriented projects to the infrastructure

sector.

BGR is one of the strongest plays in the construction

space with concentrated focus on the power segment.

It with its strong expertise & competent in house

manufacturing capabilities has emerged as one of the

leading player in the BOP space. Over the last 24 years,

BGR has transformed itself from being a multi product

manufacturer for the power plants to a turnkey service

provider undertaking entire BOP contracts

independently from the domestic State Electricity

Boards (SEBs). The company has completed more than

130 contracts in India and abroad.

CMP (02/02/2010) 474.90

Stock Details

BSE Code: 532930

NSE Code: BGRENERGY

Bloomberg Code: BGRL.IN

Market Cap (Rs Cr) 3733

Shares O/S 72 mn

52 Week H/L 590/107

Face Value Rs 10

Relative Performance 1m 3m 1Yr

NTPC (2)% 10% 228%

Nifty 2% 2% 71%

Shareholding Pattern as of 31/12/2009 Promoters 81.3%

Institutions 8.5 %

Public & Others 10.2 %

Rabin Bihani (09951633560)

[email protected]



Business Profile

BGR Energy carries on the business in two segments, the

Supply of systems and Equipment and Turnkey Engineering

project contracting.

In the Turnkey Engineering project contracting business, the

company engineer, manufacture, procure, construct and

commission projects in the Power and Oil & Gas sector,

wherein it take Turnkey responsibility to supply of a range of

equipment and services, including the civil works required for

a project and other work as may be required under the

contract for such project.

DIVISIONS Power Projects Business: The company provides turnkey

EPC and BOP services for coal‐based Thermal Power Plants

and Gas‐based Combined Cycle Power Plants typically over

100 megawatts (MW). The first contract was completed in the

year 2002. After entering into BOP components (all

components other than boiler, turbines and generators – list

mentioned below) and gaining experience, the company has

entered into EPC contracts, where it design and supplies all

equipment required for a power plant including boilersturbines and generators and civil works.

1. Design & Engineering of Civil, Electrical and

Mechanical Systems

10. Effluent Plant Treatment

2. Civil Works including 11. Demineralisation Plant

a. Chimney 12. Ash Handling System

b. Natural and Induced Draft Cooling Tower 13. Coal Handling Systems

3. Substation and Switchyard. 14. Gas Conditioning a& Metering Skid

4. Plant Piping System 15. Fabrication of Column and

Structures

5. Air Fin Cooler 16. Welded Finned Tubes

6. Air Cooled Condenser 17. Heat Recovery Systems

7. Deaerator 18. On‐line Condenser Tube Cleaning

Systems

8. Desalination Plant including RO System 19. Debris Filter

9. Condense Polishing Plant 20. Rubber Cleaning Balls for

Condenser



The company manufactures around ~40% in house of the

products included in the BOP plant and rest is sourced from

the various domestic and international suppliers. It is now

implementing two EPC contracts and four BOP projects at present. The company usually bids for the projects having

secured financial closure. The power projects division’s sales

increased to ~INR 1653 cr in FY09 from ~INR 114 cr in FY05

which accounted for 86% of BGR’s total revenue in FY09.

Source: Company Captive Power Projects: It provides turnkey EPC and BOP

services for power plants of less than 100 MW. It had been

started in 2006.The division recorded revenue of ~INR 38.4 cr

in FY09.

Oil and Gas Equipment: The division manufacturing gas

conditioning and metering skids, storage tanks, pipeline pig

launching and receiving systems, gas processing complexes,and gas compressor packages related to the oil and gas

industry got started in 2001. The division recorded revenue of

~INR 57.6 cr in FY09.

Air Fin Coolers: This division manufacturing air fin coolers,

which cool process fluids and gases used in the refining,

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615 BOPs would be required of which orders for 526 has

already been placed while the rest has to be placed for. The

company has been one of the few integrated provider for the

power plants which has the presence in all the segments of

BOP package.

