BGR Energy IPO

A Case Study

U408046 Shantanu Das

shantanu@shantanu.in
 TABLE OF CONTENTS

1. Introduction ..................................................................................................... 3

2. About the Issue ................................................................................................ 4

3. Objective of the Issue....................................................................................... 5

4. Utilization of Issue Proceeds ............................................................................ 6

5. Share holding Pattern ....................................................................................... 6

6. Benefits of going Public .................................................................................... 8

7. Cost involved for going public......................................................................... 11

8. Why Investor invest in BGR Energy ................................................................ 12

8.1. Investment Rational ..........................................................................................12

8.2. Risk Factors .......................................................................................................13

8.3. Recommendation - Subscribe with a medium term view ...................................13

9. BGR Energy Financials .................................................................................... 14

10. Offer price justification ................................................................................... 18

11. IPO Grading History in Indian Stock Market ................................................... 23

11.1. ICRA Rating for BGR Energy ..............................................................................24

11.2. ICRA Grading Perspective..................................................................................24

12. Post Listing performance of BGR Energy......................................................... 26

13. References ...................................................................................................... 29

Page 1 of 31
 ACKNOWLEDGEMENT

We take this opportunity to convey our sincere thanks and gratitude to all those who have
directly or indirectly helped and contributed towards the completion of this project.

First and foremost, we would like to thank Prof Soumya Guha Deb for his constant guidance and
support throughout this project. During the project, we realized that the degree of relevance of
the learning being imparted in the class is very high. The learning enabled us to get a better
understanding of the nitty-gritty of the topic which we studied.

We would also like to thank our batch mates for the discussions that we had with them. All these
have resulted in the enrichment of our knowledge and their inputs have helped us to incorporate
relevant issues into our project.

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1. Introduction

BGR Energy was incorporated in 1985 as a JV between GEA Energietechnik GmbH and the
promoter Mr. B. G. Raghupathy. At that point of time the product portfolio of the company
encompassed on-line condenser tube cleaning systems, debris filters and rubber cleaning balls
used in thermal and power plants. By 1993 the promoters became the sole shareholders of the
company and also started expanding their product portfolio. In 2007 the company changed its
name from GEA Energy Systems (India) Ltd. to BGR Energy Systems Ltd. The company carries
out its business in two segments, the supply of systems and equipments and turnkey engineering
project contracting. In the systems and equipments business BGR designs, engineers,
manufactures sells and service a range of systems and equipment for the power, oil & gas,
refinery, petrochemical and process industries. BGR does turnkey contracts to supply the Balance
of Plant (BOP) equipments, services and civil works for power generation projects in which they
supply all the items other than boiler, turbine and generator. The company has also started
focusing on Engineering, Procurement and Construction (EPC) in which the company provides all
the solutions to the power projects including the boiler, turbine, generator and civil works.

BGR has seven complementary businesses which include:

• Power projects business – providing turnkey EPC and BOP services for coal-based
thermal power plants and gas based combined cycle power plants typically over 100
megawatts.
• Captive power projects business – providing turnkey EPC and BOP services for power
plants typically under 100 MW which are generally designed primarily to service particular
commercial facilities.
• Oil and gas equipment business – designing and manufacturing gas conditioning and
metering skids, storage tanks, pipeline pig launching & receiving systems, gas processing
complexes and gas compressor packages related to the oil and gas industry for companies
in India and abroad.
• Air fin coolers business – manufacturing products designed to cool process fluids and
gases used in the refining, petrochemical, and oil and gas industries.
• Environmental engineering business – manufacturing and providing deaerators and
other products to treat water used in the operation of various types of power and utility
plants and also provides industrial effluent treatment plants.

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 • Electrical projects business – supplying electrical systems and equipment such as gas
insulated switchgear substations, optical fiber power ground wires, extra high voltage
substations and transmission lines to power stations, refineries and petrochemical plants.
• Infrastructure business – capable of building roads and industrial buildings.

2. About the Issue

In December 2007 BGR Energy Systems announced its decision to go public. Under the plan the
company would offer 8,636,000 shares to the public and 500,000 shares to employees. The
maximum subscription amount for retail investors would be Rs 100,000. The issue would be
100% book built and the price would be in the band of Rs 425 – Rs 480 per share. Upon
completion of the issue the company would get listed on the National Stock Exchange and
Bombay Stock Exchange. The company appointed SBI Capital Markets, Kotak Mahindra Capital,
UBS Securities India and CLSA India as lead managers to the issue.

