BGR Energy – Buy
June 29, 2010
Goldman has initiated coverage on BGR Energy with a BUY Rating. BGR will benefit from lack of a sufficient number of turnkey BoP (Balance of Plant) players in the Indian power equipment space – Most individual component makers currently lack the ability to provide turnkey services.
With its order book growing at a CAGR of 84% over FY08-10 and sales CAGR based on FY08-10 reported numbers of 42% over this period, BGR has displayed a strong execution track record. Expect continued strong execution, on its US$2.2bn power segment order book, to lead to a sales CAGR of 43% over FY10-12E, with the EPC segment contributing 34% to this growth.
In-house manufacturing of 40-50% of the BoP components leading to better than industry margins – BGR has the capability to manufacture 40-50% of the components in – house, unlike most other turnkey players. This provides a margin advantage relative to
peers and will also help the company partially offset the impact of lower margins on EPC projects, in our view.
BGR recently ventured into the EPC space and is currently executing 2 major projects for which Power Island equipment is being sourced from Dongfang Electric Company, China.
The 12-month target price on BGR is Rs 874 based on 18.6X average EPS for FY11E [Rs 41] and FY12E [Rs 54]. This target multiple is 1 SD above the company’s historical median 12-month fwd P/E of 13X but at a significant 25%-32% discount to the median 1-year fwd P/E for its larger peers in the Indian power equipment and construction space such as BHEL and L&T.