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BGR Energy: Execution issues prevail

Nov 30, 2011

BGR Energy has announced the second quarter results of financial year 2011-2012 (2QFY12). Both topline and bottomline have declined by around 32.1% YoY and 34% YoY respectively. Here is our analysis of the results.

Performance summary
  • Top-line declines by 32.1% YoY in 2QFY12 due to the ongoing issues in the power sector.
  • Operating profits decline 16.7% YoY during the quarter due to muted performance at the top-line level. However, margins improve due to higher contribution from the high margin Balance of Plant (BOP) orders.
  • Net profits decline 34% YoY during the quarter due to rising interest and depreciation expenses. Working capital requirements have been increasing due to rise in debtor days stretching the balance sheet (debt is used to fund working capital) of the company. This has lead to higher interest outgo.
  • The company's order backlog at the end of the quarter stood at Rs 72.6 bn. Approximately 84% of the orders belong to the power sector.

Standalone performance snapshot
(Rs m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
Income from operations 11,356 7,715 -32.1% 20,423 15,057 -26.3%
Expenditure 10,033 6,613 -34.1% 18,062 12,994 -28.1%
Operating profit (EBDITA) 1,323 1,102 -16.7% 2,361 2,063 -12.6%
Operating profit margin (%) 11.7% 14.3%   11.6% 13.7%  
Other income 26 0 -98.4% 52 0 -99.2%
Interest 138 302 118.2% 254 482 89.5%
Depreciation 33 40 22.7% 64 77 21.7%
Profit before tax 1,178 761 -35.4% 2,095 1,504 -28.2%
Tax 401 247 -38.3% 712 488 -31.5%
Profit after tax/(loss) 778 514 -34.0% 1,383 1,016 -26.5%
Net profit margin (%) 6.8% 6.7%   6.8% 6.7%  
No. of shares (m)         72.2  
Basic earnings per share (Rs)         14.1  
P/E ratio (x) *         6.6  
*On a trailing 12 month basis

What has driven performance in 2QFY12?
  • Net sales declined 32.1% YoY during the quarter due to the ongoing execution issues prevailing in the power sector. Revenues from the Construction & EPC segment declined 37.1% YoY. However, revenues from the Capital Goods segment increased 67.4% YoY.

  • Operating profits declined 16.7% YoY due to dismal sales performance during the quarter. Nonetheless, operating margins registered a sharp improvement of 260 bps due to higher contribution from high margin BoP projects.

    Segment wise performance (Standalone)
      2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
    Capital Goods
    Revenue (Rs m) 547 915 67.4% 815 1,497 83.6%
    % share 4.8% 11.9%   4.0% 10.0%  
    PBIT margin 7.4% 19.9%   5.2% 13.8%  
    Construction & EPC Contracts
    Revenue (Rs m) 10,791 6,791 -37.1% 19,576 13,521 -30.9%
    % share 95.2% 88.1%   96.0% 90.0%  
    PBIT margin 11.6% 13.0%   11.5% 13.2%  
    Revenue (Rs m) 11,337 7,706 -32.0% 20,391 15,018 -26.4%
    PBIT margin 11.4% 13.8%   11.3% 13.2%  

  • Net profits declined 34% YoY due to muted performance at the operating level, rise in interest expenses and fall in other income. Interest expenses increased due to increase in debt levels amidst rising working capital requirements.

What to expect?
The financial performance of the company over the last two quarters has been really disappointing. While sales growth has been impacted due to prevailing execution issues, profits have registered a sharp decline due to rising interest expenses. Slowdown in order inflows is another area of concern. It may be noted that although the company received orders worth Rs 5.2 bn in 2QFY12, the last few quarters were a big disappointment with no significant addition to the order book. Nonetheless, the recent NTPC order win has provided some cushion to the declining order pipeline. Further, rising working capital has posed a significant threat to the balance sheet of the company and has also impacted bottom line growth. Although the current set of issues warrant a downward revision in estimates and target price considering the overall long term prospects and current valuations we maintain our positive view on the stock.

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