BGR Energy Final Project by Ayodhya Paikaray

Project report on Financial Institution & Markets Group -2,PGDM – PT(WK),2008-11
SUBMITTED BY:
GROUP-II
Abhisek Mitra…………………(01)
Ayodhya Nath Paikaray……(07)
Bhabani Shankar Chayani…(09)
Bighnaraj Sahu……………….(10)
Bijay Kumar Mangaraj……..(11)
Bijay Kumar Mudali………....(12)
BGR Energy Systems Limited
About the Company
BGR Energy Systems Limited is in the business of supply of systems and equipment and turnkey
engineering project contracting. In the systems and equipment business, the company designs,
engineers, manufactures, sells and services a range of systems and equipment for the power, oil &
gas, refinery, petrochemical and process industries. In the turnkey engineering project contracting
business, the company engineers, manufactures, procures, constructs and commissions projects in
the power and oil & gas sector, wherein it takes turnkey responsibility to supply a range of
equipment and services, including the civil works required for a project and other works as may be
required under the contract for such project. The company was originally incorporated in 1985, as a
joint venture between GEA Energetechnik GmbH, Germany and Mr.B.G.Raghupathy, to produce and
sell on-line condenser tube cleaning systems, debris filters and rubber leaning balls used in thermal
and nuclear power plants. In 1993, Mr. B.G. Raghupathy and members of his family became the sole
shareholders of the company and began to expand its product and services range in the power and
oil and gas industries. In June 2007, the company changed its name from GEA Energy System
(India) Limited, to BGR Energy Systems Limited.

IPO Snapshot
100% Book Building Issue
Issuer BGR Energy Systems Limited

Public issue of 91,36,000 equity shares *
(constituting 12.69% of post issue paid up capital of issuer)
Face value of equity shares is Rs.10 per share
Price Band Rs.425 to Rs.480 per equity share
Issue Size Rs. 388.28crore – Rs. 438.53crore
Issue is open From December 05 to 12, 2007
Application for the Issue can be for 14 shares and in multiples of 14 shares thereafter
Book Running SBI Capital Markets Limited, Kotak Mahindra Capital Company Limited,
Lead Managers UBS Securities India Private Limited, CLSA India Limited
Registrar to Intime Spectrum Registry Limited
the Issue
Issue to be The Bombay Stock Exchange Limited(BSE),
listed on The National Stock Exchange of India Limited (NSE)
IPO Grading IPO GRADE 3 by ICRA Limited, indicating average fundamentals
ALLOTMENT BASIS
Employee
Reservation 5,00,000 equity shares
Portion
Not less than 25,90,800 equity shares or 30% of the Net Issue on a
Retail investors
proportionate basis
Non-Institutional
Not less than 8,63,600 equity shares or 10% of the Net Issue on a
Investors proportionate basis
Qualified
At least 51,81,600 equity shares or 60% of the Net Issue on a proportionate
Institutional
basis
Buyers
* comprising of a fresh issue of 43,20,000 equity shares and an offer for sale of 48,16,000 equity
shares by Mr. B. G. Raghupathy and Mrs. Shashikala Raghupathy.

Overview of Business
BGR Energy Systems Limited is a company in the business of supplying a range of equipment,
systems and services to the power and process industries from its base of operations in India. The
company used to execute power contracts and provides turnkey balance of plant (BOP) services for
the power industry in which it supplied, from a single source, everything required to build power
plants, with the exception of the boiler, turbine and generator. Having executed a range of BOP
contracts, the company has begun to focus on engineering, procurement and construction (EPC)
services for power plants, in which it executes the entire project, including the boiler, turbine and
generator. Hence, it now executes both EPC and BOP contracts, depending on customer
requirements. It is active in a number of related businesses which perform functions for and
manufacture products related to its EPC and BOP operations, and produce products and services for
other industries, such as the oil and gas industry, on which it is focused. Company also operates an
infrastructure business intended to provide
advanced technology to services in complex infrastructure projects.
The Company consists of seven complementary businesses, including:
• Power Projects business, which provides turnkey EPC and BOP services for coal-based
Thermal Power Plants and Gas-based Combined Cycle Power Plants typically over 100
megawatts ("MW"), and which completed its first contract in 2002.
• Captive Power Projects business, which provides Turnkey EPC and BOP services for power
plants typically under 100 MW which began operating in 2006.
• Oil and Gas Equipments business, which designs and manufactures gas conditioning &
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, and which began operating in 2001.

