>BGR Energy Systems (ANAND RATHI)

Moving up the value chain; risks continue; maintain Sell

* Maintain Sell. BGR Energy plans to transform itself into a fullyintegrated
player (manufacturing as well as EPC). While margin expansion is possible over the next couple of years due to softening material costs, we believe execution challenges remain. We maintain our Sell rating, with a marginal increase in target price to Rs112 (from Rs103 earlier).

* Operating margin expansion of 150bps.
We build in a 150-bps increase in margins over FY10-11 to factor in the benefit of lower raw material costs. However, higher interest cost and lower ‘other income’ would continue to have its impact at the PAT level.

* Boiler tie-up in place, turbine to follow.
BGR has announced a tie-up with Foster Wheeler where the latter would license boiler technology. It is also talking to Hitachi for a possible arrangement for turbines.

* EPC projects in design stage.
Projects are in the design and engineering stage (10% completion), with credit lines tied up. Foreign exchange risk would be borne by state electricity boards.

* Earnings revision. We retain our sales estimate but raise PAT estimates for FY10 (by 9%) and for FY11 (by 10%).

* Valuation. Our revised target price of Rs112 implies 5x FY10e earnings (~50% discount to sector multiple).


To see full report: BGR ENERGY SYSTEMS