BGR Energy - Lower gross margins and higher interest cost lead to PAT miss - Ambit

BGR Energy's 1QFY14 PAT at Rs374mn (up 11% YoY) was 9% below our estimates due to lower-than-expected gross margins and higher-than-expected interest cost. Whilst gross margins at 23% (down 260bps YoY) were 250bps below our estimates, interest cost (up 31% YoY) was 10% above our estimates. Note that the PAT miss was despite revenues at Rs8.2bn (up 34% YoY) coming 12% ahead of our estimates. Order book, according to the press release, was at Rs119bn, implies FY13 bill to book of ~3.7x. At CMP, the stock trades at 3.5x FY14 earnings and 0.5x FY14 P/B.

The stock price has corrected by more than 50% in the last three months given several concerns such as: (a) Execution of the NTPC bulk tender orders (as the factory is yet to be constructed). (b) Continuation of BGR's JV with Hitachi, given that Hitachi (at the global level) has entered into a JV with Mitsubishi. (Note that Mitsubishi is L&T's JV partner in India, and L&T is BGR's competitor.) (c) Equity dilution risk given the pending equity investment of Rs4bn in the JV (57% of the current market cap) to construct the factory. (d) the future leadership of the company given the sudden demise of Mr Raghupathy, the CMD of the company.

Given these concerns, we suspend our coverage on the stock. Our last published stance on the stock was a SELL with a target price of Rs200/share.

Source : Equity Bulls

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