BOP status as on July '09 Name of BOP BOPs required Order Placed Balance Order Coal Handling Plant (CHP) 68 57 11

Ash Handling Plany (AHP) 69 59 10

Demineralised (DM) water Plant' 69 57 12

Cooling Tower 145 126 19

Chimney 117 104 13

Fuel Oil (FO) Systems 71 59 12

PT Plant 76 64 12

TOTAL 615 526 89

Source: CEA, Mangal Keshav Securities Ltd.

Rising Star

From the multi product manufacturer to the turnkey service

provider undertaking entire BOP contracts independently from

the domestic State Electricity Boards, BGR energy had

transformed itself vigorously over the last 24 years. The

company has completed more than 130 contracts in India and

abroad. It has executed turnkey BOP works for various power

projects in Tamil Nadu, Andhra Pradesh and Rajasthan.

Projects Completed Project Contract Value

(Rs mn) Scope of Contract Commissioning

Date 23 MW CCP Chittorgarh, Rajasthan 444 BOP Feb‐03

95 MW CCPP (Phase I) at Valuthur,

Tamil Nadu

594 BOP Mar‐03

92.2 MW CCPP (Phase II) at Valuthur,

Tamil Nadu

3553 EPC May‐08

120 MW CCPP at Karuppur, Tamil

Nadu

2697 EPC Jul‐05

330 MW CCPP at Dholapur,

Rajasthan

2095 BOP Dec‐07

500 MW TPS at Vijaywada, Andhra

Pradesh

5788 BOP Apr‐09



The company has increased its focus on undertaking the EPC

contracts, which forms the higher end of the value chain of the

power projects. For this purpose it has associated with

DongFang Electric to source the BTG equipments. DongFang

Electric would be supplying the BTG package for the two large

EPC contracts at Mettur, Tamil Nadu and Kalisind, Rajasthan.

EPC Projects under execution Project Capacity

(MW) Fuel Order Value(Rs in

cr) Contractual Completion Schedule

RRVUNL ‐ Kalisindh TPS,

Rajasthan

2 x 600 Coal 4900 42 Months

TNEB ‐ Mettur TPS, Tamil

Nadu

1x600 Coal 3100 39 Months

Source: Company BGR Energy also has initiated plans of the backward

integration to strengthen its position in the EPC space. It has

signed a 20 year licensee agreement with Foster Wheelers,

USA to manufacture and sell sub‐ and super‐critical boilers. It

has floated a special purpose vehicle, BGR Boilers Private Ltd

and plans to invest Rs5bn for the boiler plant. The plant would

have a capacity of 3000MW and the boilers will be of capacities

ranging from 300MW to 1000MW. The plant is expected tocome up in Tamil Nadu in the next 2‐3years. Currently the

company is awaiting the approvals from the government.

In House Design and Manufacturing

BGR manufacturers ~18‐20 components of the BOP package

out of more than 40 items like coal handling plant, cooling

towers, civil works, transformers, switchgears, etc as

compared to that of its peers like that of the BHEL, Alstom

Projects, L&T, Reliance Infrastructure, Thermax and TataProjects. This gives it the advantage in timely execution of the

projects with lesser involvement in vendor management and it

also offers cost efficiencies. To facilitate undertaking this kind

of projects, the company is increasing its employee strength

and had added 500 employees in FY09 and has a planning to

add similar number in FY10.



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On the back of the huge order book, the company would post a

good revenue growth in the coming years. The bulk of the

revenues would be contributed by the power segment. The

four large orders (2 EPC and 2 BOP) the company bagged in

the last 18months would start to generate revenues from

Q2FY10E. The deliveries of equipments for both the Rajasthan

and Tamil Nadu order have started and thus the company

would start to recognize revenues on these two large projects.

Thus the revenues would start to gain momentum in H2FY10E.

