We upgrade our rating on BGR Energy to ‘hold’ given (a) improvement in working capital during Q1FY14; (b) increased focus on BoP; and (c) significant correction in the stock during the past three months. We revise our target price to R107 from R214.
While BGR has covered some ground by improving its working capital, overall macro scenario for the power sector remains weak. Clarity on appointment of top management remains a key monitorable. Increased BoP focus, in addition to significant correction in the stock during the past three months, makes the valuation compelling.
BGR Energy Q1FY14 revenue surged a robust 34% on back of pick in execution in one engineering, procurement and construction (EPC) contract. Higher proportion of EPC execution led to Ebitda margin declining 150 bps to 12.9%. PAT grew only 11% due to margin decline and higher interest cost. Order backlog at R11,900 crore dipped 5% (includes R1,580-crore OPGC order). We cut our earnings 36% for FY14e and FY15e each, based on our assessment of execution and order intake, in addition to management guidance. On our revised earnings, the stock trades at 5.4x and 4.7x.
Order backlog fell 5% to R11,900 crore, providing revenue visibility of ~3.5 years. The order book includes R7,100-crore boiler turbine-generator orders (from NTPC) with R3,000 crore from BoP and R1,000 crore from EPC contracts.