• Air Fin Coolers business, which designs and manufactures Air Fin Coolers which cool
process fluids and gases used in the refining, petrochemical, and oil and gas industries, and
which began operating in 1994.
• Environmental Engineering business, which designs manufactures and provides
Deaerators, Desalination plants, Water treatment plants and Effluent treatment plants, which
have application in Power and Process plants and other Industrial plants, and which began
operating in 1996.
• Electrical Projects business, which designs supplies Electrical systems and equipment such
as Gas Insulated Switchgear (GIS) substations, Optical Fiber Power Ground Wires (OPGW),
Extra High Voltage substations and Transmission Lines to Power Stations, Refineries and
Petrochemical plants, and which began operating in 2003.
• Infrastructure business, which is capable of building roads and industrial buildings, and
which began operating in 2004.
Competitive Strengths
Principal competitive strengths of the company are:
1. Project management expertise.
2. Company is well positioned to capitalize on the global demand in the energy and
infrastructure industries.
3. Diverse design and engineering capabilities.
4. Cost competitiveness.
5. Experienced management team.
Business Strategy
The company intends to pursue the following business strategies to exploit its competitive strengths
and grow its business:
1. Focus on large BOP contracts and EPC contracts for power projects directly from power
generation companies.
2. Expand the international businesses and operations.
3. Increase the focus on the oil and gas businesses.

4. Exploit its experience in the infrastructure business to take advantage of growth in this
business.
5. Continue to develop its technological collaboration and relationships in various businesses.
6. Continue to focus on the competitiveness and quality of its projects, products, services and
engineering capabilities.
Objective of the Public Issue
BGR Energy Systems Limited intends to utilize the proceeds from the net issue for the following
purposes:
Estimated Cost (in Rs.
Crore)
1. To augment the long term working capital requirements 214.50
2. To establish manufacturing and assembling facilities 82.60
3. To fund the expenditure for general corporate purposes -
Shareholding Pattern
100%
90%
80%
70%
60% Public & Employees
50% Pre-Ipo Investors
40% Promoters
30%
20%
10%
0%
Post-Issue Holdings Pre-Issue Holdings
The post-issue share holding pattern of BGR Energy systems will change as follows:
• Promoters Share holding will get diluted in the post-issue period to 81.3% from 100%.
• % of Share holding of Public will be 12% in the post-issue period.
• % of Share holding of Employees will be 0.7% in the post-issue period.
• % of Share holding of Pre-IPO investors will be 6% in the post-issue period.

Key Concerns
Some of the risk factors that need to be taken into consideration before applying for this public issue
are:
1. Changes in technology may impact the company’s business by making its products or services
less competitive or obsolete or require the company to incur additional capital expenditures.
2. Increased costs for raw materials and bought out items, and interruptions in their availability,
may adversely affect the results of operations and business of the company.
3. The Order Backlog of the company may not necessarily indicate future income. Projects
included in the Order Backlog may be delayed, modified, cancelled or not fully paid for by
company’s clients, which could adversely affect its results of operations.
4. Company’s accounts receivable collection cycle is relatively long, exposing it to higher client
credit risk.
5. Company relies on effective and efficient project management. Any change in its project
management procedures could affect its results of operations. It may incur liquidated
damages for time overruns pursuant to its contracts, which may adversely affect its financial
condition and results of operations.
6. As most of its projects, products and services are on a fixed-price basis, the company is
exposed to significant pricing risks that could cause it to incur losses.
7. Company’s results of operations depend on the award of new contracts and, in the power
projects, captive power, infrastructure and electrical projects businesses, it has limited control
over the awarding of new contracts and, as a result, payment dates.
8. A significant portion of company’s total income is derived from its power projects and captive
projects business. In addition, the company’s power projects business is substantially
dependent on the award of projects by a limited number of significant clients from whom it
derives a significant portion of its income.
9. As the company generates income and incurs expenses in multiple currencies, it is exposed to
the currency exchange risks.

10. Company may be liable for the quality of technology licensors’, sub-contractors’ or suppliers’
work and may be sued for product or service liability that arises from their work.
11. Company’s operations in foreign countries are subject to political, economic, regulatory and
other risks of doing business in those countries.
12. Contingent liabilities worth Rs.437.85 crore were outstanding for the company as on March
31, 2007, as not provided for.
13. External risk factors such as regulated environment and government policies, laws and
regulations, adverse weather conditions, taxes and levies imposed by the government, a
slowdown in the economic growth in India, volatility of the financial markets in India, political
instability in the country, terrorist attacks and other acts of violence involving India and other
countries, and natural calamities.
(SOURCE: Red Herring Prospectus, BGR Energy Systems, Dated August 1, 2007)
Q:1 What are the benefits and costs do you think BGR should take into consideration
before taking the decision to go public?
A: The benefits that will accrue to BGR by going public are as follows:
1. Enhancement of the company’s public profile
A successful IPO will become a major accomplishment for BGR. Because of the IPO, the
share market analysts and the press will suddenly begin taking notice of the company.
Listing on both BSE & NSE 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.
2. Enhanced loyalty of key personnel / Employees
For BGR hiring new and efficient employees will become easier as publicly traded
companies are generally perceived to be more stable than private companies for
employee’s point of view. 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.

