BGR Energy Systems - Better Order Execution, Margins In Line With Expectations - Nirmal Bang

The 3QFY13 revenue of BGR Energy Systems (BGR) was 16.3% above our estimate, at Rs8bn, primarily due to faster-than-expected execution of TRN Energy order. Consequently, EBITDA/PAT were 15%/22% above our estimates (partly aided by higher other income). However, lower revenue mix of high-margin Balance of Plant (BoP) contracts, at 45% of total revenue, led to 260bps/170bps YoY contraction in operating/net profit margin, respectively, in line with our margin expectations. Better order execution traction likely in 2HFY13 led us to raise our revenue/earnings estimates for FY13E by 2.2%/2.6%, respectively. However, delay in receipt of NTPC bulk tender orders, lower carry forward order backlog (excluding bulk tender orders) and a cut in order inflow assumption led us to reduce our revenue/earnings estimates for FY14E by 8.2%/8.4%, respectively. We have retained our Buy rating on the stock with a revised target price of Rs291 (from Rs318 earlier) based on 10xFY14E EPS.

Order execution better than expectations: Revenue booking in TRN Energy order (14% of total order book) started in 3QFY13, but the execution ramp-up was fasterthan-expected as BGR booked 13% from the project. Execution of other projects was on expected lines, with BoP contracts accounting for 45% of total revenue, EPC projects 47% and the balance 8% from the non-power segment.

Decline in margins on expected lines: Operating and net profit margins, down 260bps/170bps YoY at 13.7%/5.1%, respectively, were in line with our estimates due to lower contribution from the high-margin BoP contracts. This led to lower sub-contracting but higher in-house erection and construction jobs, leading to a 240bps YoY rise in raw material consumption and a 90bps YoY increase in staff costs.

Cut in order inflow assumption: Barring the delayed receipt of NTPC bulk tender project (Exhibit 3) at Lara in Chhattisgarh, worth Rs15.5bn, won 15 months ago, BGR did not receive any meaningful orders in 3QFY13. This led us to cut order inflow assumption to Rs100bn (from Rs110bn) over FY13E-FY14E. But our channel checks suggest that BGR has L1 status in the BoP order of OPGC worth Rs20bn.

Outlook: Even though the delay in receipt of NTPC bulk tender is likely to affect revenue traction in FY14E, BGR still offers healthy revenue visibility at 3.4xFY12 revenue (excluding the un-awarded portion of NTPC bulk tender). Also, the pressure on BGR's working capital is likely to ease in 4QFY13 on receiving advances from NTPC and collection of further retention money. We have retained our Buy rating on the stock with a revised TP of Rs291 (from Rs318 earlier).

Source : Equity Bulls

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