ipo analysis & valuation of bgr energy

Financial Institutes and Markets

Financial Institutions and Markets

Project Paper

Evaluation of BGR Energy Offer Price


TABLE OF CONTENTS

Q1 What are the benefits and costs you think BGR should take into consideration before taking the decision to go public?...............................................................................................................5

1.1 Generic Advantages of Going for an IPO........................................................51.1.1 New Capital for the Company.........................................................................51.1.2 Public traded shares for use in acquisition................................................61.1.3 Listed shares for use as remuneration........................................................61.1.4 Personal Wealth and Liquidity.........................................................................6

1.2 Drawbacks for going Public.................................................................................61.2.1 Financial costs of an IPO...............................................................................61.2.2 Bad Market Conditions..................................................................................71.2.3 Managerial Cost of an IPO............................................................................81.2.4 Share Price Emphasis.....................................................................................81.2.5 Life in fishbowl..................................................................................................8

Q2 Would you invest in this IPO? What are the risks of investing in this IPO? Make a choice and explain.....................................................................................................................................9

BGR Energy Systems Ltd. IPO - Basis of Allotment (Summarized for Retail Category).............................................................................................................12

2.2 Key Risks...................................................................................................................132.2.1 BHEL has barred the company.................................................................132.2.2 High Dependencies on Govt. Companies.............................................132.2.3 Currency Risks................................................................................................142.2.4 High Debt/Equity Ratio................................................................................142.2.5 Low PAT Margin..............................................................................................142.2.6 Contingent Liabilities....................................................................................142.2.7 Long Accounts Receivable Cycle.............................................................152.2.8 High Working Capital and Capital Expenditure Requirements.....152.2.9 Dilution in net tangible Book Value........................................................152.2.10 Future Sales of Equity Shares would cause the Equity Share Price to fall.......................................................................................................................16

Q3 Can the offer Price be justified?.............................................................................................173.1 DCF ANALYSIS.............................................................................................................183.2 P/E Method....................................................................................................................28

Q4 Track the performance of BGR after it got listed in the secondary market. Comment critically on the performance immediately after listing and in the long run?..............................30


FIGURES, GRAPHS, CHARTS & TABLES

Figure 1: Objectives of the issue......................................................................................................................5Figure 2: Components of Cost of Equity........................................................................................................7Figure 3:BGR Peer Comparison......................................................................................................................10Figure 4: FCFE for 18 months as on March 2007.....................................................................................11Figure5: Poll results for IPO subscription....................................................................................................12Table 1: Final Allotment Basis.........................................................................................................................13Figure 6: List of Contingent Liabilities..........................................................................................................14Figure 7: BGR Issue details...............................................................................................................................18Figure 8: Reinvestment Rates.........................................................................................................................20Figure 9: FCF Projections...................................................................................................................................21Figure 10: WACC Components........................................................................................................................23Figure 11: Cost of Debt and Cost of Equity................................................................................................23Figure 12: Free Cash Flow Calculations.......................................................................................................24Figure12 : BGR Sensitivity Analysis...............................................................................................................27Figure 13: P/E Method.........................................................................................................................................28Figure 14: Share Price Calculation by P/E Method...................................................................................28Figure 15: BGR IPO details................................................................................................................................29Figure 16: Historic Graphs of BGR Equity Price........................................................................................31Figure 17: Anand Rathi Performance Graph..............................................................................................32


ACKNOWLEDGEMENT

Would like to take this opportunity to convey my special thanks to our FIM professor Professor Soumya Guha Deb and the entire staff of XIM Bhubaneswar who made sure that we have understood the topics well and created an environment of learning during our stay in the campus.


Q1 What are the benefits and costs you think BGR should take into consideration before taking the decision to go public?

1.1 Generic Advantages of Going for an IPO

The main objectives of this issue is for:

Figure 1: Objectives of the issue.

1.1.1 New Capital for the CompanyAn initial public offering gives the typical private firms access to a larger pool of equity capital than is available from any other source. Whereas Venture Capitalists can provide perhaps $10- $40 million in funding throughout a company’s life as a private firm, an IPO allows a forms to raise many more times of this amount in a single Public Offering. A typical US Public IPO on an average raised about USD 110 Million (as per a statistics for the last 15 years). An infusion of equity not only permits firms to


pursue profitable investments but also improve their overall financial conditions and provides additional borrowing capacity.