3. Access to capital to fund growth / Cash Infusion
BGR will have huge cash infusion for the purpose of expanding its business. 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.
4. Creation of liquidity and potential exit for the current owners / Getting Rich
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 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.
5. Enhanced access to liquidity:
An IPO gives the company increased ability to raise even more money. Banks are willing
to lend more money and extend credit to publicly traded company.

6. Stock as currency:
A company can use its stock as a currency to purchase other businesses. Because of the
lack of liquidity and because they are hard to value, private companies often have
difficulty acquiring new businesses; which is not in the case of a listed company.
7. 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. 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.
8. 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.
9. 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 organisational
structure; selection of the key personnel; improvement of internal reporting and controls;
as well as critical evaluation of the efficiency of the entire business.

The costs that will incur to BGR by going public are as follows:
IPOs are extremely expensive and involve commitment of huge amount of resources (money and
management time and effort) on the part of the company.
Expense:
BGR has to incur huge expenses for IPO.
• Biggest of the expense items is Underwriter’s fee typically ranging between 5-10% of
the money raised.
• Billable hours of attorney’s fees.
• Accountant’s fees.
• Printing costs( mind boggling paperwork is involved).
• Filing fees with the regulator, listing fees with the exchange etc.
• Time and effort of management of the company in going through the process.
Doing business as a public company will be more complicated for BGR:
• BGR, on becoming a publicly traded company, will be required to make certain
quarterly and annual filings as per norms by regulatory bodies.
• They need to have a separate department to deal with shareholder’s enquiries.
• BGR will need to retain separate attorneys and accountants to handle regulatory
compliance.
• For BGR disclosure requirements will become much more stringent as a public
company.
Dilution of control:
After IPO BGR’s promoter holding of equity will reduce from 100% to 81.31%. Thus, a
substantial part of the holding will rest with the public after an IPO, leading to a dilution in the
control on the part of the original owners.

Q: 2 Would you invest in this IPO? What are the risks of investing in this IPO? Make a
choice and explain.
A: Yes, I would invest in BGR IPO for some listing gains as well as for a long-term investment
horizon. However, the current valuations suggest that for a long-term investing horizon, the
stock can be acquired at much lower levels than the IPO price.
The risks associated with BGR IPO are as follows:
1. It is a risky affair to invest in Indian IPO’s because of past record of 2006 and 2007.
a. Reliance Power had seen their issue open at a discount of 35% in 2007.
b. About 50% of the Class of 2006 initial offerings was trading at break-even or below
their listed price in 2007.
2. BHEL has barred the company - The Company was barred by BHEL for any business for
3 years with it. BHEL alleged that BGR formed a cartel with M/S Techno Electric & Engg
Ltd. to obtain orders from BHEL at a higher price.
3. High dependence on Govt. Companies - A significant part of order book of BGR comes
from Govt. companies and agencies. This leads to delays in payments. This causes higher
debtor days and longer working capital cycle.
4. Currency Risks - The Company operates in 42 countries. It is exposed to exchange rate
risks. Currency volatility can impact operational performance of the company.
5. High Debt/Equity Ratio - The Company has a debt/equity ratio of more than 2.5 times.
Since it operates in an industry where gestation period for an order execution is long and
requires high capital expense, this is not desirable. It also has an effect on operational
performance of the company as it leads to higher interest expense. In an increasing
interest rate scenario this might further hurt the company.
6. Has relatively limited track record in the EPC segment for complete power plant, its thrust
area going forward. Not backwardly integrated to manufacture critical boiler, turbine and
generator (BTG) equipment. Hence, complex projects could pose a challenge.