THE ISSUE

Equity Shares Offered by

Issue* 9,136,000

Of which

I) Fresh Issue by the Company 4,320,000 Equity Shares

II) Offer for Sale by the Selling 4,816,000 Equity Shares

Shareholders

Of which:

Employee reservation portion* 500,000 Equity Shares

Therefore Net Issue to the Public* 8,636,000 Equity Shares

Of which

A) Qualified Institutional Buyers (QIB) At least 5,181,600 Equity Shares(Allocation

portion on a proportionate basis)

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 Of which

Mutual Funds Portion 259,080 Equity Shares (Allocation on a

proportionate
basis)

Balance for all QIBs including Mutual Funds 4,922,520 Equity Shares (Allocation on a
proportionate
basis)

B) Non-Institutional Portion Not less than 863,600 Equity Shares

(Allocation on a proportionate basis)

C) Retail Portion Not less than 2,590,800 Equity Shares

(Allocation on a proportionate basis)

Equity Shares outstanding prior to the 64,800,000 Equity Shares*

Issue

Equity Shares outstanding after the Issue 72,000,000 Equity Shares*

Table 1

* BGR Energy Company has entered into agreements dated November 6, 2007 with certain investors for a placement of 2,880,000
Equity Shares and a transfer by our Promoter of 1,440,000 Equity Shares. The Company proposes to complete the above transactions
after the closing of the Bidding / Issue Period and before the Allotment of shares in the Issue to successful Bidders.

(1) Allocation to QIBs is proportionate as per the terms of this Red Herring Prospectus. 5% of the QIB Portion shall be available for
allocation to Mutual Funds. Mutual Funds participating in the 5% reservation in the QIB Portion will also be eligible for allocation in the
remaining QIB Portion

(2) Subject to valid bids being received at or above the Issue Price, under-subscription, if any, in the Non-Institutional Bidder and Retail
Individual Bidder categories, would be allowed to be met with spill-over from other categories or a combination of categories, at the
discretion of the Company and the Selling Shareholders, in consultation with the BRLMs

3. Objective of the Issue

• Augment long term working capital requirements

• Investment in establishment of manufacturing and assembly facilities

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 • Investment in establishment of manufacturing facilities in the Mundra Special
Economic Zone, Gujarat

• Investment in establishment of manufacturing facilities in Bahrain International

Investment Park

• Investment in establishment of assembly facilities in China

• Fund expenditure for general corporate purposes.

• Achieve the benefits of listings on the stock exchange

4. Utilization of Issue Proceeds

S. No. Expenditure Items Total Estimated Estimated Net

cost amount to be Proceeds
financed from utilization as
Net Proceeds on March 31,
of the Issue
2008 2009

1 Augment long term working 214.5 125 125

capital
requirements

2 Establish manufacturing and 82.6 80 41.8 38.2

assembly facilities

3 Fund expenditure for [●] [●] [●] [●]

general corporate
purposes

Total [●] [●] [●] [●]

Table 2

5. Share holding Pattern

The table below presents our shareholding pattern before the proposed Issue and as adjusted for
the Issue, and the Offer for Sale by the Selling Shareholders:

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 Pre-Issue Post-Issue

No of shares % No of shares %

Promoter

Mr. B.G. Raghupathy 23,654,160 36.5 19,712,160 27.38

Promoter Group

Ms. Sasikala Raghupathy 13,893,120 21.44 11,579,120 16.08

Swarna Leasing Private Limited 8,640,000 13.33 8,640,000 12.00

Priya Securities Private Limited 8,640,000 13.33 8,640,000 12.00

Vani Securities Private Limited 5,428,080 8.38 5,428,080 7.54

Arjun Securities Private Limited 4,540,320 7.01 4,540,320 6.30

Mr. S. K. Sridhar 4,320 0.01 4,320 0.01

Sub Total 64,800,000 100 58,544,000 81.31

Pre-IPO Investors*

Gautam Nayak & Keshav Bhujle as trustees

of:

CVCIGP II Ajay Relan Trust Nil 0.00 11,111 0.02

CVCIGP II Vivek Chhachhi Trust Nil 0.00 1,111 0.00

CVCIGP II Jayanta Kumar Basu Trust Nil 0.00 444 0.00

CVCIGP II P R Srinivasan Trust Nil 0.00 1,111 0.00

CVCIGP II Ajay Tandon Trust Nil 0.00 222 0.00

CVCIGP II Vinayak Shenvi Trust Nil 0.00 444 0.00

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CVCIGPII Client Rosehill Limited Nil 0.00 1,836,822 2.55