Furthermore, if the stock of these firms do well, companies will be able to raise additional equity capital in future.

1.1.2 Public traded shares for use in acquisitionUnless a firm has publicly traded shares, the only way it can acquire another company is to pay cash. After going public, a firm has the option of exchanging its own shares for that of the target firm. Not only does this minimize cash outflow for the acquiring firm, but such a payment method may be free from capital gains tax for the target firm’s owners. This tax benefit may reduce the price that an acquirer must pay for a target company.

1.1.3 Listed shares for use as remunerationHaving publicly traded shares allows companies to attract, retain and provide incentives for talented managers by offering them share options and other equity based remuneration. Going public also offers liquidity to managers who were awarded options while the firms were private.

1.1.4 Personal Wealth and LiquidityNormally entrepreneurs have all their personal and private wealth tied up in their companies. By going public they get a chance to free up their personal wealth and diversify in other portfolios.

In addition to the above benefits the act of going public generally results in a blaze of media attention which often helps promote a company’s products and services. Being a public company also increase the prestige. However, the obvious benefits of an IPO must also be weighed.

1.2 Drawbacks for going Public


1.2.1 Financial costs of an IPO

Few entrepreneurs are truly prepared for just how costly the process of going public can be in terms of out-of-pocket expenses and opportunity costs. Total cash expenses of an IPO, such as printing, accounting and

legal services, frequently are will over $1 Million, and most of these must be paid even if the offering is cancelled. Additionally , the combined costs associated with the underwriter’s discount (usually 7 percent) and the initial under pricing of a firm’s stock (roughly 15 percent in an average) represent a very large transfer of wealth from current owners to the underwriters and to the new shareholders.

The Cost of Raising Capital

Costs at IPO Stage Ongoing costs

-Direct Costs

-Underwriting fees

-Professional fees

-Initial listing fees

-Other direct IPO costs

- Indirect costs

-IPO price discounts

-Direct Costs

-Regulation, corporate governance, professional fees

-Annual listing fees

-Indirect costs

-Trading costs

Cost of Equity Capital

Figure 2: Components of Cost of Equity

The issue expense for BGR could be as high as 6% of the net proceeds which turn out to be RS 21.978 Crore – 26.31 crores. This investment has to be made even if BGR had to call back the


issue or cancel the issue. In addition, to the explicit cost of going public, there is also implicit cost in going public – public issues being listed at a price much higher than the issue price, a phenomenon called IPO under pricing.Also as per SEBI guidelines the mandatory costs works out to be additional Rs 500,000 and it takes 3 – 4 weeks.

1.2.2 Bad Market ConditionsApart form the costs of going public, other issues included possibility of poor response from investors and the issue being listed below the issue price. Companies like Wockhardt and Emaar MGF had to cancel their IPO due to poor market conditions and companies like Reliance Power has seen their issue open at discount of 35% in the recent past.About 50% of the Class of 2006 intial offerings was trading at break-even or below their listed price in 2007. Big disappointments were Jet Airways. Jet’s share price was trading at 30% off from its initial trading price in Feb, 2005.

1.2.3 Managerial Cost of an IPOAs costly as an IPO financially, many entrepreneurs find the unending claims made on their time during the IPO planning and execution process to be even more burdensome. Rarely, if ever can CEOs and other top managers delegate these duties, which grow increasingly intense as the offering date approaches. There are also severe restrictions on what an executive can say or do during the immediate pre-offering period. Because the IPO process can take many months to complete, the cost of going public in terms of managerial distraction is very high. Tope executives must also take time to meet key shareholders before the IPO is completed, and then forever thereafter.

1.2.4 Share Price EmphasisOwners/ managers of private companies frequently operate their firms in ways that balance competing personal and financial


interest. This includes seeking profits, but frequently also includes employing family members in senior positions and other forms of personal consumption. Once a company goes public, however, external pressures build to maximize share prices. Furthermore, as managerial shareholdings fall. Managers become more vulnerable to losing their jobs, either through takeover or through dismissal by the board of directors.

1.2.5 Life in fishbowlPublic shareholders have the right to a great deal of information about a firm’s internal affairs. Releasing this information to shareholders is as good as releasing this to competitors and potential acquirers as well. Managers must disclose specially in the IPO prospectus how and in what markets they want to compete – information that is obviously valuable to competitors. Additionally, managers who are also significant shareholders are subject to binding disclosure requirements and face serious constraints on their ability to buy or sell company shares.

