u@" . This case-was prepared by VishwanathS.R. of Institute of Management 'Technology, Nagpur.

276 Cases in Corporate Finance


In December 2007, BGR Energy Systems announced its decision to go public. Under theplannhe company would offer 8,636,000 shares to the public and 500;000 shares to employe~s,The maximum subscription amount for retail investors would be Rs, 100,000. The issue would be 1000/0 book built and the price would be in the bandofRs: 425~Rs. 480 per share. Upon compledoni6fthe 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 eLSA India as lead man~gers to the issue.

In book building, a syndicate of investment banks brings anissuer'sequityto the market; One of ... the investment banks. acts as arranger withthe rest of the members acting as underwriters;' The arran"gergives notice of a ~ossible price range. The underwriters s¢llequiwona best effoitsba$is.

~<, Orders for equity over the stated price tan\ge are collected by underwriters and returned to the arranger. Thus, book building assesses not only price, but also volume at each price level. The arranger has the final responsibility of setting the actual price at which equity will be issued and Irs allocation to investors. The price, thus, reflectsmarket demand. The issue has two compenents»placement -portion and public portion. The placement portion is targeted at institutional investors like Mutual funds. The book runner drafts the preliminary prospectus and files the prospectus with the concerned authority .(SEBI) fW approval. The preliminary prospectus does not contain the issue price.On obtaining the autll~tity's approval, the book runnercirculates the Hl'eUminaryprospeCtus with intermediaries like merchantbanksand brokers inviting them to join the syndicate. The revised version of the prospectus indi~atesthe price range. The intermediaries, in turn,circulatcthe prospectus among their clients and place one order for the total quantity on behalf of alldients.the book runner 'builds the book', records information like name of the intermediary, number and price at which the buyer is willing to buy etc. The book is kept open till the issue getsenoughordets.The book runner then, in consultation with the issuenprices; the .issue, d~cidesondieam.()unt .of underwriting and allocation of securities. The final prospectus is flIed with the concernedauthbrity (SEBI). The issuer advertises the prospectus announcement in the newspaper the next day. The issue opens 10 days after the announcement and is kept open for three days. Syndicate members .sendtheir completed application. Allotment is made partly on a firm basis and partly on the basis of pub lie subscription. If the public portion is undersubscribed, the syndicate members willreceive.allotment in. the pubHcportionals6;-Li~ewise, if the. issue is • over subscfibed,thesy~dicatenl~~ber .gers a

refund. Securities are allotted and' listed on' stock exchanges for' trading purposes. " .

The issue of 91.36 lakh equity shares was aimed at raising Rs. 388.3-Rs. 438.5 croreIdependlng on the price band ofRs. 425-480 per share}. The energy equipment business is working capital intensive and requires significant amount of working capital. The company availed a major portion of working capital in the ordinary course of business from its banks -as loans. At the time of the issue, the company had received sanction of aggregate fund based limits of Rs. 5,590 million and non .. fund based limits of Rs. 8,020 million. As per the lending practice of banks, BGR was required tOhting in part of the working capital out of net owned funds. Net owned funds are required is to be provided by shareholders by way of share capital, share premium and reserves and surplus.

Case 16: BGR Energy Systems', Initial P~blicOffering2n

The objectives of the issue were to. augment long-term working capitalrequiremen,t,ex:p4nd~~e production capacity by establishing additional manufacturing facilities in the Mundra speclal economic zone in Gujarat, China and Bahrain in the Middle East, and to' fund, corporateexpendimre. The plants. to. manufacture finned tubes in China and Bahrain were expected to. offer. proximity to. customers in that region. The details of the utilisation of issue proceeds are provided in Table A. ,,'

. ,

-The.issue, ;cofisistedof a, fresh issue of 4,320,,0,0,0 . equity ·shares and a.l1.offer .of saleof4~8, 16,,0,0,0

,equity share by.theprollloters~The,,companyentered, into .an.,agreement'YithCitigroHp, Yel)ture (;:af>,itatandReliaJ,lce Capital-for .subscription/purchase .. of 4,32,0;0,0,0. shares,(placement·o.(2,880,Q,OO shares and transfer by pro.mo.ter of 1;44,0,,0,0,0 shares). Pursuant to. the above, the co.111pany,pla.nnedto

, -_ . ,-,-.

rais,e;:betw~en Rs. 122.4-Rs. 129.6., cf(?re. The shareholding pattern before and after the issue are

,shown inTable B. . ." ,

278 Cases in Corporate Finance


The company was originally incorporated in 1985 as a joint venture between GEA .Energiet.echnik GmbH, Germany and the promoter, Raghupathy, to produce and sell on-Ilnecondensertube-deaning systems, debris filters, and rubber cleaning balls used in Thermal and nudeal'powerplants.ln 199.3 Raghupathy and his family members became the sole shareholders of the • company and began to expand the range of product and services in the power and oil and gas lndusrrles; The company was renamed BGR Energy Systems in .2007. Exhibits 1 through 4 present the flnancial statemertts<artdkcy

ratios for BGR. •. .