CVCIGPII Employee Rosehill Limited Nil 0.00 1,028,735 1.43

Reliance Capital Trustee Company Limited

A/c Nil 0.00 1,440,000 2.00

Reliance Diversified Power Sector Fund

Sub Total Nil 0.00 4,320,000 6.00

Public Nil 0.00 8,636,000 11.99

Employees Nil 0.00 500,000 0.70

Total 64,800,000 100.00 72,000,000 100.00

Table 3

6. Benefits of going Public

Access to capital to fund growth

Public placement of shares on a stock exchange allows the company to attract capital to fund
both organic growth (modernization and upgrade of production facilities, implementation of
capital-intensive projects) and acquisitive expansion. It is often the case that the available
sources of funding (retained earnings, owners’ equity, other private capital) are insufficient for
implementation of serious expansion plans. Also quite often, debt funding may be unsuitable for
such plans – for example, interest rates could be excessively high or maturity periods could be
unreasonably short. In such circumstances, an IPO becomes one of the most realistic and
convenient ways to secure the continuing growth of the business. The new share capital allows
the company to make time-crucial capital expenditure quickly and efficiently. IPO provides access
to a massive, timeless pool of capital and boosts the investment credibility of the business.

Creation of liquidity and potential exit for the current owners

Formation of a public market for the company’s shares at fair price creates liquidity and provides
an opportunity to sell the shares promptly with minimal transactional costs. The private owners
of the company can dispose of their stakes in the business both during an IPO (this route is often
taken by the minority financial investors such as venture or private capital funds) and at a later
stage (this is often preferred by the majority shareholders). Subsequently, the market value of

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the business achieved at the IPO and the company’s public status form a stable basis for
sustaining the accumulated capital and welfare of the private owners.

Maximum value of the company

Normally, an IPO is an offer to a large number of institutional and retail investors to become
shareholders of the company. These investors have a very significant pool of combined capital,
especially in such a large financial centre as London. The very multitude of large investors and
their confidence in the liquidity of their investment in a public entity assure the current owners of
a private company about achieving the maximum possible valuation of the business at the time
of an IPO.

Enhancement of the company’s public profile

Listing on a recognized stock exchange means that the business will receive wide media
coverage, usually a very favorable one, thus increasing the company’s visibility and recognition of
its products and services. The company’s activities will also be reflected in the reports by
professional financial analysts. Such public profile supports liquidity of the shares and contributes
to the expansion of the business contacts. It also helps to increase confidence among the
company’s business partners.

Improvement in debt finance terms

For domestic (Ukrainian or other CIS country-based) financial institutions – used to working with
the low-transparency businesses and often inadequate financial reporting – a company listed on a
recognized stock exchange becomes a desirable and reliable partner. Banks are often ready to
extend loans to public companies in larger amounts, under smaller collateral, for longer
maturities and with lower interest rates. Even the largest and most prestigious banking
institutions are keen to work with public companies – whose transparency and corporate
governance serve as additional factors of confidence for banks and other suppliers of credit.

Extra assurances for partners, suppliers and clients

Partners and contractors of a public company feel more confident about its financial state and
organizational capabilities as compared to those of a non-transparent private business. Partners
take additional comfort in the fact that the public company has gone through rigorous legal,
financial and corporate due diligences – all of which are required for a successful completion of an
IPO. Confidence among partners and contractors is a sound foundation for stable and predictable
business relations with the public company, and allows the latter to obtain additional leverage in
negotiating better terms for doing business.

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Enhanced loyalty of key personnel

Publicly available information about the share price of a public company allows development of
employee motivation schemes based on partial remuneration of staff in the form of participation
in the equity capital (for example, share options). Equity-based incentive schemes stimulate the
key personnel to become more efficient in their work in order to support the company’s growth
rates and profitable development – which in turn increase the operational and financial efficiency
of the company and its market value. Equity-based incentive schemes can only be used when the
company shares are liquid and have a market value, in other words, in case the company is listed
on a recognized stock exchange. Moreover, such motivational tools may help the company to
attract and retain valuable employees.

Superior efficiency of the business

Conduct of various due diligences during the IPO process requires a thorough and comprehensive
analysis of the company’s business model. During the IPO implementation process, certain
internal changes take place, including modification of the organizational structure; selection of
the key personnel; improvement of internal reporting and controls; as well as critical evaluation
of the efficiency of the entire business. Normally, such extensive internal efforts result in
significant improvements of the communication system, management and controls; they also
help eliminate any previously hidden shortcomings in the internal functioning of the business.

The increase in the capital: An IPO allows a company to raise funds for utilizing in
various corporate operational purposes like acquisitions, mergers, working capital,
research and development, expanding plant and equipment and marketing.

Liquidity: The shares once traded have an assigned market value and can be resold. This
is extremely helpful as the company provides the employees with stock incentive
packages and the investors are provided with the option of trading their shares for a price.

