BGR Energy Systems is entering the capital market on 5th December, 2007, with a public issue of 91.36 lakh equity shares of Rs.10 each in the band of Rs.425 to Rs.480 per share. Of this, 43.20 lakh shares are issued by the company while 48.16 lakh shares are being offered for sale by the existing promoters of the company. Apart from this, the company would be issuing 29.80 lakh equity shares to certain identified pre-IPO investors coupled with transfer of 14.40 lakh shares to such investors by the promoters.
In nutshell, fresh issue by the company would be of 72 lakh equity shares, which would mobilize Rs.345.60 crores at the upper band of Rs.480 while offer for sale is for 62.56 lakh shares and promoters would receive Rs.300.29 crores from this divestment. Equity of the company would rise from Rs.64.80 crores to Rs.72 croes.
The company carries on business in two segments, the supply of systems and equipment and turnkey engineering project contracting. In the systems and equipment business, it designs, engineers, manufactures, sell and services a range of systems and equipments for the power, oil & gas, refinery, petrochemical and process industries. In the turnkey engineering project contracting business, the Company engineers, manufactures, procures, construct and commission projects in the power and oil & gas sector, wherein it takes turnkey responsibility to supply 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.
It executes turnkey contracts to supply the balance of plant ("BOP") equipment, services and civil works for power generation projects, in which it supplies, from a single source, and balance of the plant, i.e. items other than the boiler, turbine and generator. Having successfully executed BOP contracts, the company has begun to focus on engineering, procurement and construction ("EPC") contracts, in which it designs, engineers and supply all of the equipment required for a power plant including the boiler, turbine and generator and civil works. BGR is currently executing BOP and EPC contracts, tailored to customer demands.
The business segments and prospects for the coming years are extremely buoyant with good growth and margin visibility. But ultimately, everything has a price tag, which needs to be valued in its right perspective.
For 18 months ending 31st March, 07, the total income of the company was Rs.790 crores, of which, cost of raw material and purchased goods were Rs.560 crores. This has resulted in an EBITDA of Rs.88.50 crores, giving a margin of 11.20%. PBT was at Rs.61.28 crores and PAT was at Rs.39.96 crores, which has resulted into an annualized EPS of Rs.4.11, on equity of Rs.64.80 crores. As the company procures item from outside for its BOP and EPC contracts, working capital requirements are quite high. Due to this, Sundry Debtors as at 31st March, 07 were at Rs.369 crores.
Even during three months ending 30th June, 07, total income was at Rs.245 crores with PBT of Rs.25.25 crores and PAT of Rs.17.50 crores, resulting into an annualized EPS of Rs.10.80 per share. Sundry Debtors on 30-06-07 were at Rs.421 crores, almost 172% of first quarter topline.
Realising huge requirement of working capital to ramp up its business, the company has estimated a working capital requirement of Rs.215 crores, while Rs.83 crores has been estimated for establishing new manufacturing and assembly facilities. The debt burden of the company also sharply improved to Rs.268 crores as at 30-06-07 from Rs.90 crores as at 30-09-05.
The company may report a topline of Rs.1,400 crores and bottomline of Rs.115 crores for FY 08 which would translate into an EPS of Rs.16. As against this, BHEL, maker of Turbines and Boilers, is likely to report an EPS of close to Rs.72 with topline of Rs.25,000 crores and bottomline of Rs.3,500 crores for FY 08. If BHEL is now ruling at a PER of 36 times, what is the justification of valuing this company at a PER of 30 times.
The company does not have its own manufacturing facilities of the equipments and most of them are outsourced. Expertise of the company lies in sourcing and financing coupled with technical expertise of execution. This area of business, bound to have huge competition from large players like Reliance Energy, Engineers India, L&T and other EPC players in the time to come, thus bringing down the margins of the company as well as putting huge working capital pressure. Cash Accruals of Rs.100 crores may not be able to give good growth thereafter.
Considering all these, share looks quite expensive at the upper band of Rs.480. Lower band of Rs.425 seems more reasonable.