Kotak Securities puts BUY on BGR Energy

We recently spoke to the management to understand company’s progress on its key power projects and other ventures. The management is quite confident of achieving the targeted revenues from its key BoP projects while recently won EPC projects are also expected to start generating revenues from this year itself.

The order book stands at Rs106 billion, providing a revenue visibility for next 3 years. With the award of large EPC orders from TN electricity board (Rs31 billion) and Rajasthan government (Rs49 billion), contribution of power projects in the total order book has increased to almost 93%.
Since most of the power projects are from various state electricity boards, BGR Energy doesn’t foresee any risks pertaining to cancellation in these projects going forward.
Even with significant proportion of order book in fixed price contracts, operating margins of the company have remained fairly stable at 10.2% in H1FY09. Commodity prices have witnessed a correction in past few months, impact of which is expected to be felt from Q4FY09.

We expect operating margins to remain stable in the current fiscal. Though we have assumed a decline in the operating margins from FY10 onwards due to increase in contribution from EPC projects as well as higher commodity prices, BGR is quite confident of maintaining margins at around 10% going forward also on account of lower commodity prices.

Outlook and valuation
With an order book of Rs106 billion, we expect revenues to grow at a CAGR of 49% between FY08-FY10. We expect operating margins to remain around 10% for FY09 and 9% for FY10.
We incorporate higher working capital requirements and correspondingly higher borrowings. We thus estimate net profits to grow at a CAGR of 30% between FY08-FY10 as against our earlier estimate of 37% between FY08-FY10.

At the current price of Rs.134, the stock is trading at quite attractive valuations. It is available at 8.5x and 6.5x its FY09 and FY10 P/E multiples, respectively.

The company is well set to tap the upcoming opportunities in power and oil and gas segment with its expertise as well as capacity expansion plans. We maintain our positive bias for the company based on its strong order book as well as capability to bag new orders. We continue to maintain BUY recommendation on the stock with a revised price target of Rs310 as against Rs349 earlier based on FY10 estimates.

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