Poor execution concerns continued to roil BGR Energy Systems Ltd in the September quarter as the non-availability of coal linkages delayed the commissioning of power projects.
BGR’s management had guided for Rs.3,500 crore in revenue for FY13, implying an 11% growth. But with sales slumping 18% in the first half of this fiscal, it will be difficult to meet that target. The only positive for BGR in the September quarter was an improvement in operating margins, which grew 90 basis points (bps) from a year ago as it benefited from lower cost of raw materials and by executing some higher margin contracts. However, even that appears unsustainable as it starts executing projects such as NTPC Ltd’s orders, where its price quotes were low owing to tough competition.
One basis point is one-hundredth of percentage point.
The company had an order backlog of around Rs.14,000 crore in the September quarter, up from Rs.12,000 crore at the end of June. Not only are the order inflows tepid, even the existing orders could face execution risks because of delays from customers as they may not have the necessary approvals or coal linkages in place. For instance, NTPC orders worth Rs.8,500 crore make up 60% of the order book, but that may take around four years for BGR to execute, said analysts.
It is also becoming more difficult to manage working capital. BGR’s working capital cycle stretched to 373 days at the end of the September quarter, compared with 240 days six months ago. Overall debt rose 70% in the first half of the year to Rs.3,000 crore and higher interest costs ate into the bottom line. These concerns will not be going away soon as BGR is also investing in a joint venture with Hitachi Ltd to build a new boiler and turbine factory. This new facility is being added when there is overcapacity in the industry and will probably hit the bottom line in the near term.
Thus, it is not surprising that BGR shares have fallen 30% from their February highs, underperforming the BSE Power Index and rivals such as Bharat Heavy Electricals Ltd. The stock is trading at 9.6 times one-year forward estimated earnings. Though that may appear cheap, note that given the grim environment in the power sector and funding constraints, earnings visibility is very shaky. Thus, a further downside cannot be ruled out.