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BGR Energy: Profit growth under pressure - Views on News from Equitymaster
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BGR Energy: Profit growth under pressure
Feb 26, 2013

BGR Energy has announced the third quarter results of financial year 2012-2013 (3QFY13). While the topline increased 0.2% YoY bottomline declined by around 24.3% YoY. Here is our analysis of the results.

Performance summary
  • Top-line registers a flattish growth of about 0.2% YoY in 3QFY13.
  • Operating profits decline 15.6% YoY during the quarter due to muted performance at the top-line level. Operating margins also declined by 260 bps YoY to 13.7% during the quarter.
  • Net profits decline 24.3% YoY during the quarter due to muted performance at the operating level and rise in interest & depreciation expenses.
  • The company's order backlog at the end of the quarter stood at over Rs 135.7 bn.
  • The company acquired 100% stake in Sravanna Properties Ltd during the quarter for a consideration of Rs 1.28 bn.

Standalone performance snapshot
(Rs m) 3QFY12 3QFY13 Change 9MFY12 9MFY13 Change
Income from operations 8,035 8,050 0.2% 23,066 20,432 -11.4%
Expenditure 6,724 6,943 3.3% 19,718 17,492 -11.3%
Operating profit (EBDITA) 1,311 1,106 -15.6% 3,348 2,940 -12.2%
Operating profit margin (%) 16.3% 13.7%   14.5% 14.4%  
Other income 2 55 2625.0% 29 60 110.1%
Finance cost 462 503 9.0% 943 1,246 32.1%
Depreciation 41 44 7.5% 119 129 8.5%
Profit before tax 810 614 -24.3% 2,314 1,626 -29.8%
Tax 263 199 -24.3% 751 528 -29.8%
Profit after tax/(loss) 547 414 -24.3% 1,564 1,098 -29.8%
Net profit margin (%) 6.8% 5.1%   6.8% 5.4%  
No. of shares (m)         72.2  
Basic earnings per share (Rs)         15.2  
P/E ratio (x) *         8.6  
*On a trailing 12 months basis

What has driven the performance in 3QFY13?
  • Net sales registered a flattish growth of 0.2% YoY during the quarter. Revenues from the Construction & EPC segment increased marginally by 2.5% YoY while that from the Capital Goods segment declined 22.3% YoY.

  • Operating profits declined 15.6% YoY due to muted sales performance during the quarter. Operating margins too declined by 260 bps YoY to 13.7% during the quarter. This can be due to lower execution of Balance of Plant (BoP) projects during the quarter which have better margins compared to engineering, procurement and construction (EPC) contracts.

    Segment wise performance (Standalone)
      3QFY12 3QFY13 Change 9MFY12 9MFY13 Change
    Capital Goods
    Revenue (Rs m) 754 587 -22.3% 2,252 1,602 -28.9%
    % share 9.4% 7.3%   9.8% 7.8%  
    PBIT margin 12.1% 11.7%   13.2% 6.5%  
    Construction & EPC Contracts
    Revenue (Rs m) 7,281 7,463 2.5% 20,814 18,829 -9.5%
    % share 90.6% 92.7%   90.2% 92.2%  
    PBIT margin 16.2% 13.3%   14.1% 14.4%  
    Total
    Revenue (Rs m) 8,035 8,050 0.2% 23,066 20,432 -11.4%
    PBIT margin 15.8% 13.2%   14.0% 13.8%  

  • Net profits declined 24.3% YoY due to muted performance at the operating level, and rise in interest & depreciation expenses.

What to expect?
Since our initial recommendation dated 11th May 2011, the stock of BGR Energy has corrected by approximately 57%. Slowdown in the power sector, deteriorating margins due to aggressive bidding and execution issues have impacted the stock price. In FY12, topline declined by 27% YoY and considering the 9MFY13 performance (where revenues have already declined by 11.4% YoY) it seems that FY13 would be another year of de-growth. While the prevailing pressure on topline growth is not exclusive to the company alone and is related to execution issues prevailing in the industry, what is most worrying is the margin performance expected in the future. Historically, the company had registered strong margins (12% odd at the EBITDA level) due to higher share of BoP contracts. But a gradual shift towards boiler, turbine, and generator (BTG) space can pressurize margins. Also, it should be noted that the company is quite aggressive on bidding. Thus, the future margin performance will depend upon the operational efficiencies it can extract from the orders that have come on board.

Amidst all these issues, we had advised investors to not take further position in the stock and downgraded the company to a hold sometime back. However, we do not see the situation improving in future. Margins are expected to remain under pressure and growth under check. The debt/equity ratio as of 1HFY13 was also high and stood at 1.8x. Thus, leverage is another concern. In light of all these factors, we now advise investors to SELL the stock as we believe that the recovery will take longer than usual.

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