'Indlilstry Background

·i;. . . .. I

Power The International Energy Agency estimates that more than $16 trillion or $550 b a year ne~s tq'.be invested' in energy supply infrastructure worldwide over the threedeca.dest~ .2030,a.n)amouut equal to .'10/0 of projected . grossdOIn~sticproduct.The average annuilrate?finvestment is.pfC)iected

to rise from $455 b in the decade 2001-10 to $632b in thedecade2021"';:3'O~ .

According to crus INFAC, over the next five years, Indian investment in generation ca.pa.city Is expected to increase, with the central sector accounting for the largest share of stichincrea.sf.Thus, based on the above expansion, the-construcrion investment is expected to beapproxiriiatelyRs,. 450 billion from 2005-06 to 2~09_:10.erusINFAC expects the impact of generation delicertslng.in the Electricity Act will be felt\l~rgdy in"\the period from 2002-12, given therninimumthtee react' construction period for Greenfield power projects.

The Indian government has an objective of achieving "Power for all by 2012". The development of the power sector traditionally has been the responsibility of the.governmentthroughthecentraland state utilities, with a relatively insignificant contribution by the private sector. Inordertotedtice the gap between demand and supply, the Indian government formulated policies-in 1991 fotincrea.sin.g .the role of the private sector in power sector.

On the other side, the dependence on captive power has been increasing, •• due to the .contirtulrig shortage of power generation and India's economic growth. Currently,captivepowet/ca.pacity accounts for 16% (19,103 MW), of total, installed capacity in India in 2004 .... 05. The ElectridtyAct provides imputes to captive generators by exempting them from license requirements. Thisteslilts in an increase in captiy~ power capacity ad(Htion,?yjl}dustrial units. ReHabHityofpowetsupplyand

hetterecono~icsare other factorspushirrg 'industries. to' opt for .capth~egeneratio~s .

. . Onanavera-ge, the cost of setting ~pal MWplahtin.theprlvate sector isassuniedto·he]~s;.40':"5(fmn. for coal-based plants, Rs. 25-40 rnn. for gas/naphtha based plants and Rs. 45-60mn. for hydroelectric plants.

Oil and Gas Demand for engineering constructionservices in the oil and gas isdependenton the level of exploration, production, storage, refining and transportation activity in the oil and gas

1. This description is from the details availableon the company's website.

Case 16: BGR Energy Systems' Initial Public Offering 2'7l)

industry and the corresponding capital spending by energy industry conglomerates. The oil and gas sector has been one of the key industry focus areas of the engineering, procurement and construction industry. The lEA has estimated that India will receive investments in the energy industry of approximately US$ 900 bn. over the next 25 years. Further there will also he investment from the private players like Reliance and Craine Industries.


The company operates in two main segments:

The company carries out business in two segments: supply of systems and equipment and turnkey engineering project ,fontractlbg. In the systems and equipment business, the cornpany.designs, manufactures, sells and services a range of systems and equipment for power, oil and gas, refinery, petrochemical and process industries. In the turnkey engineering project contracting business, .the company carries out engineering, manufacturing, procurernent, construction and commissioning of projects in power and oil and gas sector.

The company currently executes turnkey contracts to supply balance. of plant (SUP) equipment, servi~es and civil work for power generation projects. It supplies all.equipmentbarring boilers, turbines and generators. Ha\rin~ completed various BOP contracts, the company has now changed its focus to engineerihgv.psocttrement and construction (EPC) contracting, in which BGR designs, engineers and supplies-all .the equipment needed in the power plant. The company has alsoan infrastructure business intended to provide construction services and technology.

