Stock Market Result Update on BGR Energy Systems for 2QFY2012

Stock Market Result Update on BGR Energy Systems for 2QFY2012 with a SELL recommendation and a Target Price of `229 (12 months).

BGR Energy Systems’ (BGR) results stabilized in 2QFY2012 (after witnessing exponential growth in the past few quarters, mainly FY2011). As expected, the company’s top line declined by 32.1% yoy to `771.5cr on a high base, however it was much below our (below street’s) estimate of `978.4cr. EBITDAM expansion of 263bp could not support the company’s earnings, which declined substantially in tandem with lower sales as well as higher interest costs. We believe the company continues to face headwinds on the business front – the lull in order inflows is weighing heavily on the stock. The stock has fallen by ~30% and underperformed the Sensex by ~22% (since our previous downgrade). We recommend Sell on the stock.

Weak execution and higher interest cost play a spoilsport: During the quarter, BGR’s revenue declined by 32.1% yoy to `771.5cr, driven by execution bottlenecks (such as monsoon season, delayed approvals from clients and consultants and engineering issues). On the EBITDA front, margin expanded by 263bp yoy to 14.3%, led by increased execution of high-margin BoP orders. Interest cost continued to increase during the quarter, growing by 118.2% yoy/67.7% qoq to `30.2cr, which offsetted operating gains. Driven by lower revenue and higher interest cost, the company’s PAT declined by 34.0% yoy to `51.4cr (`77.8cr) – 18.8% below our (below street’s) estimate of `63.2cr.

Outlook and Valuation: Despite the NTPC order win, which provided some breather; BGR remains in the dark spot. The slowdown in the power sector is likely to limit order releases (BTG/EPC/BoP) in the near-to-medium term which, in our view, poses serious concerns beyond FY2012. Hence, the stock continues to de-rate on account order intake concerns and has fully factored the worrisome growth trajectory of the company, thus capping any upside to the stock. We recommend Sell on the stock with a target price of  `229, assigning a multiple of 7.0x its FY2013E P/E.