IPO Update: BGR Energy Systems Limited

Electrifying Business at Sky High Pricing

BGR Energy systems has entered the capital markets with a public issue of 91.36 Lac shares at a price band of Rs. 425-480. Investment Guru is of the view that the company is into the powerful business of Power equipments and hence has potential to deliver excellent performance given its unique business proposition, government’s thrust on this sector and the demand supply mismatch.

However, the promoters have been greedy in pricing the issue and the issue at the higher band is asking for a valuation in line with those of Blue-chips like BHEL and L&T. ICRA has assigned Grade 3 to the issue indicating Average fundamentals. I would prefer to stay away from the issue (though it is commanding a premium in grey market even at this aggresive pricing) since the current fundamentals do not justify such a high valuation and I would not like to pay a price today for the three year forward earnings of the company given the risk factors (see below). I would suggest that investors with long term view or high risk takers should only invest in the issue.

What’s Good about BGR Energy ?

• The company is well placed in its business of power projects which provides turnkey Engineering, procurement and construction (EPC) and Balance of plant (BOP) services given the limited players in the space and huge business opportunities due to focus on power sector.

• BGR plans to open a marketing office in Dubai to ensure proximity to clients and to open a manufacturing facility in China to expand manufacturing capabilities.

• Company boasts of a strong order book of Rs. 33212 million which brings visibility to its earnings.

• The company has in house designing and engineering capabilities which provide significant cost advantage.

• BGR has a proven track record of executing 130 contracts in 42 countries in Asia, Middle east, Africa and Eurpoe.

• The company has come along way from a subcontractor to securing direct orders from power generation companies.

• The company has posted a strong growth in both top line and bottom line over past two years. For the Quarter ended 30th June the company posted a top line of Rs.239 crore and Net Profit of 17 crores.

• The company has carried out Pre IPO placement of its shares to CVC (20.88 Lac shares) and Reliance Capital (14.4 lac shares) at a price of Rs.450.

• The issue proceeds would be utilized in augmenting the working capital and establishing manufacturing and assembling facilities.

• The company generates a Return on Net worth of 39% which is higher than that of L&T and BHEL.

What’s not good about BGR Energy ?

• The company is dependant on few customers for a major chunk of its revenue. The Top three clients contributed 48% of the topline.

• Major chunk of the revenue (73%) comes from its business with government entities and hence the business is prone to delays in execution of the projects based on political developments and changes in budgetary allocations.

• The company has a very high account receivable collection cycle (as high as 180 days). This puts a burden on the working capital position of the company and could be a limiting factor in optimizing the operational and financial efficiencies.

• Pricing Risks – Most of the projects executed by the company are on a fixed price basis. For 18 months ending 31st March 2007, 90% of the total income was derived from fixed price contracts. Though the company enters into back to back contracts from suppliers, pressure on margins due to rise in input costs cannot be ruled out and would adversely impact the company’s performance.

• The annualized EPS on the results posted for Quarter ending 30th June,2007 stood at 9.7 which translates into a PE multiple of 50. This makes the issue priced in line with valuation of much stronger, capable and dependable companies like L&T and BHEL.

• The Net asset value per share comes to 12.8 which shows that the IPO price is 37.5 times its Net asset value. This makes issue quite expensive.

Issue Opens : December 5, 2007
Issue Closes : December 12, 2007
Registrar : Intime Spectrum

You can check BGR Energy IPO Allotment Status here.