7. Most of the products and services, largely catering to the power sector, are sold at a fixed
price. There is no cushion of price variation available to insulate margin from the vagaries
of fluctuation in metal and other input prices. About 89.80%, 79.10% and 94.05% of the
total income in FY 2007 (18 months) and FY ended September 2005 and 2004 are fixed-
price contracts.
8. Changes in technology could impact the company's business by making its products or
services less competitive or obsolete. It may also have to incur additional capital
expenditures.
9. Increased costs for raw materials and bought-out items, and interruptions in their
availability, could adversely affect the operations and business.
10. In the construction business, if the company is unable to accurately estimate the overall
risks of income from or costs of contracts, or is unable to agree to the pricing of work
done pursuant to change orders, may earn lower than anticipated profits or incur losses
on the contracts.
Future Prospects of investment in BGR are as follows:
According to CRIS INFAC, captive power capacity, at 19,103 MW, accounted for 16% of the total
installed capacity in India in 2004-05. The dependence on captive power has been increasing,
due to the continuing shortage of power generation and India’s economic growth. This has
resulted in high growth in the captive power sub-sector over recent years, in terms of increased
capacity and generation. According to the 10th plan, the growth in generation has been 3.2%,
5.1%, 5.2% and 5.2% during fiscal years 2003, 2004, 2005 and 2006, respectively. In the fiscal
year 2007, but up to December 2006, a growth rate of 7.5% was recorded. The CAGR of
generation during the 10th Plan period is expected to be about 5.1%. However, higher growth
could have been achieved if adequate gas would have been available for the existing and new gas
based plants commissioned during 10th plan.

Future plans and the rough estimate of the financial growth on the period 07 - 09
1. Massive opportunities of Rs 477 bn in the BOP segment - BGR to be the prime beneficiary.
2. Tie up with Chinese equipment provider - BGR to move up the value chain.
3. Strong In-house design and engineering team.
4. Exports to further fuel growth.
5. Eyeing aggressive expansion in product business.
6. Strong Order book position provides earnings visibility.
7. BGR to deliver strong earnings growth over FY2007-09E.
On the back of strong order book of Rs33 bn and the massive opportunity of Rs477 bn in the
BOP space we believe is exposed to strong growth FY2007-09E. Even the management has
guided for order inflow of Rs200 bn in next 6-8 months. Based on our back of the envelop
estimates, we expect BGR to register 80% CAGR in revenues over FY2007-09E with revenues
of Rs25.5 bn in FY2009. With healthy EBIDTA margin of 12.5% in FY2009 we expect BGR to
register strong earnings CAGR of 103% over FY2007- 09E with EPS of Rs12.8 in FY2008 and
Rs22.8 in FY2009.
Q: 3 Can the offer price be justified?
A: The offer price of BGR IPO has been grossly overvalued & hence is not justified. The Valuations
were tested according to the following 2 methods:
1. PE Multiplier Method:
In this method, the Price-Earning ratio of comparable firms is analyzed & accordingly the
Price/Share of the company is fixed. In this case the PE of the peer group companies are as
follows:
PEER COMPARISION
Company Name EPS PE

ABB 19.40 74.40
Alstom Projects 17.20 54.60
Areva T&D 40.50 45.50
BHEL 50.40 47.90
Crompton Greaves 6.00 59.90
Thermax 19.40 43.50
BGR Energy Systems 4.15 102.40-115.66
So accordingly, we derive the following prices for BGR, which happen to be the IPO price
band:
Lower
Price as per PE of the company (Rs./Share) Band 425
Higher
Band 480
But it is clearly visible from the above data, that the PE of BGR in both the lower & higher
band is much above the PE of peer group companies; which suggest an over-valuation of
BGR’s IPO price.

Next, the weighted average EPS of BGR can be derived as under:
Weighted Avg EPS BGR
Weighted
Year EPS Weight Price
2004 1.7 1 1.7
2005 2.05 2 4.1
2007 4.15 3 12.45
Total Weighted Price 18.25

Weighted Average 3.04
Price as per Weighted Avg EPS of BGR (Fair Lower
Valuation in Rs.) Band 311.47
Higher
Band 351.80
Again here we find that the price band of BGR according to the weighted average EPS works
out to be Rs.311.47 – Rs.351.8, which is quite lower than the offered IPO price band. Hence,
according to the weighted average EPS also, the IPO is over-priced.
Lastly, in this method we try to derive the IPO price of the company by analyzing the highest,
lowest & the industry average PE of the peer group companies, which is illustrated below:
Industry PE
PE
Highest 74.4
Lowest 43.5
Industry Average 56.24
So accordingly, the various prices will be:
Normal Weighted
Price EPS EPS
4.15 3.04
Price as per highest PE 308.76 226.176