Q2 Would you invest in this IPO? What are the risks of investing in this IPO? Make a choice and explain.

As per the calculations in Q 3 the Fair value of BGR Share is 409.03 (DCF Method) and as per P/ E Ratio Industry average method it is 407.95. Hence based on those calculations it seems the share is slightly overpriced. It was listed at Rs 801 in BSE and Rs 840. 3 days high was Rs 989 in BSE and 3 days low as Rs 801 in BSE. Hence, it seems at that juncture in Jan 2008 it was a good bet to buy BGR Shares.

As per some analysts at the price band of Rs. 425 to Rs.480, the issue is priced expensively with the PE of 102.40x at the lower band and 115.66x at the upper band considering the EPS of Rs.4.15 on its FY07 earnings. The company’s peers like BHEL and ABB are currently trading at a PE of 47x and 74x respectively. However, the company has a strong order book and the company


is also expected to benefit from the fast growing industry. Its order book, which is almost 6.4 times its FY07 annualized revenues, if executed over the next two‐three years will provide significant top line and bottom line growth. Thus we recommend SUBSCRIBE to the from long term perspective.

ValuationsPeer Comparison


Figure 3:BGR Peer Comparison

The PE of the company is high as compared to most of its peers which makes the issue expensive. However the RoNW of the company is high as compared to its peers and the company should try to maintain it.

FREE CASH FLOW TO EQUITY DISCOUNT MODELFree Cash Flow to Equity (FCFE) = Net Income ‐ (Capital Expenditures ‐Depreciation) ‐ (Change in Non‐cash Working Capital) + (New Debt Issued ‐ Debt Repayments)

Figure 4: FCFE for 18 months as on March 2007

The free cash availability to the shareholders is positive which is a good sign and gives an indication about the good liquidity of


the company in the short term as well as in medium term. However the free cash flow available to the company is positive mainly because of the increase in long term debt. As on March 31, 2007, about 73% of the income came from government entities. Most of the projects taken up by the company are for government and large Indian and international power, oil and gas or energy utilities. Dealing with government means delay in payments leading to higher debtors and higher working capital cycle.

However in 2007 the overall mood in the market for any Power, infra, and other similar offerings had been very positive and

A poll conducted on December 15th 2007 showed that 48% of the polled people were eager to invest in BGR which meant although the

Which of these IPOs would you invest in?

Total Votes: 80

Figure5: Poll results for IPO subscription.

http://1.bp.blogspot.com/_8AxKPW7Pm98/R2OnB-N051I/AAAAAAAAAHM/4xL2AWooMUY/s1600-h/poll.JPG


Final Allotment was done on the following basis as on January 1, 2008

BGR Energy Systems Ltd. IPO - Basis of Allotment (Summarized for Retail Category)

No. of Sh

AppliedNo. of Sh Allotted Ratio

14 14 1:4828 14 1:2442 14 3:4756 14 4:4770 14 5:4684 14 3:2398 14 7:46

112 14 4:23126 14 9:46140 14 5:23

http://www.indianipoblog.com/2007/12/bgr-energy-systems-ltd-ipo-basis-of.html

http://www.indianipoblog.com/2007/12/bgr-energy-systems-ltd-ipo-basis-of.html


154 14 11:46168 14 6:23182 14 13:46196 14 31:100

Table 1: Final Allotment Basis

2.2 Key Risks

2.2.1 BHEL has barred the companyThe company was barred by BHEL for any business for 3 years with it. BHEL alleged that BGR formed a cartel with M/S Techno Electric & Engg Ltd. to obtain orders from BHEL at a higher price.

2.2.2 High Dependencies on Govt. CompaniesA significant part of order book of BGR comes from Govt. companies and agencies. This leads to delays in payments. This causes higher debtor days and longer working capital cycle.

2.2.3 Currency RisksThe company operates in 42 countries. It is exposed to exchange rate risks. Currency volatility can impact operational performance of the company.

2.2.4 High Debt/Equity RatioThe company has a debt/equity ratio of nearly 2.5. Since it operates in an industry where gestation period for an order execution is long and requires high capital expense this is not desirable. It also has an effect on operation performance of the company as it leads to higher interest expense. In an increasing interest rate scenario this might further hurt the company.


