Strong execution in its EPC (engineering, procurement and construction) business projects helped BGR Energy Systems Ltd report better-than-expected financial results for the March 2010 quarter. BGR posted a 130% year-on-year growth in both stand-alone revenue and net profit in the March quarter, at Rs1,657.07 crore and Rs108.33crore, respectively.

Revenue from EPC contracts accounted for 95% of total revenue and increased by a huge 154%. This can be attributed to significant progress in executing two EPC projects in Mettur (Tamil Nadu) and Jhalawar (Rajasthan). The remaining 5% of revenue came from the capital goods business, which was under pressure and posted 17.6% lower revenue.

Graphic: Ahmed Raza Khan/Mint

For fiscal 2011, the company has given a guidance of 11.5% OPM. This augurs well as BGR’s OPMs are on the lower side compared with its peers.

Analysts, however, expect margins to be flattish. “The margin is likely to plateau as the share of revenue from balance of plant (BoP) projects increases (with the price variation clause) compared to the fixed-price EPC projects," wrote analysts from Anand Rathi Financial Services in a post-results note last week.

Decline in margins led to relatively slower growth (112.5%) in operating profit, against revenue growth of 130%. Net profit growth of 130% was helped by a 33.4% decline in interest expenses. Meanwhile, the robust order book offers good comfort in terms of revenue visibility. BGR’s order book at the end of fiscal 2010 stood at Rs10,230 crore and the contracts are to be executed over the next 30 months.

BGR’s stock has outperformed the Bombay Stock Exchange’s (BSE) Sensex and BSE Capital Goods Index in the past one year. This may limit sharp upsides from current levels.

At Rs658.60, the stock trades at 18 times its estimated earnings for fiscal 2011. The management has given revenue growth guidance of 60% for fiscal 2011. BGR’s tie-up with Hitachi Ltd to manufacture super-critical boilers and super-critical turbines is expected to bode well in the long run.

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