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BGR Energy 3QFY2012 performance highlights and results update

Contributed by Angel Broking

BGR Energy’s (BGR) results were disappointing for 3QFY2012, as expected. The company’s top line for the quarter declined on account of a high base, leading to downbeat earnings growth. Amidst execution concerns, management has guided revenue of ~Rs.3,400cr for FY2012E, which is in a stark contrast to the earlier guidance of Rs.4,800cr and well below our conservative estimates of Rs.4,196cr. Hence, we revise downwards our FY2012E/FY2013E revenue estimates by 20.3%/7.6% and earnings estimates by 18.0%/18.9%. The stock continues to remain range-bound – opaque visibility on new orders remains an overhang, thus capping any upside to the stock. We remain Neutral on the stock.

Execution decelerates as expected, positive surprise on margins: The company’s top line declined by 36.1% yoy to Rs.803.7cr (Rs.1,257cr), which was lower by 10.8% compared to our (below street) expectation of Rs.901.1cr. On the EBITDA front, the company’s margin reported a sharp expansion of 463bp yoy to 16.3%, (est. 12%), which can mainly be attributed to higher proportion of revenue from the BoP vertical. Interest cost jumped by 175% yoy/53% qoq to Rs.46.2cr, mainly due to high working capital borrowings. Subdued top-line growth and high interest cost resulted in PAT declining by 37.5% yoy to Rs.54.7cr (Rs.87.6cr).

Outlook and valuation: BGR's working capital has seen severe deterioration over the past few quarters (from 74 days in FY2010 to 225 days in 1HFY2012), mainly due to high receivables. Amid issues impairing the power sector, credit availability may harden for SEBs, as banks have already chosen to remain risk-averse. Hence, in our view, tight liquidity is likely to transmit negatively on BGR's books. Along with this, the BTG venture is expected to stretch its balance sheet – we expect the leverage to rise from 1.3x in 1HFY2012 to 2.4x in FY2013. At the CMP, the stock is trading at PE multiple of 8.6x FY2013E EPS, which we believe is reasonable amidst structural issues (slowdown of order inflow in the BTG space and high leverage) faced by the company. Hence, we maintain our Neutral view on the stock.