2.2.5 Low PAT Margin

2.2.6 Contingent Liabilities

Contingent Liabilities worth Rs 437.85 crores were outstanding for the company as on March 31, 2007, as not provided for.

As of March 31, 2007, they had contingent liabilities in the following amounts, as disclosed in their restated consolidated financial statements:

Figure 6: List of Contingent Liabilities

2.2.7 Long Accounts Receivable Cycle

Company’s accounts receivable cycle is relatively long, exposing it to higher client credit risk.

The accounts receivable cycle is fairly long due to the nature of the business and operations. During the years ending September 30, 2002, 2003, 2004, 2005, and the 18


months ending March 31, 2007 the cycle ranged from 90 days to 180 days, which makes the business more susceptible to market downturns and client credit risk.

2.2.8 High Working Capital and Capital Expenditure Requirements

They have a very high working capital and capital expenditure requirements. If they experience insufficient cash flows or are unable to borrow funds to meet working capital, capital expenditure and other requirements, there may be adverse effect on the operations.

2.2.9 Dilution in net tangible Book Value.

As the issue price of the Equity Share is higher than the book value per Equity Share, purchasers in this Issue will immediately experience a substantial dilution in net tangible book Value.

2.2.10 Future Sales of Equity Shares would cause the Equity Share Price to fallUpon completion of this issue BGR will have 72,000,000 outstanding Equity Shares. Of these shares 13,456,000 Equity Shares offered will be freely tradable without restrictions in the public market. The holders of approximately 43,200,000 Equity Shares, representing approximately 60% of the issued and outstanding Equity Shares, who will be entitled to dispose of


their shares following the expiration of a one-year Indian statutory ‘lock-in’ period. Sales of a large number of our Equity Shares by shareholders, especially the Promoters, could adversely affect the market price of the Equity Shares. Additionally, any future equity issue by BGR, including issuances of stock options, or anyperception by investors that such issuances might occur, may lead to the dilution of investor shareholding in the company or affect the market price of the Equity Shares and could impact the ability to raise capital through an Issue of securities.

Q3 Can the offer Price be justified?

Following is the calculations based on FCF method, to justify the Offer Price.

BGR Energy System Ltd – IPO


BGR IPO - opened for subscription on 28 June, 2007 and closed on July 03,

2007.

About the Company:

Business Profile

BGR provides products and services to sectors like power, oil and gas, and

also has presence in other high growth sectors like infrastructure,

petrochemicals, etc. BGR operates through two broad business verticals, 1)

industrial products i.e. supply of systems and equipments and 2) turnkey

engineering project contracting. BGR provides turnkey solutions for the

Balance of Plant (BOP) part of projects.

Issue Details :

Fresh Issue

4,320,000

Offer for Sale

4,816,000

Reserved for employees

500,000

Net Issue to public

8,636,000

Issue Size

9,136,000

Pre and post-Issue Equity Shares:


Shareholding pattern Pre-Issue

Post-Issue

No of shares % No

of shares %

Promoter and 64,800,000 100.0 58,544,000

81.3

promoter group

Pre-IPO investors 0 0.0 4,320,000

6.0

Public 0 0.0 8,636,000

12.0

Employees 0 0.0 500,000

0.7

Total 64,800,000 100.0 72,000,000

100.0

Figure 7: BGR Issue details

IPO VALUATION:

3.1 DCF ANALYSIS

INTRODUCTION:

In simple terms, discounted cash flow tries to work out the value of a

company today, based on projections of how much money it's going to

make in the future. DCF analysis says that a company is worth all of the

cash that it could make available to investors in the future. It is described as

"discounted" cash flow because cash in the future is worth less than cash

today.

For example, let's say someone asked you to choose between receiving

Rs100 today and receiving Rs100 in a year. Chances are you would take the


money today, knowing that you could invest that Rs100 now and have more

than Rs100 in a year's time. If you turn that thinking on its head, you are

saying that the amount that you'd have in one year is worth Rs100 today -

or the discounted value is Rs100. Make the same calculation for all the cash

you expect a company to produce in the future and you have a good

measure of the company’s revenue. There are several tried and true

approaches to discounted cash flow analysis; we will use the free cash

flow to firm

approach commonly used by Street analysts to determine the "fair value" of

companies.