Price as per lowest PE 180.525 132.24
Price as per Industry Average PE 233.396 170.9696
Here also we find that the derived prices from highest industry PE, lowest industry PE &
average industry PE is much on the lower side than the declared IPO price (both in the case of
normal EPS of 4.15 & Weighted EPS of 3.04), thus signaling an over-valuation of the IPO
price.
2. Discounted Cash Flow method:
In simple terms, discounted cash flow (DCF) tries to work out the value of a company today,
based on projections of how much money it is going to make in the future. DCF analysis says
that a company is worth all of the cash that it could make available to investors in the future.
It is described as “discounted” cash flow because cash in the future is worth less than cash
today. Here the choice of an appropriate discount rate is quite important as also the selection
of the forecast period.
DCF method of equity valuation can be of many types. Here we have taken into consideration
3 different types of DCF methods to value the IPO price of BGR Energy Systems. These are:
A) Discounted cash flow to equity method:
In this method, first the net income, depreciation, changes in capital expenditure (∆CAPEX),
changes in net working capital (∆NWC) & increase in long-term debt is ascertained for the
current year. All these are computed together with the following formula to obtain the Free
Cash Flow to Equity holders (FCFE) for the current year:
Net Income (EBIT*[1-Tax]) + Depreciation (D) = Operating Cash Flow (OCF)……………………. i
OCF- ∆CAPEX- ∆NWC+ increase in LT debt = Free Cash flow to Equity holders (FCFE)……….…ii
Next, a forecast period of 5 years is chosen considering the nature of the business. Then a
projected FCFE is determined for these forecast period of 5 years + 1 year (which is
considered as the year where terminal value of the firm is determined), keeping the current
year as base year & applying a suitable(justified) growth rate to the various components of
the current year. The growth rates as applied can be either fixed or varying.
(In Rs. Crores)

PROJECTED
CurrentYear
(18months) CurrentYear 2008 2009 2010 2011 2012 2013 Growth
Expected Growth (G) 90% 50% 30% 30% 30% 6%
Net Income 39.96 26.64 50.62 75.93 98.71 128.32 166.82 176.83
Depreciation 8.88 5.92 6.81 7.83 9.00 10.35 11.91 13.69 15%
OCF 48.84 32.56 57.43 83.76 107.71 138.68 178.73 190.52
(∆CAPEX) 13.73 9.15 10.52 12.10 13.92 16.01 18.41 21.17 15%
(∆NWC) 115.69 77.13 87.36 98.96 112.09 126.96 143.81 162.89 13.27%
Increase in LT Debt 157.51 105.01 110.26 115.77 121.56 127.64 134.02 140.72 5%
FCFE 76.94 51.29 69.80 88.47 103.27 123.35 150.53 147.18
Here the expected growth in net income across the forecasted years of 2008 to 2013 has
been taken as 90%, 50%, 30%, 30%, 30% & 6% respectively. The rationale for the same is
that as the company is getting access to huge funds post IPO in 2008, so the forecast for
2008 will have the maximum expected growth of 90%. Subsequently, the company may not
be able to sustain such abnormal growth in the next year & hence the growth for 2009 will be
around 50%. Beyond 2009 there will be a consolidation phase in the company for at least 3
years from 2010 to 2012 & in this period the company will register a modest growth of 30%.
Beyond this period, i.e from 2013 onwards, the company will mature & the average growth
for coming years will be around 6% forever.
The growth in depreciation figures has been taken as 15%, commensurate to the growth in
the ∆CAPEX & the growth in ∆NWC has been taken as 13.27%. The growth in Long-term debt
has been taken as 5%. This is because post IPO, because of huge funds infusion, there may
not be a necessity to avail further big funds through debt & hence the growth margin has
been fixed at a very nominal value. Applying the given growth rates, the FCFE for the various
years are determined.
Next, the discount rate has to be ascertained, which in this case is cost of Equity (Ke) & is
determined as follows:
Risk Free Rate (Rf) 7%

Market Risk Premium (Rm-Rf) 9%
Average Beta (β) of peer companies 0.9151
β(Rm-Rf) 8.24%
Cost of Equity [Ke = Rf+β(Rm-Rf)] 15.24%
Finally, by applying the discount rate (i.e the cost of equity), the Discounted cash flow to
equity (DCFE) is arrived at. The terminal value FCFE is discounted by using the formula
“cost of equity - Terminal period Growth Rate” & is then added to the other DCFE’s to get the
Total Discounted Cash Flow to Equity (TDCFE). TDCFE is then divided by the number of
outstanding shares to calculate the fair value of the share.
Discount Rate (Cost of equity Ke) 15.24% 15.24% 15.24% 15.24% 15.24% 9.24%
DCFE 60.57 66.62 67.48 69.94 74.06 1592.90
TDCFE 1931.57
No of Equity Shares 7.2
Price/Share(Fair Valuation in Rs.) 268.27
So, here we find that the price/Share of the IPO issue by BGR comes to Rs.268.27, which is
much below than its offer price band. Hence, according to this method also the price of BGR is
over-priced.
B) Discounted Cash Flow to Equity (Reinvestment Rate method):
Here first the net income i.e EBIT(1-T) is determined for the current year (i.e the base year).
Again the same growth percentages are applied to it (as mentioned in the previous method),
in order to derive the net income of the subsequent periods from 2008 to 2013. Then an
average return on equity (ROE) is estimated from the past data, which in this case is 39%.
The company is expected to maintain the same ROE for the next 5 years at least & then
maintain the industry average ROE 0f 32% from 2013 onwards forever.
The next step is to calculate the Equity Reinvestment Rate (ERR). It is a measure to estimate
directly how much equity the firm reinvests back into its businesses in the form of net capital
expenditures & investments in working capital.
It is calculated as under:
Equity reinvestment Rate(ERR)= Expected Growth Rate/ ROE
In case of Terminal period (TP), it is ERR= TP Expected Growth Rate/ TP ROE
Then FCFE is calculated as under:
FCFE = EBIT(1-T)*[1-ERR]
The method is illustrated here:
(In Rs. Crores)

