| The growth in the power sector has created plenty of opportunities across the value chain. From the point of generation to the consumer, it has laid down a solid foundation for companies, which are directly and indirectly related with the power sector, to grow. |
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| BGR Energy Systems is one such player generating about 80 per cent of its revenues from the power sector. Generally, power generation companies and the large EPC (engineering, procurement and construction) contractors outsource several smaller activities related to the construction of the power plant, which includes components, structures and services to third parties known as BOP (balance of plant) work. |
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| BGR, is one such player, executing five such projects worth Rs 2,500 crore. BGR provides BOP services and equipment required for the construction of power plants, mainly gas and coal based power plants. |
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| In addition to this, the company also undertakes industrial and oil and gas projects supplying products and services in the domestic and international markets. The company manufactures about 40-50 per cent of its equipment requirement. |
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| Power proxy |
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| Along with the opening up of opportunities in the power, BGR has been able to grow rapidly. Its power project division earned revenues of Rs 150.9 crore in FY04, while its Q1 FY08 revenue was Rs 115 crore. The company had a consolidated current order book of Rs 3312 crore as on September 30, 2007, which is significantly high compared with about Rs 950 crore in the corresponding period last year. About 80 per cent of this is accounted by the power projects. |
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| During the Eleventh Five Year Plan, the government is estimated to add another 80,000 MW of new capacity, which will further require huge investment for the EPC and BOP work. According to industry estimates, for every investment in new power generation capacity, about 60-80 per cent of the total project cost is spent over equipment and EPC work, while BOP is the rest. |
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| In India, generally the EPC contractor takes care of the BOP work for power generation companies and there are bigger companies in this segment such as Reliance Energy, Tata Projects and L&T. However, most of these bigger companies are fully booked as a result of the huge capex in the power industry. |
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| The power generation companies are now allocating BOP work separately. BGR which is leading player in this segment catering smaller projects ranging 25-500 MW should be able to stand out in the competition and benefit from the ongoing investment. |
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| Further, the company is also making efforts for developing expertise and skills for setting up of projects in the range of 600 MW to 800 MW, so that it can participate for larger projects. |
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| EPC dreams |
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| Besides, BGR also intends to scale up its EPC business. The company is commissioning two EPC projects worth Rs 432 crore at present. EPC projects require proven capability and experience, thus this segment is currently dominated by the large domestic and international players. BGR will scale up this business gradually and may also seek strategic alliances in the form of joint ventures or sub-contracting for specific projects. |
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| “We also intend to partner with global manufacturers of boilers, turbines and generators to establish a more visible presence throughout India. This will enable us to capitalise on our past experience and bid for larger contracts,” says B G Raghupathy, chairman and managing director, BGR Energy Systems. The successful entry into the EPC area will help the company increase its top line significantly. |
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| However, as EPC is generally a lower margin business, BGR’s overall margins may fall a bit. Besides, demand from captive power generation plants entails additional opportunities for the company. The revenues from the captive power division was just Rs 63.2 crore in FY07 (18 months), which has gone up to Rs 93.5 crore in Q1 FY08. |
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| Exports growth |
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| BGR is also present in some of the overseas markets mainly servicing clients in the field of oil and gas and power equipment. Oil and gas, which generated about Rs 71 crore of revenues in FY07, now accounts 13 per cent of its current order book at Rs 431 crore. |
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| The company will set up manufacturing and assembly facilities in Bahrain and China at a cost of Rs 55.5 crore. These new facilities will target opportunities in the oil and gas and power sectors around the world. At present, exports account for 18 per cent of the total order book. With these expansions the proportion of exports is likely to go up. |