BGR Energy Systems

Investors with a three-year perspective can consider buying the stock of BGR Energy Systems.

The company’s strong financials, the resilience shown in the current slowdown and the ability to achieve financial closure in large projects during a liquidity crunch, suggest that the company will be able to capitalise on the huge business opportunity in the power and oil and gas space.

An order book of over Rs 10,000 crore (7 times FY08 sales) provides revenue visibility for the medium term. The company’s move to tie-up technology for power equipment manufacturing, if successful, could result in a significant re-rating of the stock over the next couple of years. At the current market price of Rs 180, the stock trades at 10 times its expected earnings for FY10. The stocks can be bought on declines linked to broad markets.

For the nine-months ended December 2008, BGR recorded 30 per cent growth in sales as well as net profits compared with a year ago numbers. This performance stands out at a time when most companies in the engineering space have witnessed either a slow down in their business or were heavily burdened with raw material and interest costs.

Profitability remained intact for the above nine months with operating profit margins holding at 10.5 per cent. While BGR did see a rise in its interest costs, higher profits provided sufficient cushion. The company’s superior debt servicing capabilities enabled it to tie up funding for two huge projects for state electricity boards (SEBs), thus achieving financial closure on time.

At the time of its IPO in 2007, BGR was primarily a turnkey player in oil and gas and also executed Balance of Plant (BOP) for power projects. From an engineering project executor, BGR has graduated into a full fledged Engineering Procurement and Construction (EPC) player with backward integration of manufacturing a good proportion of components in-house.

The company’s two EPC power projects, bagged after competing with top power equipment makers, is an indication of the above transition. Its in-house manufacturing for some components could also have come to its aid in bidding at competitive rates. However, timely execution in these projects would act as a point of reference for future projects.

While BGR would import the power equipment for its existing SEB projects, in a move to improve cost viability of projects and avoid the hassle of imported technology, the company has recently tied-up with US-based Foster Wheeler North America, for sub-critical and super-critical boilers.

With plans to have a manufacturing unit in India, this strategy would support its EPC business and do away with technology related setbacks involved in some imported power equipment.