>BGR ENERGY: BTG JV with Hitachi supports growth prospects; maintain Buy

What's changed
BGR has signed today two JV agreements with Hitachi for design and manufacturing of Boiler-Turbine-Generator (BTG) sets for Thermal power plants in India. These JV’s would involve a total investment of Rs4,400cr (BGR’s share at Rs3,200cr) and would have capacity of c.4,000MW starting from end-2012. This arrangement is on expected lines in terms of total project costs and planned capacities, but slightly ahead of our expectations in terms of aimed commissioning.

Implications
The signing of the JV reiterates our view on the company’s ability to secure such a partnership and also its ability to win future orders in the super-critical thermal sets category. However, the impact of any such orders on revenues would only be visible starting FY13E as most of these orders will be for commissioning of plants in the later half of XIIth five-year plan (2012-2017). So, our current 12m TP of Rs874 (based on 18.6X P/E on average of FY11E and

FY12E EPS) does not include these subsidiaries.
BGR’s share of investment would mean an equity capex of Rs960cr (assumed 70:30 D/E) spread across three years. Based on our cash flow estimates, we believe the company is adequately funded to make this capex from internal accruals without need for external fund raising.

Valuation
BGR currently trades at FY12E P/E of 14.8X, still at significant 33% and 26% discount to FY12E P/E of bigger peers like BHEL and L&T. Given our expectations of better growth and margin profile for BGR, at 39% EPS CAGR over FY10-12E, vs. 2-yr median EPS CAGR of 17% for its Indian peer group, we continue to view current valuations as attractive and reiterate our Buy rating. We fine tune our numbers for FY11E-FY13E on the back of earnings.

Key risks
1) Relatively new business in BTG space, 2) aggressive bidding for orders.

To read the full report: BGR ENERGY