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BGR Energy: BoP acts as margin lever

Feb 23, 2012

BGR Energy has announced the third quarter results of financial year 2011-2012 (3QFY12). Both topline and bottomline have declined by around 36.1% YoY and 37.5% YoY respectively. Here is our analysis of the results.

Performance summary
  • Top-line declines by 36.1% YoY in 3QFY12. Engineering procurement & construction (EPC) contracts contributed 38% to the top line while 60% of the contribution came from Balance of Plant (BoP) projects.
  • Operating profits decline 10.8% YoY during the quarter due to muted performance at the top-line level. However, margins improved significantly to 16.3% in 3QFY12 due to improvement in execution over BoP contracts.
  • Net profits decline 37.5% YoY during the quarter due to rising interest and depreciation expenses.
  • The company's order backlog at the end of the quarter stood at Rs 82 bn. However, this excludes the NTPC bulk turbine order where the company has emerged as the lowest bidder.
  • The company intends to bid for orders worth 6,000 MW in the next 6-9 months.
  • Management expects revenues to be in the region of Rs 34 bn for the current fiscal. EBITDA margins are pegged at 14-15% with an expected EPS of Rs 30 for the year.

Standalone performance snapshot
(Rs m) 3QFY11 3QFY12 Change 9MFY11 9MFY12 Change
Income from operations 12,569 8,037 -36.1% 32,992 23,094 -30.0%
Expenditure 11,097 6,724 -39.4% 29,159 19,718 -32.4%
Operating profit (EBDITA) 1,472 1,313 -10.8% 3,833 3,376 -11.9%
Operating profit margin (%) 11.7% 16.3%   11.6% 14.6%  
Other income 17 -   69 0  
Interest (Net) 168 462 175.3% 422 943 123.6%
Depreciation 34 41 20.5% 98 119 21.3%
Profit before tax 1,287 810 -37.0% 3,382 2,314 -31.6%
Tax 411 263 -36.1% 1124 751 -33.2%
Profit after tax/(loss) 876 547 -37.5% 2,259 1,564 -30.8%
Net profit margin (%) 7.0% 6.8%   6.8% 6.8%  
No. of shares (m)         72.2  
Basic earnings per share (Rs)         21.7  
P/E ratio (x) *         9.2  
*On a trailing 12 month basis

What has driven performance in 3QFY12?
  • Net sales declined 36.1% YoY during the quarter due to the ongoing execution issues prevailing in the power sector. Revenues from the Construction & EPC segment declined 38.8% YoY. However, revenues from the Capital Goods segment increased 19.0% YoY.

  • Operating profits declined 10.8% YoY due to muted sales performance during the quarter. Nonetheless, operating margins registered a sharp improvement due to increasing contribution from high margin BoP projects. However, it may be noted that as the mix between EPC and BoP changes over time, margins are likely to decline in the future.

    Segment wise performance (Standalone)
      3QFY11 3QFY12 Change 9MFY11 9MFY12 Change
    Capital Goods            
    Revenue (Rs m) 632 752 19.0% 1,447 2,249 55.4%
    % share 5.1% 9.4%   4.4% 9.8%  
    PBIT margin 7.9% 12.2%   6.4% 13.2%  
    Construction & EPC Contracts            
    Revenue (Rs m) 11,878 7,271 -38.8% 31,455 20,792 -33.9%
    % share 94.9% 90.6%   95.6% 90.2%  
    PBIT margin 11.7% 16.2%   11.6% 14.2%  
    Revenue (Rs m) 12,511 8,023 -35.9% 32,902 23,041 -30.0%
    PBIT margin 11.5% 15.9%   11.4% 14.1%  

  • Net profits declined 37.5% YoY due to muted performance at the operating level, rise in interest expenses and fall in other income.

What to expect?
Recently Supreme Court upheld NTPC's decision of disqualifying the Italian Boiler maker Ansaldo from its bulk tender bid. This has further improved the order pipeline visibility for BGR as it had already qualified for the tender/bid which was stuck in a limbo for quite some time as the aggrieved parties had sought redressal in the court. This should support revenue growth in the future. However, it may be noted that the margin profile of the company is likely to deteriorate as focus is gradually shifting to the EPC projects which have lower margins. Majority of the state utilities have now started awarding projects on EPC basis (consists of both BTG and BoP Island of the power project) and thus the BoP orders in future will be limited to independent power producers (IPPs). Nonetheless, considering the healthy order pipeline (82 bn excluding the NTPC order) and the strong bid credentials of the company, we maintain our positive view on the stock.

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