PROJECTED
Current
Year 2008 2009 2010 2011 2012 2013
Expected Growth (G) 90% 50% 30% 30% 30% 6%
EBIT(1-T) 26.64 50.62 75.92 98.70 128.31 166.81 176.81
Return on Equity (ROE) 39% 39% 39% 39% 39% 32%
Equity Reinvestment Rate ERR=G/ROE 230.77 128.21 76.92 76.92 76.92 18.75
EBIT(1-T)*ERR 116.81 97.34 75.92 98.70 128.31 33.15
- -
EBIT(1-T)[1-ERR]=FCFE 66.19 21.41 22.78 29.61 38.49 143.66
Next the discount rate has to be ascertained & in this case again it is the cost of equity (Ke),
which we have already calculated above. However, the Terminal Period FCFE has to be
discounted with “Ke-G”.
Discount Rate 15.24% 15.24% 15.24% 15.24% 15.24% 9.24%

DCFE -57.44 -16.13 14.88 16.79 18.94 1554.77
TDCFE 1531.82
Finally, the TDCFE is calculated by adding all the DCFE’s of the 5 periods & the Terminal
Period DCFE. It is then divided by number of outstanding shares to determine the fair
valuation of the issue price. Here we get it as Rs.212.75, which is again quite below the offer
price made by BGR. So, the issue is expensive on the basis of valuation by this method also.
C) Discounted Cash Flow Method:
In this approach, first a projected Balance Sheet & a projected Income Statement of the
company has to be prepared for the forecast period. The components of the projected Balance
Sheet & Income Statement are prepared by multiplying a certain growth percentage to the
corresponding component in the current year or base year balance sheet & income statement.
The choice of the growth percentage has to be backed up by a supporting rationale.
(In Rs. Crores)
Projected
BALANCE SHEET
Current Current
Year (18 Year
Particulars months) 2007 2008 2009 2010 2011 2012 2013 Growth
Share Capital 10.80 10.80 72.00 72.00 72.00 72.00 72.00 72.00
Reserves & surplus 72.10 48.07 320.45 384.54 461.45 553.74 664.49 797.38 20%
Net Worth 82.90 58.87 392.45 456.54 533.45 625.74 736.49 869.38
Total Debt 246.40 164.27 172.48 181.10 190.16 199.67 209.65 220.13 5%
Minority Interest 1.50 1.00 1.20 1.44 1.73 2.07 2.49 2.99 20%
Capital Employed 330.80 224.13 566.13 639.08 725.34 827.48 948.62 1092.50
Net Fixed Assets 38.40 36.60 244.00 280.60 322.69 371.09 426.76 490.77 15%
CWIP 3.00 2.00 2.40 2.88 3.46 4.15 4.98 5.97 20%
Intangible Asset 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50
Investments 0.30 0.20 0.24 0.29 0.35 0.41 0.50 0.60 20%
Net CA 288.60 184.83 318.99 354.81 398.35 451.32 515.89 594.66 13.27%
Capital Deployed 330.80 224.13 566.13 639.08 725.34 827.48 948.62 1092.50
Here, initially the Reserves & surplus are adjusted in the proportion to the increased share
capital in 2008 & thereon it is increased with a 20% growth throughout the forecast period
(based on past growth rate of reserves & surplus). Similarly, the Net Fixed Assets are first
adjusted in proportion to the increased share capital in 2008 & thereon there has been a 15%
continuous growth (again basing on the past growth rate of net fixed assets). The minority
interest, CWIP & investments are growing at 20% according to past figures throughout the
period. The total debt is increasing at a growth rate of 5% only as the infusion of equity
through the IPO process in 2008 will dilute the existing high debt/equity ratio to a great
extent & the company will not like to disturb the equation in the coming future, considering
the nature of business it is into. The Net Current Assets are increasing at a growth rate of
13.27% p.a.
Projected INCOME
STATEMENT
Particulars Current
Year (18 Current
months) Year 2007 2008 2009 2010 2011 2012 2013 Growth
Net Sales 786.80 524.53 697.63 927.85 1234.04 1641.27 2182.89 2903.24 33%
Total Operating Expenses 699.00 466.00 619.78 824.31 1096.33 1458.12 1939.30 2579.26 33%
Operating Profit 87.80 58.53 77.85 103.54 137.71 183.15 243.59 323.98
Other Income 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.30
Interest (6.91%) 18.00 11.35 11.92 12.51 13.14 13.80 14.49 15.21 5%
Depreciation (16.17%) 8.88 5.92 39.45 45.37 52.18 60.01 69.01 79.36 15%
PBT 61.22 41.56 26.78 45.95 72.69 109.65 160.40 229.71
Tax 21.26 14.92 9.37 16.08 25.44 38.38 56.14 80.40
Reported PAT 39.96 26.64 17.40 29.87 47.25 71.27 104.26 149.31
Adjustments 0.90 0.60 0.60 0.60 0.60 0.60 0.60 0.60
Adjusted PAT 40.86 27.24 18.00 30.47 47.85 71.87 104.86 149.91
Operating Profit Margin 11.16 11.16 11.16 11.16 11.16 11.16 11.16 11.16
Net Profit Margin 5.19 5.19 2.58 3.28 3.88 4.38 4.80 5.16
Similarly, here the top-line & bottom-line growth has been in line with the previous growth
figures which, we think is sustainable in future as well, looking into the line of business & the
future prospects of the company. The interest figures are calculated on the outstanding debt
of the company + newly issued debt with an interest charge of 6.91% & an annual growth of
5%, commensurate to the growth in the long-term debts. Similarly, the depreciation figures
are calculated on existing + newly procured net fixed assets with a rate of 16.17% & it grows
at a rate of 15%, commensurate to the growth in net fixed assets.
Basing on these projected Income statements & Balance sheets, we find the net income
[EBIT(1-t)], depreciation(D), (∆NWC) & (∆CAPEX) of all the projected periods as also the
Terminal Period & from them we calculate the Free Cash Flow as follows:
[EBIT(1-t)] + (D) = OCF
OCF - (∆NWC) - (∆CAPEX) = FCF