The Forecast Period:

Growth Rate:

BGR is expected to grow at to have CAGR of 80 % (source: Emkay Research)

for the period 2007-09 and 50% in 2010 & 25% in 2011 (source: IDBI

Capital). We take fixed growth rate accordingly for DCF valuation for coming

6 years.

Reinvestment Rate:

If we relax the assumption that the only source of equity is retained

earnings, the growth in net income can be different from the growth in

earnings per share. Intuitively, note that a firm can grow net income

significantly by issuing new equity to fund new projects while earnings per

share stagnate. To derive the relationship between net income growth and

fundamentals, we need a measure of how investment that goes beyond

retained earnings. One way to obtain such a measure is to estimate directly


how much equity the firm reinvests back into its businesses in the form of

net capital expenditures and investments in working capital.

Growth Rate (in Earnings) = Equity Reinvestment Rate* ROE (if ROE

remains same throughout)

Equity Reinvestment Rate = Growth Rate / ROE

ROE = 48% (source: case given)

Year 2007-

08

2008-

09

2009-

10

2010-

11

2011-

12

Growth

Rate

80% 80% 80% 50% 25%

ROE 48% 48% 48% 48% 48%

Reinvestm

ent Rate

166.67

%

166.67

%

166.67

%

104.17

%

52.08%

Figure 8: Reinvestment Rates

Forecasting Free Cash Flows:

Free cash flow is the cash that flows through a company in the course of a

quarter or a year once all cash expenses have been taken out. Free cash

flow represents the actual amount of cash that a company has left from its

operations that could be used to pursue opportunities that enhance


shareholder value - for example, developing new products, paying dividends

to investors or doing share buybacks.

Free cash flow = EBIT (1-tax) – [EBIT (1-tax) × Reinvestment

Rate]

EBIT (1-tax)nth year = EBIT (1-tax)n-1 year × (1 + growth rate)

Rs in mn

Current Year 2006-07 (12

months)

2007-08

2008-09

2009-10

2010-11

2011-12

Expected Growth Rate

80% 80% 80% 50% 25%

EBIT(1- Tax) 528.67* 951.61 1712.9 3083.334624.8

35781.0

3

Equity Reinvestment

Rate

166.67%

166.76%

166.67%

104.17%

52.08%

FCF Equity(634.54

)(1142.0

)(2055.6)

(192.85)

2770.27

* source: case given(proportionately converted from 18 months to 12

months)

Figure 9: FCF Projections

A wide variety of methods can be used to determine discount rates, but in

most cases, these calculations resemble art more than science. Still, it is

better to be generally correct than precisely incorrect, so it is worth your

while to use a rigorous method to estimate the discount rate. A good

strategy is to apply the concepts of the weighted average cost of capital

(WACC). The WACC is essentially a blend of the cost of equity and the after-

tax cost of debt.


Cost of Equity (Re):

Unlike debt, which the company must pay at a set rate of interest, equity

does not have a concrete price that the company must pay. But that doesn't

mean that there is no cost of equity. Equity shareholders expect to obtain a

certain return on their equity investment in a company. From the company's

perspective, the equity holders' required rate of return is a cost, because if

the company does not deliver this expected return, shareholders will simply

sell their shares, causing the price to drop. Therefore, the cost of equity is

basically what it costs the company to maintain a share price that is

satisfactory (at least in theory) to investors. The most commonly accepted

method for calculating cost of equity comes from the Nobel Prize-winning

capital asset pricing model (CAPM), where:

Cost of Equity = RF + Beta (Rm-Rf)

Rf - Risk-Free Rate - This is the amount obtained from investing in

securities considered free from credit risk, such as government bonds from

developed countries. The interest rate of government bonds is frequently

used as a proxy for the risk-free rate. (Given: 7%)

ß - Beta - This measures how much a company's share price moves against

the market as a whole. A beta of one, for instance, indicates that the

company moves in line with the market. If the beta is in excess of one, the

share is exaggerating the market's movements; less than one means the

share is more stable. We take Beta of industry average i.e beta of

0.915.

(Rm – Rf) Equity Market Risk Premium - The equity market risk

premium (EMRP) represents the returns investors expect, over and above

the risk-free rate, to compensate them for taking extra risk by investing in

the stock market. In other words, it is the difference between the risk free

rate and the market rate. (Given: 9%)


Cost of Debt (Rd):

As companies benefit from the tax deductions available on interest paid, the

net cost of the debt is actually the interest paid less the tax savings

resulting from the tax-deductible interest payment. Therefore, the after-tax

cost of debt is Rd (1 - corporate tax rate).