Valuation: The public trading of the shares determines a value for the company and sets
a standard. This works in favor of the company as it is helpful in case the company is
looking for acquisition or merger. It also provides the share holders of the company with
the present value of the shares.

Increased wealth: The founders of the companies have an affinity towards IPO as it can increase
the wealth of the company, without dividing the authority as in case of partnership.

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7. Cost involved for going public

There are several costs associated with going public. These costs include:

- Underwriting Fees – Underwriting is the highest cost associated with going public.
Underwriters (investment bankers) collect a percentage of the total amount raised in
the public offering (usually around 7%). The more complex the offering, the higher the
underwriting costs. Also, the more shares sold, the lower the commission paid to the
underwriter.

- Legal Fees – Attorney’s will review and prepare various documents for regulatory
compliance as well as perform due diligence.

- Audit and Accounting Fees – Most IPOs require a set of audited financial statements
(not just the current year, but prior years as well).

- Listing and Registration Fees – There are registration fees involved with the
Securities and Exchange Commission (SEC), the National Association of Securities
Dealers (NASD), and the various states. For example, you have to register securities
under the Blue Sky Laws in each state in which the company plans to do business or
sell its securities. The fees associated with the Blue Sky Laws can run as low as
$10,000 or less up to $50,000 or more depending on the number of states involved.
And don’t forget about franchise taxes, transfer taxes, and capital stock taxes.

- Printing – Printing can be costly, especially if there is an error with the prospectus.
Printing can encompass not only the prospectus, but also underwriting documents and
other legal documents.

- Public Relations – Long distance trips, presentations, lost time away from the office,
and other costs will be incurred as you build investor interest for the public offering.

Besides these, a lot of these costs don't go away after the IPO. Every year you will incur audit
fees, legal fees, quarterly reports, proxy reports, miscellaneous filings, annual reports, transfer
agent fees, public relations, investor relations, and other expenses to keep the company public.

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8. Why Investor invest in BGR Energy

8.1. Investment Rational

Boom in Energy Sector

BGR executes projects for companies in the energy sector which includes oil, gas, power &
nuclear. The energy sector is experiencing a boom and a number of energy companies are
coming up with new plans and projects. According to International Energy Agency (IEA) more
than US$ 16 trillion needs to be invested in energy supply infrastructure worldwide by 2030 and
of this almost half of total energy investment is to take place in developing countries. This will
definitely benefit BGR in the long run.

Robust Order book

BGR has an order book of around Rs 3300 Cr as of 30/09/2007 to be executed up to year 2009.
Of this around Rs 3000 Cr order is to be executed up to Mar 2009. This healthy order book of 6.3
times FY 07 revenue with execution period of 1.5-2 years gives visibility of high growth in near
terms. Apart from this over Rs 20,000 Crs fresh order are expected to be awarded in the next 6
mths and BGR is in well position to take on the opportunity.

Growing at a high rate

BGR has shown a consistent growth for the last 5 years. The Sales and PAT has been increasing
at a rate of 33.17% and 33% CAGR respectively over the period of FY 2002-07.Even in the
recent past revenue and PAT has grown 48% & 73% during the period FY 2005-FY 08
(annualized).

Strong customer base and expertise

BGR has strong presence in the market with clients spread as far as US, Europe, Africa and the
Middle East. The company also has strong expertise in its field. It has completed 131 projects in
42 countries.

One stop shop

Along with engineering, manufacturing, procurement, construction and commissioning BGR also
has the capability of designing of new projects. The company has employed over 100 engineers
for the task and is quite capable of providing designing solutions. In this way for setting up new
projects BGR acts as a one stop shop.

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 8.2. Risk Factors

Risk of Currency fluctuation:

BGR generates income, incurs expenditure and also procures raw materials in a number of
currencies. For the year end 31st Mar 07(18 mths), Sep 30th 2004 and 2005 around 12%, 17%
& 14% of the total income respectively was denominated in foreign currency. Therefore any Re
fluctuations against foreign currency can impact the company negatively.

Delay in project execution

For the turnkey contracts that the company does, it provides the Balance of Plant (BOP)
equipment i.e all items other than boiler, turbine and generator. For the completion of any
project these three items are must and BGR is dependent on other sources. Therefore the
projects may get delayed because of this. The payment received by BGR also delays if the project
is delayed.

Hike in cost of raw materials

The main raw materials that BGR requires in its operations are steel, aluminum, copper, other
base metals, cement, tubes and pipes. The company generally procures its raw materials from
India and some high end metallurgical products are imported from Europe, South Korea & China.
Therefore if any of the raw material prices increases it can impact on margin.