BOP is the weakest link in Indian Power Equipment space as there are very few companies in the field. Typically, the BOP package accounts for 40% of the power plant.cost. and powet producer manufactures about 40% of the BOP equipment in-house, giving BOP suppliers all edge. Order ' inflow for the industry continues to be strong as the power sector continues to attract investment as well as due to no let down in capacity building in the manufacturing sector.

BGR's business is divided into seven key areas.

Power Plant Business

BGR boasts itself to be one of the first companies to develop the BOP concept in India. ,It provides services for both gas and, coal-fired plants. The company manufactures approximately 40 ...... 50% of the materials included in BOp, in-house, while the rest of the materials are sourced fromoutside. After successfully executing a number of BOP contracts, the company has started takingnpEPCcontracts now. Till date, the power plant division has completed three projects and is currently executing four other.

Key competitors in this segment include Bharar Heavy Electricals Ltd (BHEL) s : Larsen and Toubro (L&T), Tara Projects, Punj Lloyd Ltd and Reliance Energy.

280 Cases in Corporate Finance

Captive Power Business

Established in 2006, the captive power business provides services to standalone power plants and public utility projects in India. The division executes projects ranging from 25-150 megawatt (MW) and is currently working on two projects.

Key competitors in this segment include Cerhar Vessels Pvt Ltd (CVL), Tata Projects, .Indure Ltd, L&T and Greenesol Power System Pvt Ltd for projects under 50 MW and L&T, BHEL, Thermax, and Tata Projects for projects over 50 MW.

Oil and Gas Equipment Business


Startecrin 2001, the oil aad gas equipment business provides range of services mainly those needed to

transport oil or gas between well-head and end users. Manufacturing activities for this business are carried out by the subsidiary Progen. Customers include industries focused on oil and gas fields, cross country pipelines, refineries, petrochemicals and power plants.

Key domestic competitors include Gastech Process Engineering India Ltd and Multitex Filteration Engineering Ltd. And foreign competitors include Equinox Hydrocarbon Processing Facilities (Canada), Kar group, Kurdistan and Petral Resources from France.


Air Fin Cooler Business

The Air Fin Cooler business designs, manufactures and markets air-cooled heat exchangers, aircooled radiators and finned tubes used in oil and gas, power, process and petrochemical industries. The manufacturing facility is located in Panjetty near Chennai.For 18 months ended March 31, 2007, the Air Fin Cooler division clocked a revenue of Rs. 96.9 crore.

Key domestic competitors in this segment include Paharpur Cooling Towers and GEl. Industrial Systems and international competitors include Samyoung Science and Technology, Korea Heat Exchangers Industries Ltd, FBM Hudson and GEA Batrignolles Techniques Termiques.

Environmental Engineering Business

The environmental engineering business supplies a range of products and services to xrustorners across India and abroad. Originally started to provide de-aerators domestically, the company has now diversified into water treatment, demineralisation plants for power projects, effluent treatment and recycling and reverse osmosis-based desalination plants. The company claims to have· manufactured the largest de-aerator in India for Nuclear Power Corporation facility at Tarapur with. a capacity of 3.103 tonne per hour.

Key competitors in this segment include BHEL, L&T, Therrnax, Allied Energy Systems Pvt Ltd, VATech Wabag, Ion Exchange Ltd.

Case 16: BGR Energy Systems' Initial PuhlicOffering 281

Electrical Power Business

Started in 2003, the Electrical power business works in conjunction with other businesses of the company by supplying electrical systems and equipment for power stations, refineries and petrochemical operations. This line of business undertakes turnkey contracts to set up transmission and distribution networks, gas insulated substations, switchgears and other electrical projects.

Key competitors in this segment. include ABB Ltd, L&T, Crompton Greaves, Areva T&D, Siemens and IVRCL.

Infrastructure Business

. -

The Infrastructure bJsiness was set up to address growing demand for products and services for the

construction of roads, ports and airports. The company claims to be capable of providing advanced technology for complex infrastructure 'projects. The focus here is on built-operate-transfer (BOT) projects in India, tunneling, BOT and specialised construction projects related to airports and seaports, and multi-level parking in metro cities.

Key competitors in this segment include L&T, IVRCL, Gammon India and Reliance.

To strengthen its position among competitors, BGR has entered into alliances for .itsdifferent business segments . .,For instance, it has formed global marketing agreements with Samsung{for air-fin coolers); Termomeccanica Ecologia, Italy, for environmental engineering; SK Engineering and Construction, Korea,· t6 j6intly explore opportunities in the domestic market for infrastructure projects; and Ariel Corporation for oil and gas equipment.