Also, the robust order inflows in FY10 would help sustain the

high growth in revenues in FY11E. The two largest order flow

in FY10 being

a) Chandrapur Mega Project (2 x 500 MW) for Rs 16.3 bn and

b) Marwa Thermal Project (2 x 500 MW) for Rs 16.3 bn.

Thus I estimate the revenue growth to be around ~42% in

FY11 and ~28% in FY12 with a CAGR of ~24% from FY10 to

FY15.

Strong Management Team

The company has a strong and experienced management team.

Such a strong and experienced management team alleviates

the execution risk of such large power projects. The execution

risk is especially higher when it is working with the

government agencies like SEBs. Also there has been a history

of delay happening in some of the past projects.

Recently Mr. T. Sankarlingam (ex CMD of NTPC Ltd) has joined

the company as its Managing Director. There has been other

senior appointments in the senior management of the

company which provides comfort on the execution cycle of the

company. Also, Mr. V. Anantha Krishnan (former executive

director of BHEL) has joined BGR Boilers as Director

Operations. This reflects well on the company’s commitment tobecome an integrated EPC player in the power space with in‐

house manufacturing facilities.



Financial Outlook

Revenue I expect that the net sales of the company to show a CAGR of

approximately 25% from FY10 to FY15. The net sales isestimated to be around Rs 26.5 bn and to be around Rs 80.5 bn

in FY15.

EBITDA and EBITDA Margin The EBITDA is expected to grow from ~ Rs 386 cr to Rs 1175

cr at a CAGR of 25% from FY010 to FY15.

15.119.3

26.5

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60.1

70.4

80.5

0.0

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20.0

30.0

40.050.0

60.0

70.0

80.0

90.0

FY08 FY09 FY10E FY11E FY12E FY13E FY14E FY15E

Sales (Rs bn)

Sales (Rs bn)

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

0

200

400

600

800

1000

1200

1400

EBITDA

EBITDA Margin



The EBITDA margin would, I believe, consolidate around the

levels of 15%.

Risk and Concerns

Execution Risk BGR had execution delays in the past. The 500MW thermal

power plant at Vijayawada was scheduled to be completed in

July 2008 but the project got completed in April 2009.

Similarly, the 500MW Kakatiya project is under execution

which was schedule for completion by February 2009. Hence,

executing the two sizeable EPC contracts without any delay

would be a test for BGR, as it would involves handling large

number of subcontractors. Also, any delay in such large

contracts would procrastinate earnings.

Dependence on Chinese Manufacturers – Quality concerns BGR has placed orders of BTG with Dongfang for both of its

EPC contracts. Dongfang Electric Corporation is one of the

major manufacturers of BTG in China with an annual capacity

of around 30,000 MW per year. There has been concerns

regarding these products not suited for Indian coal. Also, a

turbine supplied by Dongfang for the West Bengal Power

Development Corp.’s 300MW Sagardighi project had failed in

mid 2008. Occurrence of any such incidents, supply of inferiorquality of equipment, or any delay from Dongfang would

impact BGR’s operations.

Competition For contracts that has been tendered as EPC, BHEL is a major

competitor. However, recently BHEL has increased its focus on

BTG orders than executing entire EPC contracts. In case of

contracts tendered as BTG and BOP orders separately, many

players compete for BOP orders while BTG orders are usually

awarded to BHEL.

Raw Material prices Most of the contracts received by BGR are fixed price contracts,

any unexpected rise in prices of raw material or power

equipment would adversely affect margins going forward.



Valuation

I have made the valuation of the company on the basis of the

DCF model. I have forecasted the cash flows till FY15 and then

applied the terminal growth rate of 5% which is below the GDP

growth rate considering the half yearly GDP growth rate of the

country. The forecasting has been done after taking into

account the slippages on the capacity addition. The key to such

a forecasting is that the company executes the project without

further delay. The valuation further contains the assumption

that on an average the assumed capital expenditure is spent by

the company.

Based on the valuation, I arrive at the fair value of the

company’s stock at Rs 566. Based on the prevailing market

price, the stock is undervalued and provides a good potential

upside.