High Debt Equity Ratio

BGR has very high debt equity ratio of 2.79 and 2.93 for FY 07 and Q1 FY 08 respectively. This
shows that the company is highly leveraged. This also implies that the company has to bear
additional interest expense.

8.3. Recommendation - Subscribe with a medium term view

BGR Energy Systems Ltd. (BESL) is an engineering construction major which executes
Balance of Plant (BOP) and EPC contracts in the power sector. It manufactures air fin
coolers for oil and gas industry and deaerators, desalination plants, water treatment
plants and effluent treatment plants, which have applications in power and process plants
and other industrial plants.

India is witnessing a great boom in the power sector due to demand and supply
mismatch. Though power generating capacities are being ramped up aggressively, we
believe that they will still fall far short of the demand over next few years. In our view,

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 engineering and infrastructure companies with strong project management capabilities
would be ideally placed to capture the opportunities.

India requires power generation capacity of 1210 BU to meet the demand. Since
equipment costs constitute 75-80% of the total cost of a thermal plant, this coupled with
India's requirement of power, opens up huge opportunities for engineering companies.

In our view, BESL is one of the few players which can tap the opportunities in the power
sector. BESL has already executed BOP as well as EPC projects for power sector ranging
from 95 MW to 330 MW and is in the process of executing 3 power projects of 500 MW
each. Though risk of timely execution remains, we believe if BESL is able to deliver on
these projects, it will be able to get more such projects.

Healthy order book of Rs33Bn, of which 81% constitutes power projects (incl. captive
power projects), expected to be executed over the next 3 years.

The company has a strong visibility of earnings growth, since a major chunk of the order
book will likely be executes over the next 2 years. We expect revenues and earnings to
grow at CAGR of 96.2% and 136.7% respectively, over FY07-09.

While the company has been in operation since 1993 and has been into air fin coolers and
environmental engineering since 1994 and 1996 respectively, it entered the more exciting
power projects business only in FY01 by securing its first contract for BOP from BHEL. The
relatively short track record in key business segments of power projects and captive
power projects is in our view a major concern.

9. BGR Energy Financials

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Balance Sheet

Figure 1

Cash Flow Statement

Figure 2

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Profit & Loss Account

Figure 3

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Ratios

Figure 4

Peer Group Comparison

Figure 5

Free Cash Flow to Equity as on March 31st, 2007

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Figure 6

10. Offer price justification

P/E Ratio Method

From the Profit & Loss Account, Earnings of BGR Energy for the period 2007 (18 months) is 408.1
million (40.8 crores).

Industry P/E Average Ratio = Average(47.90,54.60,61.0,43.50,74.40,45.5,63.10,59.90) = 56.24

Earnings of BGR = 40.8 crores (for 18 months) (from Figure 3)

For 12 months = (40.8/18) * 12 = 27.2 crores

Total Share outstanding = 7.2 crores

P/E Ratio = (Earnings * P/E Average) / No of shares outstanding

= (27.2 * 56.24) / 7.2 = Rs 212.46

OR

Lower Ratio of industry = 43.50 (from Figure 5)

Lower band for BGR Energy as per lower industry P/E= Rs 161

And higher band for BGR Energy as per higher industry P/E = Rs 275

As is evident from the above calculations, the offer price of Rs 425 – Rs 480 per share is not
justified.

Page 18 of 31
DCF approach to Valuation

Assumptions

Free Cash Flow to Equity method which has been followed by us, the growth assumptions are
based on its past performance on net income. Going through its order in hand (Rs. 3300 Cr as of
2007) and also considering the prospects in power sector both nationally and internationally.
Further looking at BGR’s expertise in supply of systems and equipments, more specifically turn
key engineering where there are very few available players; BGR’s prospect for growth is
tremendous. Looking at every available data and aspects of business we have assumed the
growth in its income by 40% in 2008. This we have taken into account despite of 3 months of
business available after IPO, as the company would have planned its IPO much earlier and
accordingly planned its business financials. Further we have assumed growth of 60% in 2009 and
2010 and the stabilized growth @ 10% from 2013 onwards. However looking at its business
requirement and company performance BGR can again plan for more IPO in that case the growth
can vary.

