Weak outlook for BGR Energy

Power company has seen orders falling, execution slowing and interest cost rising

After the promoters priced the offer for sale (OFS) lower and the poor set of numbers in the March quarter, the BGR Energy stock has lost around 17 per cent in last three trading sessions. On Friday, the promoters announced the OFS representing 6.13 per cent of the outstanding capital at Rs 163 a share at a time when the stock was trading at around Rs 200. This saw BGR’s stock fall sharply on Monday. But even at these lower prices, the OFS failed to elicit sufficient response. It did not fully subscribe.

While this has resulted in valuations falling to eight times based on FY14 estimated earnings, analysts remain cautious. "At this point, the issue is not about price or valuation, especially in companies like BGR Energy, which do not have much of assets. So, if one wants to value the company, it has to be on the basis of earnings. But the company has very less earnings visibility. Investors at this point in time are very sceptical about investing in the power space because one does not know how long it could take for these companies to recover," said Ankur Sharma, analyst at Philip Capital. In case of BGR analysts are also worried over margin compression, delay in execution, low visibility in terms fresh orders and high working capital.   

Muted performance
The entire value chain in the power industry, including the companies like BGR Energy and Bharat Heavy Electricals, have suffered in the past because of various issues. BGR, too, has its share of worries, as seen in falling order book and new orders. At end-March 2013, the order book is down 20 per cent, compared with the December 2012 quarter. On top of that, the execution has slowed due to client side issues and dues receivable from them. No wonder, in the March quarter, revenues fell by almost seven per cent. Although margins improved by 109 basis points on a year-on-year basis, they were lower sequentially by 74 basis points. Analysts highlight that low margin projects have now started to kick in, and hence, the fall in margins. Interest cost is another big component, which is eroding its profits as a result of higher working capital. For instance, in the March quarter, as a result of a 22 per cent increase in interest cost to Rs 50 crore, BGR’s net profit dropped 20 per cent to Rs 53.8 crore. The company's working capital cycle has risen to 311 days in FY13, compared to 248 days in FY12.

Low visibility
The situation is expected to continue, especially in the light of low visibility. Though the current order book at Rs 11,000 crore is comfortable at about 3.5 times, FY13 revenues, delays in execution and lower order inflows are key issues. The management is hopeful given the order bid pipeline of Rs 12,000 crore. However, analysts believe uncertainty in the sector, delay in projects awarding and increasing competition could impact order inflows.

While the current order book may help reasonable sales growth, the trend in margins and profitability are key. "The Ebitda (earnings before interest, taxes, depreciation, and amortisation) margin is expected to trend downwards in FY14 due to higher proportion of relatively low margin BTG (boiler, turbine and generator) contracts (66 per cent of order book).

With the interest cost of Rs 220 crore (FY15 estimates) expected to remain at elevated levels due to reliance on debt to fund the expanded working capital, we expect net profit to fall at an annualised rate of six per cent in FY13-15," said Apurva Patel, who tracks the company at Spark Capital Advisors in a note. Due to uncertainty on earnings growth, lower returns (return on equity are expected to fall from 14 per cent in FY13 to 12 per cent in FY14) and increasing debt-equity (1.4 times in FY14), the stock is likely to remain under pressure in the near term.