PROJECTED INCOME STATEMENT FY10E FY11E FY12E FY13E FY14E FY15E

IncomeSales Turnover 2645.28 3902.22 4984.77 6006.01 7037.95 8050.89

Excise Duty 13.23 19.51 24.92 30.03 35.19 40.25

Net Sales 2632.05 3882.71 4959.85 5975.98 7002.76 8010.63

Other Income 39.48 58.24 74.40 89.64 105.04 120.16

Total Income 2671.53 3940.95 5034.25 6065.62 7107.80 8130.79

Expenditure

Raw Materials 1842.44 2717.90 3471.89 4183.19 4901.93 5607.44

Power and Fuel Cost 2.63 3.88 4.96 5.98 7.00 8.01

Employee Cost 105.28 155.31 198.39 239.04 280.11 320.43

Other Manufacturing Expenses 210.56 310.62 396.79 478.08 560.22 640.85

Selling and Administration Expenses 86.59 127.74 163.18 196.61 230.39 263.55

Miscellaneous Expenses 37.90 55.91 71.42 86.05 100.84 115.35

PreOperative Expenses Capitalised 0.00 0.00 0.00 0.00 0.00 0.00

Total Expenses 2285.41 3371.36 4306.64 5188.94 6080.50 6955.63

EBITDA 386.12 569.59 727.61 876.68 1027.30 1175.16

Less: Depreciation 10.93 14.80 20.57 27.38 34.91 42.99

EBIT 375.20 554.79 707.04 849.29 992.39 1132.17

Less: Interest 99.12 107.09 116.85 128.14 140.86 155.05

EBT 276.08 447.71 590.20 721.16 851.53 977.13

Less: Tax 93.87 152.22 200.67 245.19 289.52 332.22

EAT 182.21 295.49 389.53 475.96 562.01 644.90

Appropriation

Proposed Dividend 32.80 44.32 58.43 71.39 84.30 96.74

Corporate Dividend Tax 5.25 7.09 9.35 11.42 13.49 15.48

Balance Carried forward to BalanceSheet 144.17 244.07 321.75 393.15 464.22 532.69



PROJECTED BALANCE SHEET FY09 FY10E FY11E FY12E FY13E FY14E FY15E

Sources of Funds

Share Capital 72.0 72.0 72.0 72.0 72.0 72.0 72.0Reserves 489.2 633.3 877.4 1199.1 1592.3 2056.5 2589.2

Total Shareholder's Funds 561.2 705.3 949.4 1271.1 1664.3 2128.5 2661.2

Secured Loan 636.0 698.1 763.3 843.2 935.6 1039.7 1155.7

Unsecured Loan 71.8 77.6 84.8 93.7 104.0 115.5 128.4

Total Debt 707.8 775.7 848.1 936.9 1039.5 1155.2 1284.1

TOTAL 1269.0 1481.0 1797.5 2208.0 2703.8 3283.7 3945.3

Application of Funds

Gross Block 113.2 181.1 253.5 342.2 444.9 560.6 689.5

Less: Accum. Depreciation 22.1 33.0 47.8 68.4 95.8 130.7 173.7

Net Block 91.1 148.0 205.7 273.8 349.1 429.9 515.8

Capital Work in Progress 5.4 5.4 5.4 5.4 5.4 5.4 5.4

Investments 4.8 4.8 4.8 4.8 4.8 4.8 4.8

Inventories 12.5 19.7 29.1 37.2 44.8 52.5 60.1

Sundry Debtors 1278.0 1579.2 1863.7 2231.9 2689.2 3151.2 3604.8

Cash and Bank Balance 15.9 244.8 573.5 950.4 1209.4 1506.5 1781.6

Total Current Assets 1306.4 1843.8 2466.3 3219.6 3943.4 4710.2 5446.4

Loans and Advances 671.2 805.4 966.5 1159.7 1391.7 1670.0 2004.0

Fixed Deposits 595.0 595.0 595.0 595.0 595.0 595.0 595.0

Total CA, Loans & Advances 2572.5 3244.2 4027.8 4974.3 5930.1 6975.3 8045.4

Deffered Credit 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Current Liabilities 1337.1 1842.4 2329.6 2901.5 3406.3 3921.5 4385.8