DCF Method
Current Year 2008 2009 2010 2011 2012 2013
Expected G 39% 30% 30% 20% 20% 7%
Net Income 266.42 295.03 326.72 361.81 400.67 443.70 491.35
Capital Expenditure 91.52 101.35 112.23 124.29 137.64 152.42 168.79
Depreciation 59.19 65.55 72.59 80.38 89.02 98.58 109.16
Capital Expenditure - Dep 32.33 35.80 39.65 43.91 48.62 53.84 59.63
Change in WC 771.29 854.13 945.86 1047.45 1159.94 1284.52 1422.48
increase in LT Debt 1050.09 1162.87 1287.76 1426.07 1579.23 1748.84 1936.66
FCFE 512.89 567.97 628.97 696.53 771.33 854.17 945.91
Discount Rate 10.74% 10.74% 10.74% 10.74% 10.74% 10.74% 10.74%
DCFE 512.89 512.89 512.89 512.89 512.89 13713.64

TDCFE 16278.09
No of Equity Shares 72.00

Price/Share(Fair Valuation) 226.08

Table 4

Net income for 18 months =399.64 (from Figure 6)

For 12 months = (399.64/18)*12=266.42

Capital expenditure = (137.28/18)*12=91.52

Depreciation = (88.8/18)*12=59.19

Same calculation follows for all other items

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CFE Method 1

Table 5

CFE Method 2

CFE METHOD -B
Current Year 2008 2009 2010 2011 2012 2013
Expected G 40.00 60.00 60.00 40.00 20.00 10.00
Net Income 266.42 372.99 596.78 954.85 1336.79 1604.15 1764.56
Capital Expenditure 91.52 128.13 205.00 328.01 459.21 551.05 606.16
Depreciation 59.19 82.87 132.59 212.14 296.99 356.39 392.03
Capital Expenditure - Dep 32.33 45.26 72.42 115.87 162.22 194.66 214.13
Change in WC 771.29 1079.81 1727.69 2764.30 3870.02 4644.03 5108.43
increase in LT Debt 1050.09 1470.13 2352.20 3763.52 5268.93 6322.72 6954.99
FCFE 512.89 718.05 1148.87 1838.20 2573.48 3088.17 3396.99
Discount Rate 15.10 15.1 15.1 15.10 15.1 15.1 15.10
DCFE 623.85 867.20 1205.50 1466.29 1528.71 28812.47

TDCFE 34504.01
No of Equity Shares 72.00

Price/Share(Fair Valuation) 479.22

Table 6

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Price Calculation by Reinvestment Rate

Assumptions

Here we calculate higher growth rate as we are also increasing our retained earnings and
reinvesting. This a necessary looking at energy industries expansion rate and BGR’s order biking
we have assumed very high reinvestment rate initially for 4 years and subsequently reducing it.
Here the profit along with retained earnings is invested into business for capital expenditure and
investments in working capital.

Despite of higher growth and higher retained assumption the pricing that we got was 400%

Reinvestment Rate Method –A

2008 2009 2010 2011 2012 2013

Expected Growth (G) 0.20 0.30 0.30 0.20 0.20 0.10

ROE 0.20 0.30 0.30 0.40 0.40 0.40

ERR 1.00 1.00 1.00 0.50 0.50 0.25

FCFE 615.00 799.50 1039.35 1247.22 1496.66 1646.33

CAPM Discount rate 0.151 0.151 0.151 0.151 0.151 0.151

DCFE 534.32 603.49 681.61 710.63 740.88 13963.78

TDCFE 17234.70

No of Equity Shares 72.00

Price/Share(Fair Valuation) 239.37

Table 7

Reinvestment Rate Method –B

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 2008 2009 2010 2011 2012 2013