AS per FORMULA Rd = 14.15%

Interest Expense X (1 – Tax Rate)_______________________

Amount of Debt – Debt Acquisition Fees + Premium on Debt –

Discount on Debt

Weighted Average Cost Of Capital (WACC):

The WACC is the weighted average of the cost of equity and the cost of debt

based on the proportion of debt and equity in the company's capital

structure. The proportion of debt is represented by D/V, a ratio comparing

the company's debt to the company's total value (equity + debt). The

proportion of equity is represented by E/V, a ratio comparing the company's

equity to the company's total value (equity + debt). The WACC is

represented by the following formula:

WACC = Cost of Equity + Cost of Debt

= E/V x Re + Rd x (1 - corporate tax rate) x D/V.

E/V 0.25 Rf 7%Corporate Tax

33% Rd 14.15% Beta 0.915

D/V 0.75 Rm 16%


Figure 10: WACC Components

Cost of Debt Cost of EquityD/V x Rd(1 - corporate tax rate) E/V x [Rf + Beta (Rm-Rf)]

0.75x0.1415x0.67 0.25x(0.07+0.9151x0.09)7.11% 3.80%

Figure 11: Cost of Debt and Cost of Equity

WACC = Cost of Debt + Cost of Equity = 10.9%

Present Value:

The present value of a single or multiple future payments (known as cash

flows) is the nominal amounts of money to change hands at some future

date, discounted to account for the time value of money, and other factors

such as investment risk. A given amount of money is always more valuable

sooner than later since this enables one to take advantage of investment

opportunities. Present values are therefore smaller than corresponding

future values.

When future cash flow of the company is divided by the discount rate, we

get the present value of that predicted years cash flow.

(Present Value)n = (Predicted cash flow)n / (1+ discount rate)n

Where, n = year

Rs in mn


2007-08 2008-09 2009-10 2010-11 2011-12Free Cash Flow (634.54) (1142.0) (2055.6) (192.85) 2770.27

Discount Rate 1.109 1.1092 1.1093 1.1094 1.1095

Present Value(572.17

)(928.55

)(1507.1

1)(127.5) 1651.45

Figure 12: Free Cash Flow Calculations

TERMINAL VALUE

Perpetuity Growth Model:

The Perpetuity Growth Model accounts for the value of free cash flows that

continues into perpetuity in the future, growing at an assumed constant

rate. Here, the projected free cash flow in the first year beyond the

projection horizon (N+1) is used.

We have assumed perpetuity growth rate for BGR as 6%

Beyond 2012 BGR is expected to grow at 6% p.a i.e. at its perpetuity rate,

hence net income for the year 2013 will be:

Net income of 2012 × (1+ perpetuity growth rate)

= 5781.03 × (1+0.06)

= Rs. 6128.0 mn

Reinvestment rate after 2012 (Terminal Point):

Reinvestment rate = Perpetuity Growth rate / Return on

Equity


Here, return on equity is rate at which company expect to get returns on its

investments after terminal point i.e. 2012.

Return on equity will drop to the stable period cost of capital of 10.9%.

Reinvestment rate (terminal point) = 6/10.9

= 55%

Free cash flow = EBIT (1-tax) – [EBIT (1-tax) x Reinvestment Rate]

Therefore,

Free cash flow 2013 = 6128 – [6128 x 0.55%]

= Rs. 2757.6 mn

Gordon Growth Model:


There are several ways to estimate a terminal value of cash flows, but one

well-worn method is to value the company as a perpetuity using the Gordon

Growth Model. The model uses this formula:

Free cash flow of the year after the terminal year(Discount Rate –Perpetuity Growth Rate)

The formula simplifies the practical problem of projecting cash flows far into

the future.

Therefore,

Terminal Value = (2757.6 × 100)/(10.9-6)

= Rs 56277.55 mn

Present value of = 56277.55 / (1.109)6

Terminal year

= Rs. 30251.43mn

Calculating Total Enterprise Value:

Total Enterprise = Sum of Present value for 5 years +

Present value Of Terminal Year + Cash – Debt

= 28767.57 + 929.02 – 246.4

= Rs. 29450.17 mn

Fair value = Rs 29450.17 mn

Number of outstanding shares = 72 mn

Fair value of the BGR per share = Rs 409.03


Hence as per the above calculations BGR cost of share is almost

Fairly priced. (As per the DCF method). As per other methods like

Perr comparison it seems that BGR was over priced.

