About a year ago, BGR Energy Systems Ltd was riding high as it won contracts to supply five of NTPC Ltd’s turbines.

That win boosted the company’s order book by nearly 11,000 crore or 50%, and the stock price as well. But BGR Energy, just like other power equipment makers, is not insulated from the mess in the power generation and distribution sector. Its outlook has decidedly taken a turn for the worse since those heady days.

For one, the company has received a letter of award from NTPC for only two out of the five projects. While the third award is expected to take place later this calendar year, the other two projects could get delayed as the power generator struggles to get clearances to start them. That is just a symptom of the larger malaise affecting the sector in general and private power producers in particular.

As coal shortages start affecting plant load factors, many power producers are postponing their investments to increase capacities, which has started telling on BGR Energy’s order books. The management acknowledges as much and has forecast slower revenue growth this fiscal year.

Secondly, this slowing down of order books comes at a time when power equipment makers are suffering from overcapacity. According to Antique Stock Broking Ltd, “We believe that BTG (boiler turbine generator) awards in FY12-14 will fall in the range of 8-12GW (significantly lower than project awards of 20-25GW during FY9-11). On the other hand, capacity will reach to 36GW per annum by FY14." GW stands for gigawatts and 1GW equals 1,000 megawatts.

That overcapacity as well as competition from Chinese equipment suppliers is leading to aggressive bidding as can be seen from BGR Energy’s own quotes for the NTPC project wins. Although operating margin increased in the first quarter over a year ago, it is likely to come under pressure during the rest of this fiscal as BGR Energy executes more lower-margin orders.

At the same time, managing working capital is also proving to be more difficult. At the end of the last fiscal, the company’s receivables stood at 389 days of sales. The deteriorating working capital means that there is unlikely to be any relief on interest payments even if BGR Energy has scaled down the capex on factories it was building with Hitachi Ltd.

Given these problems, the stock is unlikely to see any upside unless there is an improvement in the overall operating environment.

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