Current Year 2008 2009 2010 2011 2012 2013

Expected Growth (G) 6%
EBIT(1-T) 26.64 17.40 29.87 47.25 71.27 104.26 149.31
Depreciation (D) 5.92 39.45 45.37 52.18 60.01 69.01 79.36
EBIT(1-T)+D=OCF 32.56 56.86 75.24 99.43 131.28 173.27 228.67
Change in net working capital (∆NWC) 134.16 35.82 43.54 52.97 64.57 78.77
Change in Capital Expenditure (∆CAPEX) 207.40 36.60 42.09 48.40 55.66 64.01
Free Cash Flow [FCF=OCF-∆NWC-∆CAPEX] -284.70 2.82 13.80 29.90 53.03 85.88
This FCF is a free cash flow, available to both equity holders as well as debt holders of the
company. Hence it is required to be discounted with the Weighted Average Cost of Capital
(WACC) & not just cost of equity (Ke) or cost of debt (Kd). The WACC is calculated as under:
Risk Free Rate (Rf) 7%

Market Risk Premium (Rm-Rf) 9%
Average Beta (β) of peer companies 0.9151
β(Rm-Rf) 8.24%
Cost of Equity [Ke = Rf+β(Rm-
Rf)] 15.24%
Corporate Tax (T) 35%

(1-T) 65%
Cost of Debt 6.91%
After tax cost of Debt (Kd) 4.49%
Debt/Equity ratio (D/E) 0.7

Debt 0.7
Equity 1
Value (D+E = V) 1.7
E/V (We) 0.59
D/V (Wd) 0.41
We*Ke 8.96%
Wd*Kd 1.85%
WACC = (We*Ke)+(wd*kd) 10.81%
Here cost of debt is derived from the projected balance sheet & income statement. The
projected debt/equity (D/E) ratio is taken as the average value of D/E ratio in the projected
balance sheet from 2007 till 2013.
All the FCF’s corresponding to the years from 2008 to 2012 will be discounted by WACC & the
terminal period FCF will be discounted by:

“ WACC – Rate of growth starting from terminal period”
In this case, it will be 10.81% - 6% = 4.81%.
Hence we get:
Discount Rate (WACC) 10.81% 10.81% 10.81% 10.81% 10.81% 4.81%