SENSITIVITY ANALYSIS

Sensitivity analysis is the investigation of how the projected

performance varies along with changes in the key assumptions

on which the projections are based.

The sensitivity analysis of the above DCF model can be done as

follows:

PERPETUITY

GROWTH RATE

DISCOUNT RATE10.5% 10.9% 11.5%

5% 430.135 403.65 364.626% 435.67 409.03 369.797% 438.33 415.16 370.72

Figure12 : BGR Sensitivity Analysis


3.2 P/E MethodP/E Ratio Ratio EBIT (1-Tax) For 2006 -

2007 (12 Months pro rata

basis)

Industry Highest 74.4

528.67 Million

Industry Lowest 43.5

Industry Average 56.24

BGR Energy Highest 102.4

BGR Energy Lowest 115.66

Figure 13: P/E Method

P/E Ratio Ratio Enterprise

Value

(Mn)

No of

Shares

Fair Value

of BGR /

share (Rs)

Industry

Highest74.4 39333.048

72 million

546.29

Industry

Lowest43.5 22997.145 319.405

Industry

Average56.24

29372.400

8407.95

BGR

Energy

Lowest

102.4 54135.808 751.89

BGR

Energy

Highest

115.66 61145.972 849.25

Figure 14: Share Price Calculation by P/E Method


BGR IPO

Particulars Figures

Issue OpenDec 05, 2007 - Dec 12, 2007

Issue Type 100% Book Built Issue IPOIssue Size 9,136,000 Equity Shares of Rs.

10 Issue Size Rs. 438.53 Crore Issue Price Rs. 425 - Rs. 480 Per Equity

ShareListing At BSE, NSEListing Price 801.0 (BSE), 840.0 (NSE)3 Days High 989 (NSE)3 Days Low 801 (BSE)DCF Valuation 409.03P/E Valuation at Industry Avg

407.95

P/E Valuation at BGR Energy Highest

849.25

Figure 15: BGR IPO details

It is observed that as per both the DCF Method and P/E ratio (Industry Average) the price comes in the range of 407.95 – 409.03. Hence this seems to be slightly overpriced. As per P/E method also it appears to be overpriced.However if we consider BGR Energy Highest P/E Ratio the value comes to 849.25 which is very close to the listing price of BGR Energy at NSE.

The BGR IPO had performed pretty well.


It had been subscribed by 119.54 times (oversubscribed

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Retail category has been subscribed by only 46.8934 times

(oversubscribed by 45.8934 times).

Non Institutional investor category in the BGR IPO had been

subscribed by over 153.0816 times (oversubscribed

152.0816 times)

The QIB category had been subscribed by 161.6744 times

(oversubscription ratio: 160.6744 times).

Q4 Track the performance of BGR after it got listed in the secondary market. Comment critically on the performance immediately after listing and in the long run?

Based on calculations in Q3 it is a good bet to invest in this IPO. It was listed at Rs 801 in BSE and Rs 840. 3 days high was Rs 989 in BSE and 3 days low as Rs 801 in BSE. Hence, it seems at that juncture in Jan 2008 it was a good bet to buy BGR Shares.

Finally BGR Energy Systems Limited IPO got Oversubscribed by the following:

QIBs: 161.67 timesNon Institutional Investors: 153.08 timesRetail: 46.89 timesEmployees: 1.46 timesOverall: 119.54 times


Figure 16: Historic Graphs of BGR Equity Price


Figure 17: Anand Rathi Performance Graph

As in the above graphs it can be seen the share prices of BGR

maintained at around Rs 800 above listing. But when the sensex

crashed in 2008 prices of BGR energy also fell at the same or

similar rate and hovered around 150 mark. After 2009 (after

sings of recovery), prices of BGR started recovering at a faster

rate and is now traded at above Rs. 500. It may be noted that

BGR energy systems has a recommendations of leading research

houses like IDBI Capital, Anand Rathi, Asit C Mehta, Jaypee

Capital Services. From the past trends of BGR and as per the

Predictions of Analysts in 2007 the IPO Price can be considered to

be reasonable.

ipo analysis & valuation of bgr energy

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