The break-up of revenues from different businesses is given in Exhibit 5. At the time of the issue, BGR had an order book of Rs. 3321.2 crore from all its businesses. Exhibit 6 provides a summary of financial information for some of the major peer companies and BGR.


The process of preparing the company to go public is time consuming. BGRhadhoped to take the company public in order to build the brand and raise additional capital. Theseniormanagement at BGR was aware that the IPQ would be the first day of its public life and believed that it was very important to meet the company's responsibilities to its new shareholders and fortife in the public spot light. The company's executives spent several months preparing the company to take it public, developing the infrastructure and systems that would enable it to meet the demands placed on public companies. While the IPO brought additional capital, a stock market listing entailed costs like investment bankers fees, stock exchange listing fees, IPO grading fee2 and so on.The issue expenses could be as high as 6% of net proceeds. In addition to the explicit cost of going public, there is also an implicit cost in going public- public issues often list at a price much higher than the issue price, a

2. In 2007, the Securities Exchange Board of India made it mandatory that all IPOs must get a grading from one of the credit rating agencies like Crisil, ICRA, CARE and Fitch. The grading is on a 5 point scale with 1 indicating poor fundamentals and 5 indicating strong fundamentals. The cost of grading works Out to Rs. 500,000 and takes about 3-4 weeks.

282 Cases in Corporate Finance

phenomenon called IPQ underpricing. In the early 90s an average IPQ produced 35.3% returns upon listing.3

Market Conditions

Apart from the costs of going public, other issues included possibility of poor response from investors and the issue getting listed below the issue price. Companies likeWockha:rdt and Emaar MGF had to cancel their IPQ due to pqor market conditions and companies like Reliance Power had seen their issue open at a discount of 35% in the recent past.

After a big initial public offering season in 2006, some 150 companies were expected to raise up to $10 billion in new Mstin_gs in 2007. A combination of near double-digifleconomicgrowth,a roaring bull market, and expansion-minded executives had set the stage for another year of highvolume initial public offering activity in India. .And this year could be a record-buster, felt the market watchers.

One reason was the Bombay Stock Exchange's benchmark SensexIndex, which. delivered a nearly 50% return in 2006, was up about 2.2% by January 2007. More than 30 companies had (already filed or received approval from the Securities and Exchange Board of India to raise $6.3 billion in early 2007.

About 80 companies raised $5,4"'billion in 2006. And some investors were rewardedhandsorP-.ely, particularly with companies in high-growth sectors. Energy transportation company, GujaratSta.te Petronet, which operates the second-largest pipeline in India, raised $84 million initsJPOin February 2006 and shares jumped 75% during its first day of tradirig..I'I' Service'firm Tech Mahindra was another winner. Its shares more than doubled to 743 rupees ($16.84) since its IPOin August 2006.

Even so, investing in India IPOs overall has been a risky affair. AboUt 50% of theClassof2006 initial offerings was trading at break-even or below their listed price in 2007. One ofthe real disappointments in 2006 was Jet Airways, India's biggest domestic airliner. Irlauhched trading .a.year back just as oil prices started their ascent to record levels by mid-year and budget carriers started to pressure margins. Jet's share price is off 30% to 763.95 rupees ($17.32) from its initial tradil1gprice back in February, 2005. No-frills carrier Air Deccan, which also debuted a year back, has fared better and now trades at $3.40 per share vs. a listing price of $2.20.

Exhibit 7 presents a list of IPOs in 2007.

Preparing the Prospectus

Having selected lead managers, the company's officials turned their attention to thepreparatiohof the prospectus. The Securities Exchange Board of India (Act) requires all companies to prepare a prospectus for distribution of securities to investors. The contents of the prospectus and

3. Loughran, Tim, Jay Ritter and Kristian Rydqvist, "Initial Public Offerings: International Insights", Pacific Basin Journal, Vol 2, June 1994.

