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Reduce BGR Energy – Kotak

May 6, 2008

All though Energy / Power sector looks attractive, Kotak Sec Analyst has recommended a REDUCE on BGR Energy Systems. The company is poised to grow strongly on the back of massive investments expected in the country, especially in the power generation sector. BGR Energy has expanded the scope of its products/services to emerge as a complete Balance-of-Plant (BOP) contractor for power plants. Successful project execution and managing strong growth are key challenges.

Kotak expects revenues and earnings to grow at CAGR of 53% and 62%, respectively, over FY2007-10E, led by growth in power division. Order backlog of Rs36 bn at beginning Mar’08 provides visibility of 1.8 years based on FY2009E revenues.

High working capital levels (115 days) and lowmargin profile (10.6%) imply lower return on capital and free cash flow generation. BGR Energy based on DCF at Rs460 per share, implying a P/E multiple of 28X and EV/EBITDA multiple of 16X on our FY2009E estimates. However, current valuation multiples of 27X and 20X, FY2009E and FY2010E EPS preclude further optimism. Kotak has set a target price of Rs 460.

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