Expected Growth (G) 0.20 0.40 0.40 0.30 0.20 0.10

ROE 0.20 0.40 0.40 0.60 0.40 0.40

ERR 1.00 1.00 1.00 0.75 0.50 0.25

FCFE 615.00 861.00 1205.40 1567.02 1880.42 2068.47

CAPM Discount rate 0.151 0.151 0.151 0.151 0.151 0.151

DCFE 534.32 649.91 790.51 892.84 930.85 17544.27

TDCFE 21342.69

No of Equity Shares 72.00

Price/Share(Fair Valuation) 296.43

Table 8

Reinvestment Rate Method –C

2008 2009 2010 2011 2012 2013

Expected Growth (G) 0.40 0.40 0.40 0.40 0.20 0.10

ROE 0.50 0.50 0.50 0.50 0.30 0.20

ERR 0.80 0.80 0.80 0.80 0.67 0.50

FCFE 615.00 861.00 1205.40 1687.56 2025.07 2227.58

CAPM Discount rate 0.151 0.151 0.151 0.151 0.151 0.151

DCFE 534.32 649.91 790.51 961.52 1002.45 18893.81

TDCFE 22832.51

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No of Equity Shares 72.00

Price/Share(Fair Valuation) 317.12

Table 9

Reinvestment Rate Method –D

2008 2009 2010 2011 2012 2013

Expected Growth (G) 0.50 0.50 0.50 0.50 0.25 0.10

ROE 0.50 0.50 0.50 0.50 0.30 0.20

ERR 1.00 1.00 1.00 1.00 0.83 0.50

FCFE 615.00 922.50 1383.75 2075.63 2594.53 2853.98

CAPM Discount rate 0.151 0.151 0.151 0.151 0.151 0.151

DCFE 534.32 696.33 907.47 1182.63 1284.35 24206.79

TDCFE 28811.88

No of Equity Shares 72.00

Price/Share(Fair Valuation) 400.17

Table 10

11. IPO Grading History in Indian Stock Market

ICRA’s Grading of Initial Public Offerings (IPOs) is a service aimed at facilitating assessment of
equity issues offered to the public. The Grade assigned to any individual IPO is a symbolic
representation of ICRA’s assessment of the “fundamentals” of the issuer concerned on a relative
grading scale. IPO Grades are assigned on a five-point point scale, where IPO Grade 5 indicates
the highest grading and IPO Grade 1 indicates the lowest grading, i.e a higher score indicates
stronger fundamentals. An ICRA IPO Grade does not comment on the valuation or pricing of the
issue that has been Graded, nor does it seek to indicate the likely returns to shareholders from
subscribing to the IPO. The emphasis of the IPO Grading exercise is on evaluating the prospects
of the industry in which the company operates , the company’s competitive strengths that would

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allow it to address the risks inherent in the business(es) and effectively capitalise on the
opportunities available as well as the company’s financial position. In case the IPO proceeds are
planned to be used to set up projects, either greenfield or brownfield, ICRA evaluates the risks
inherent in such projects, the capacity of the company’s management to execute the same, and
the likely benefits accruing from the successful completion of the projects in terms of profitability
and returns to shareholders. Due weightage is given to the issuer company’s management
strengths and weaknesses and issues, if any, from the corporate governance perspective. ICRA’s
five point IPO Grading Scale is as follows:

• IPO Grade 5 Strong fundamentals

• IPO Grade 4 Above-average fundamentals

• IPO Grade 3 Average fundamentals

• IPO Grade 2 Below-average fundamentals

• IPO Grade 1 Poor fundamentals

(source www.icra.in)

11.1. ICRA Rating for BGR Energy

• ICRA has assigned an IPO Grade 3, indicating average fundamentals, to the proposed
IPO of BGR Energy Systems Limited. ICRA assigns IPO gradings on a scale of IPO
Grade 5 through to IPO Grade 1, with Grade 5 indicating strong fundamentals and
Grade 1 indicating poor fundamentals.

• An ICRA IPO Grade is a symbolic representation of ICRA’s current assessment of the

fundamentals of the issuer concerned. The fundamental factors assessed include, inter
alia, business and competitive position, financial position and prospects, management
quality, corporate governance, and history of compliance and litigation.

11.2. ICRA Grading Perspective

Strengths

- Established track record in executing Balance of Plant (BOP) contracts for power plants

- Currently strong order book position , which is likely to be sustained given the buoyant
investment prospects in the major business segments the company operates in

- Experienced managerial personnel alongwith in-house design engineering capabilities

provides it with competitive edge

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 - Technical collaborations with foreign licensors, which has enabled it to absorb the
technology required for design engineering and manufacturing of products such as air-
fin coolers, deareators, and oil and gas equipments

- The company’s returns on capital employed (RoCE) and on net worth (RoNW) remain
strong despite moderate profit margins, because of the low fixed-capital intensity of its
business.

Concerns

- Increasing competitive pressures from domestic and international players in all

business segments.

- Relatively limited track record in EPC segment for complete power plant , which is
going to be its thrust area, going forward

- Absence of backward integration into the manufacture of critical plant equipment such
as boilers, turbines and generators (BTG)

- The company’s operating profitability remains vulnerable to fluctuations in the prices of

basic raw materials and bought -out components, given the fixed price nature of
contracts in the projects business

- High working capital intensity, which has resulted in company reporting negative
operating cash flows

- Execution risks involved in scaling up business volumes given the increasing

complexity of projects that the company is handling. The company’s success in
recruiting and retaining skilled engineering personnel would be critical

- The company has not been able to execute certain road projects in timely manner, and
has incurred losses of around Rs. 230 million over the period of 2004-05 to 2006-07

Grading Rationale

The IPO Grade 3 assigned by ICRA reflects BGR’s established track record in implementing BOP
contracts for power projects, its in-house design engineering capabilities, and its strong order
book position, besides the favourable prospects for its business in the power sector. BGR’s
technical collaborations with foreign licensors have enabled the company absorb the technology
required for design engineering and manufacturing of products such as air-fin coolers,
deareators, water treatment systems, and oil and gas equipment over the past few years. The
company’s products business, although currently small in terms of contribution to overall
revenues, offer considerable growth potential and also supports its competitive advantage in

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 power project contracts. These strengths, along with buoyant investment in the power generation
segment , have led to BGR reporting a revenue growth of 80% (annualised) in 2006-07.

