Stock Review: BGR Energy

BGR Energy has underperformed the Sensex since the second half of November, despite the company denying its involvement in the bribe-for-loans scam. Analysts view this as a 'buying opportunity' because fundamentals remain robust and valuation reasonable at 15 times FY12 average estimated earnings. Based on the average target price of `880, the stock provides an upside potential of 25 per cent from the current levels of `715.

Analysts are positive on the transformation of its business model from balance of-plant (BoP) projects to full fledged power plant engineering-procurement-construction (EPC) contracts. Further, the joint venture with Japan-based Hitachi to manufacture boiler-turbine-generators (BTGs) is comparable to heavyweights such as Larsen & Toubro and BHEL in upcoming tenders. Thus, BGR's unique position to provide the whole package of BOP, EPC and BTG makes it the best pick in the power equipment space.

The company is also geared for strong growth due to its robust order backlog, comprising mainly two EPC projects (Rajasthan and Tamil Nadu state electricity boards) worth `8,000 crore, or 76 per cent of the total order backlog of `10,500 crore. These two projects are at advanced stages of execution.

The company is also awaiting the outcome of bids submitted for two projects of RRVUNL (Rajasthan Rajya Vidyut Utpadan Nigam) worth `6,000-7,000 crore each, and the NTPC bulk tender for boiler ( `11,000 crore) that will help fuel growth beyond FY12. It is also focusing on private power producers and other state electricity boards which are expected to come up with tenders.

Analysts are confident of the management's guidance of `12,000-15,000 crore order inflows in FY11 and 50 per cent growth in sales and profit in both FY11 and FY12. However, year-on-year growth in revenues during the second half of FY11 is likely to be affected by the high base of the first half of FY10, though operating profit margin will be between 11 per cent and 11.5 per cent. High working capital requirements and competition in the BTG market are key risks.

The stock's underperformance over the last two months is being seen as a 'buying opportunity'