>BGR ENERGY (RELIGARE SECURITIES)

BGR Energy (BGR), one of India’s leading BoP (balance of plant) companies in the power sector, has recently made a successful transition into full-service EPC (engineering, procurement and construction), winning two turnkey contracts worth Rs 80bn during FY09. It now intends to enter the market of BTG (boiler, turbine, generator) supply by establishing a 4,000–5,000MW manufacturing facility in India. Considering the expanding scope of business and Rs 122bn power project order book, we believe the stock offers multi year growth opportunity. We expect the sales and earnings CAGR of 41% and 40% respectively over FY08-FY11E. Buy.

Stage is set, execution remains the key

Strong industry potential: India’s power sector harbours significant business opportunities given the quantum leap in generation capacity planned by the government over the next 8–10 years. According to the Ministry of Power (MoP), India has targeted to build ~78GW of power generation capacity in the course of the 11th Five Year Plan from 2007 to 2012, and ~100GW in the subsequent plan ending 2017. This opens up a tremendous market for BGR.

Earning outlook healthy: BGR holds a large order book of Rs 122bn in the power project division, which is 6.3x its FY09 sales. All the necessary project approvals are in place, with term loan and working capital funding tied up. This mitigates the execution risk to a large extent. Considering the industry growth prospects and BGR’s strong credentials, we expect order flows in the power project division to remain robust, both in EPC and BoP. This would support a sales and earnings CAGR of 41% and 40% respectively over FY08-FY11E.

Evolving into a full-fledged EPC player: BGR has bagged two major EPC contracts worth Rs 80bn during FY09 – a major breakthrough in the company’s drive to evolve from a BoP supply company to a full-service EPC play. At present the company sources its BTGs for EPC contracts from China-based Dong Fang. It now intends to enter the market of BTG supply by establishing a manufacturing base in India through technical tie-ups with global majors. To this end, the company has signed an exclusive 20- year technology transfer agreement with US-based Foster Wheeler for the manufacture of subcritical and supercritical boilers from 100MW to 1,000MW. The company is also scouting for a global partner for its turbine venture.

Initiate with Buy and target of Rs 581: The stock is currently trading at a P/E of 13.6x on FY11E earnings, which is ~40% discount to BHEL’s valuation. Considering BGR’s expanding BoP and EPC presence in the high-growth power sector, we believe this discount should narrow – we have valued the stock at 17x FY11E earnings, which is a 26% markdown to BHEL. We initiate coverage on BGR with a Buy rating and a target price of Rs 581.

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