The grading also takes due note of the fact that despite moderate profit margins, BGR’s returns
on capital employed and on net worth have remained strong (24.2% and 39.3% respectively, in
2006-07) because of the low fixed-capital intensity of its business.

The grading is however constrained by the increasing competitive pressures from both domestic
and international players in all of BGR’s business segments, the company’s high working capital
intensity, and the sensitivity of its operating profits to fluctuations in the prices of basic raw
materials and bought-out components (given the fixed-price nature of contracts in the project
business). ICRA further notes that BGR does not have facilities for manufacture of critical plant
equipments such as BTG. This makes it critical for the company to be able to tie up with OEMs for
sourcing of BTG while bidding for the entire portion of EPC contracts for power projects. Also,
BGR’s success at recruiting engineers and retaining its key management/experienced personnel,
and its ability to execute contracts in a timely manner without cost overruns, given the
anticipated growth in business volumes, would remain critical factors from the grading
perspective.

12. Post Listing performance of BGR Energy

Shares of BGR Energy Systems Ltd almost doubled on the first day of its trading. It debuted at a
premium of 75 per cent against the issue price of Rs 480 on the NSE. During the intra-day, the scrip
touched a high of Rs 922.70 and a low of Rs 840 before closing at Rs 901.45. The company witnessed
a total turnover of Rs 73,959.31-lakh, as per the NSE data.

On the BSE, it debuted at a premium of 66.8 per cent. It hit an intra-day high of Rs 940 and a low of
Rs 801 before closing the day at Rs 901.30. The company had entered the capital markets with a fresh
issue of 43.20-lakh equity shares and an offer for sale of 48.16-lakh equity shares. From the proceeds,
the company would use Rs 80 crore to set up plants in the Mundra Special Economic Zone in Kutch,
Bahrain International Investment Park and Langfang of China. Of the total requirement of Rs 254.50
crore to augment long-term working capital, the company will finance about Rs 125 crore from the
public issue.

BGR Energy Systems Ltd declared its first annual performance results after its initial public offering.
The company’s net profit for 2007-08 has more than doubled to Rs 84.44 crore from Rs 39.19 crore
for the previous year. For 2007-08, BGR Energy’s turnover was Rs 1,505 crore against Rs 775 crore
for last year. The company’s board has recommended a dividend of Rs 2 a share (20 per cent).

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During the year 2008-09, despite the slowdown in Indian Capital Goods sector, the company had
secured orders worth for Rs 8278 crore. As on March 31, 2009 order book stood at Rs 9,523 crore, of
which Power Sector – EPC & BOP Contracts Power Sector – EPC & BOP contracts stood at Rs 9,039
crore, while Oil & Gas sector turnkey contracts and equipment business stood at Rs 417 crore and Rs
67 crore respectively.

Its net profit rose 17.47 Percent to Rs 20.24 crore in Qtr ending June 2009 for the financial year 2008-
2009 compared to Rs 17.23 crore in qtr ending June 2008. Sales rose 1.38 Percent to Rs 311.07 crore
in Qtr ending June 2009 for the financial year 2008-2009 compared to Rs 306.83 crore in qtr ending
June 2008.The Board has recommended a dividend of Rs 3 per equity share of Rs 10.

The stock is running today at a price of Rs. 451.20 of its 52wk H/L (Rs) 524.80 - 107.00. The price
was low (107 – 220) from the month Nov 2008 to April 2009. It is continuously rising from Rs 198 on
April 2009 to Rs of 451.20 Sep 2009.

As per the annual report and other details, the stock will definitely touch its pervious value of Rs 990
in the next fiscal year.

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Graph 1

Graph 2

As the Graph 2 shows BSE sensex also shown a downward movement but the percentage is only
13.49% (very low as compare to the BGR ) during the 4 month period.

The comparison of fluctuation between BSE & BGR price is shown in the Graph 3.

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Graph 3

So shown on Graph 3 the fluctuation of BGR price is much more high as compare to the BSE
fluctuation .

More over the performance of BGR price for a short run was good but it could not hold or say
sustain over a long period. But any ways starting was good. But performance is always below the
IPO price.

13. References

www.bgrcorp.com

www.icra.in

www.bseindia.com

www.nseindia.com

www.google.com

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