Case 16: BGR Energy Systems' Initial Public Offering 283

supplemental financial information are governed by the SEBI regulations. The prospectus is an important document. The company and its management team are liable for information provided in the prospectus and for omission of any material information. The company's investment banker drafts the prospectus after conducting due diligence investigation of the firm in consultation with the accountant and the legal counsel. The prospectus gives the details of the company'sbusiness and management, names of principal shareholders and their level of ownership, audited financial statements, underwriting agreement, information on the use of proceeds, dividend policy and capitalisation. A discussion of management's perception of all risk factors and competitive position is also included. The company has' to file the draft prospectus with SEBI through-a-merchant hanker. After the preparation of prospectus, the merchant banker along with the due diligence certificates and other compliances sends the same to SEBI for vetting. On receiving the same, the Board scrutinises it and may.suggest changes~ithin 21 days of receipt of prospectus. Acom.panycatlcome out with a public issue any time within 365 days from the date of the letter from. SEBL orifno letter is received from SEBI, within 365 days from the date of expiry of 21 days of submission of prospectus with SEB!. If the issue size i~ up to Rs. 20 crores, then the merchant .bankers are required to file prospectus with the regional office of SEBI falling under the jurisdiction in which registered office of the company is situated. If the issue size is more than Rs. 20 crore, merchant. bankers are required to file prospectus at SEBI, Mumbai office. A prospectus is also filed with the concerned stock exchanges along with the application for listing its securities. After making changes, if any, made by SEBI/Stock Exchanges, the final Prospectus duly signed by all the Directors {or by Authorised Representatives" through its Power of Attorney) must be filed with the Registrar of Companies (ROC) along with the copy of all material documents. The. ROC 111aysuggest changes which should also be reported to SEBI I Stock Exchanges. The date on which ROC •• Cardis obtained is the date of the prospectus. The draft offer document filed with the SEBI shall be made public for a period of 21 days from the date offiling the offer document with the SEBLOnce tlieregistrarion statement is approved by the SEBI, the marketing of the offering begins.

After the preparation of the prospectus, the company sets out on a road showtoaddtesspotential investors. A typical road show lasts 3-4 weeks. A timeline diagram of the IPOprocessisgiven in Exhibit 8. Once the stock is listed, the underwriter has the obligation to stabilise thepriceand provide analyst recommendations.

Pricing and Valuation

Finally, the company had to make sure the issue price was right. If the price were to be low, the issue would be hopelessly oversubscribed whereas if the price were to be high there was a possibility that the stock would list at below the issue price.

In determining the initial public offering price, the factors that would be considered . are the prevailing market and general economic condition, the history of and prospects f6t .thecompany and industry, an assessment of the company's management and its operating results and the marketprices of securities and certain financial and operating information as they relate to market valuations of companies engaged in activities similar to those of the company. The company could eitherperfotm a discounted cash flow valuation or compare the valuation multiples with those of the-peer group companies. The DCF approach involved forecasting of cash flows to equity andestimation of appropriate discount rate to discount cash flows. The value of equity thus arrived, is divided by the

284 Cases in Corporate Finance

number of shares outstanding to arrive at the intrinsic value. Exhibit 9 presents the free cash flow to equity in 2007.

Under the relative valuation, the objective was to find out if BGR was under or over valued relative to peer companies. Credit Rating agency, ICRA assigned a grading of 3 to the BGR IPQ suggesting "average fundamentals" and four brokerage houses- Asit C Mehta Investments, Sharekhan,Mansukh Investments, and Jaypee Capital Services gave a "subscribe" recommendation.

Source: Company, analyst reports.

*Eighteen months

**Three months

Case 16: BGR Energy Systems' Initial Public Offering 285

Source: Company, Analyst reports. ...

. iii!

Source: Analyst reports.

286 Cases in Corporate Finance

~real<-uf? of Revenues . '" ,." .'

Source: Company, analyst reports. 1 = Power Projects Business

2 = Captive Power Business


3 = Oil and Gas equipment

4 = Air fin coolers business

5 = Environment Engineering Business 6 = Electrical Projects

7 = Infrastructure Business

8 == Progen (subsidiary)

ouree: Analyst reports.


Case 16: BGR Energy Systems' Initial Public Offering 287

(Exhibit 6 Contd.)

Source: National Stock Exchange.


288 Cases in Corporate finance

(Exhibit 8 Contd.)

Source: Analyst reports.

------------------- --------------------------------~~-------~~.


Case 16: BGR Energy Systems' Initial Public Offering 289

1. Mehta, Chin tan, "BGR Energy Systems IPQ Note", Asit C. Mehta Investrnent Intermediates Ltd.,

December 4, 2007

2. BGR Energy Systems IPa Flash, Sharekhan, December 3,2007

3. BGR Energy Systems Ltd.: Power play, Mansukh Investment and.TradingSolutions

4. BGREnergy Systems, ]aypee Capital Services

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