Provisions 67.7 79.0 116.5 148.8 179.3 210.1 240.3

Total CL & Provisions 1404.8 1921.4 2446.1 3050.3 3585.6 4131.6 4626.1

Net Current Assets 1167.7 1322.8 1581.7 1924.0 2344.5 2843.6 3419.3

Miscellaneous Expenses 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Total Assets 1269.0 1481.0 1797.5 2208.0 2703.8 3283.7 3945.3

Ratios (x)Debt Equity 1.26 1.10 0.89 0.74 0.62 0.54 0.48

Average ROE % 32.47% 41.89% 41.03% 37.44% 33.77% 30.30%

Book Value Per Share 97.96 131.86 176.55 231.15 295.63 369.61

EV/EBITDA 1.47 0.99 0.78 0.65 0.55 0.48

P/BV 5.78 4.30 3.21 2.45 1.92 1.53

P/E 22.38 13.80 10.47 8.57 7.26 6.32



PROJECTED CASH FLOW STATEMENT FY10E FY11E FY12E FY13E FY14E FY15E

Profit before Interest and Tax 375.20 554.79 707.04 849.29 992.39

1132.17Add: Depreciation 10.93 14.80 20.57 27.38 34.91 42.99

Change in Working Capital 73.91 69.78 34.60 ‐161.55 ‐202.05 ‐300.60

Total Tax Paid ‐93.87 ‐152.22 ‐200.67 ‐245.19 ‐289.52 ‐332.22

Cash Flow from Operating Activities 366.16 487.16 561.54 469.93 535.73 542.34

Capital Expenditure 67.90 72.43 88.73 102.67 115.67 128.93

Change in Investments

Other Items

Cash Flow from Investing Activities -67.90 -72.43 -88.73 -102.67 -115.67 -128.93

Net Debts Raised/Repaid 67.90 72.43 88.73 102.67 115.67 128.93

Dividend Payment (including tax) 38.05 51.41 67.78 82.82 97.79 112.21

Interest Paid 99.12 107.09 116.85 128.14 140.86 155.05

Cash Flows from Financing Activities -69.26 -86.07 -95.90 -108.29 -122.98 -138.33

Net Cash Flows 229.00 328.66 376.92 258.98 297.08 275.08

Opening Cash Balance 15.85 244.85 573.51 950.42 1209.40 1506.48

Closing Cash Balance 244.85 573.51 950.42 1209.40 1506.48 1781.56



DISCOUNTED CASH FLOW VALUATION FY10E FY11E FY12E FY13E FY14E FY15E

EBIT 375.20 554.79 707.04 849.29 992.39 1132.17

Tax 127.57 188.63 240.40 288.76 337.41 384.94

NOPAT 247.63 366.16 466.65 560.53 654.98 747.23

Depreciation and Ammortisation 10.93 14.80 20.57 27.38 34.91 42.99

Working Capital Changes 73.91 69.78 34.60 -161.55 -202.05 -300.60

Operational Cash Flow 332.46 450.75 521.81 426.37 487.84 489.62

Less: Capital Expenditure 67.90 72.43 88.73 102.67 115.67 128.93

Free Cash Flow to Company 264.56 378.32 433.09 323.70 372.17 360.69

Discounted Value of FCF 264.56 338.18 346.06 231.21 237.62 205.86

Terminal Value 5512.791

Discounted Terminal Value 3146.32

Sum of Present Value of FCFs 1623.48

EV 4769.81

Net Debt 707.8

Add: Cash 15.85

Total Equity Value 4077.86

Value Per Share 566.37



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