India Capital Markets has come out with research report on BGR Energy Systems IPO. The firm has advised to subscribe to the issue with a long term view.
BGR Energy Systems, a supplier of systems and equipment for the power, oil & gas, refinery, petrochemical and process industries, proposes to enter the capital markets on December 5, 2007 with a public issue of 9,136,000 equity shares of Rs 10 each through 100% book building process.
The issue closes on December 12, 2007 and the price band has been fixed at Rs 425 to Rs 480 per equity share.
India Capital Markets report on BGR Energy Systems IPO
BGR Energy Systems (BGR) formerly GEA Energy System (India) Pvt. Ltd supplies a range of equipments, systems and services to the power and process industries. It executes power projects, contracts and provides turnkey balance of plant (BOP) Services for the power industry.
It is one of the country's largest engineering, procurement and construction (EPC) provider to power plants and oil & gas units, has chalked out a greenfield and brownfield expansion plan in India and overseas at an outlay of Rs 826 million. The company is now focusing on engineering, procurement and construction services for power plants. It also operates an infrastructure business intended to provide advanced technology services in complex infrastructure projects.
Investment Rationale
Moving up the value chain
The company has expertise in BOP projects and now it’s moving up the value chain and getting into managing EPC contracts for captive power plants. BGR has worked on large sized power plant projects ranging from 100 MW-600 MW. The EPC projects provide higher margin visibility.
Increased focus on Oil & Gas business
BGR intends to capitalize on its experience of working in the oil & gas industry to benefit from the significant investments proposed in gas gathering, liquefaction, storage and transportation projects in India.
Expand its international businesses and operation
The company plans to open marketing office in Dubai to ensure proximity to its clients. It also plans to open manufacturing facilities in Bahrain and China. The company plans to open offices where it can have cost advantage vis-à-vis its competitors. The company is also seeking to identify acquisition targets and joint partners for the same. The company is also planning to increase its exports, as the margins are better in international market.
Operating in high powered Sectors
BGR is operating in high-powered sectors of Power, Captive power, Oil & gas, Refinery, petrochemical and Infrastructure
Concerns
The company is exposed to construction risks for fixed price contracts that could cause them to incur losses
For its fixed price contracts, an increase in the quantity of material, fuel and labor required to execute the project could cause the actual expense to the company for executing the project to vary from the assumptions underlying the bid for such contract, which could expose the company to increased actual costs and reduced profit margins.
BHEL has banned business dealing with the company for 3 years
BHEL by its letter dated 1 March 2006, issued proceeding banning BGR and related companies from business dealings with BHEL for 3 years. The company was alleged for forming a cartel with Techno Electric Engineering Company Ltd to obtain an order from BHEL at a high price.
Outlook & Valuations
BGR’s annualised EPS of Rs 9.76 (based on June quarter EPS) discounts the upper price band by 49x and the lower price band by 44x. The company is moving up the value chain from executing BOP projects to EPC contracts for captive power plants. With the current order book position of Rs 33 bn, which is expected to go up to Rs 200 billion in the next 2-3 years, and with the sunrise sectors it is operating in, the company has a huge potential going forward. We recommend Subscribe to the IPO with a long-term view.
Source: Moneycontrol.com
Tuesday, December 4, 2007
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