DCF -256.93 2.30 10.14 19.83 31.74 1785.53
Adding the DCF values & the terminal value, we get Total Discounted Cash Flow (TDCF). From
it, the value of debt of the firm has to be deducted, which is calculated by discounting the
interest figure in the first projected income statement by difference amount of rate of interest
(6.91%) & growth rate in total debt (5%). Thereafter, what we get is TDCFE & it is then
divided by number of outstanding shares to obtain the fair valuation of each share:
TDCF 1592.61
DEBT 173.74
TDCFE 1418.88
In this method, it works out to be 197.07, which is again drastically low from the offered
issue price band of BGR.
Hence, we can safely conclude that by using any of the valuation techniques for getting the
fair price/ share of BGR, we find that the IPO offer is grossly over-priced.
Q: 4 The case states that BGR received a grading of 3 from ICRA. Briefly describe the
developments in India regarding IPO grading (since 2007).
A: IPO grading is the grade assigned by a Credit Rating Agency registered with SEBI, to the
initial public offering (IPO) of equity shares or any other security which may be converted into
or exchanged with equity shares at a later date.
The grade represents a relative assessment of the fundamentals of that issue in relation to
the other listed equity securities in India. Such grading is generally assigned on a five-point
point scale with a higher score indicating stronger fundamentals and vice versa as below.
IPO grade 1: Poor fundamentals
IPO grade 2: Below-average fundamentals
IPO grade 3: Average fundamentals
IPO grade 4: Above-average fundamentals
IPO grade 5: Strong fundamentals
• IPO grading has been introduced as an endeavor to make additional information available for
the investors in order to facilitate their assessment of equity issues offered through an IPO.
• The company desirous of making the IPO is required to bear the expenses incurred for
grading such IPO.
• SEBI does not play any role in the assessment made by the grading agency. The grading is
intended to be an independent and unbiased opinion of that agency.
IPO Grading is not a recommendation to invest
Even if a Company is Graded 5 (i.e. with strong fundamentals), IPO grading is not a
recommendation to invest in the graded instrument. It does not a comment on the price of the
graded security or its suitability for a particular investor. It does not comment on issue price,
likely price on listing or movement in price post listing.
IPO grading in India since 2007
The Securities and Exchanges Board of India (SEBI) made it mandatory for businesses to grade
their initial public offers (IPOs) in May 2007, mainly aimed at helping investors make sound
investment decisions IPO grading is a service that provides 'an independent assessment of
fundamentals' to aid comparative assessment that would prove useful as an information and
investment tool for investors. Such a service is particularly useful for assessing the offerings of
companies accessing the equity markets for the first time where there is no track record of their
market performance. The grading is intended to be an independent and unbiased opinion of the
agency concerned. The grading is a one-time exercise and will only focus on assisting the
investor, particularly the individual investor, in taking an informed investment decision.
IPO grading is a service aimed at facilitating the assessment of equity issues offered to the
public. The grade assigned to any individual issue represents a relative assessment of the
'fundamentals' of that issue in relation to the universe of other listed equity securities. Such
grading is assigned on a five-point scale with a higher score indicating stronger fundamentals. All
other factors remaining equal, a security with stronger fundamentals would command a higher
market price. The grading can be used by an investor as a tool to make investment decisions.
The IPO grading will help the investor appreciate the meaning of the disclosures in the issue
documents better to the extent that they affect the issue's fundamentals.
Only credit rating agencies (CRAs) registered with the SEBI can carry out IPO grading. The
grading agencies include CRISIL, CARE, Fitch, and ICRA. The cost of IPO grading can be met by
stock exchanges or out of the corpus of the Investor Education and Protection Fund (IEPF). The
grading is intended to be an independent and unbiased opinion of that agency. SEBI does not
play any role in the assessment made by the grading agency. IPO fundamentals are graded on a
five-point scale from Grade 5 (indicating strong fundamentals) to Grade 1 (indicating poor
fundamentals). The assigned grade will be a one-time assessment done at the time of the IPO
and meant to aid investors who are interested in investing in the IPO.
The grade will not have any ongoing validity. In order to get its IPO graded, the company needs
to first contact one of the grading agencies and mandate it for the grading exercise. The agency
will then follow a process. It will seek information required for the grading from the company,
and on receipt of the information, have discussions with the company's management and visit the
company's operating locations. It will then prepare an analytical assessment report and present it
to a committee comprising senior executives of the grading agency. This committee will discuss
all relevant issues and assign a grade.
The companies should initiate the grading process about 6-8 weeks before the targeted IPO date
to provide sufficient time for any contingencies. CRAs have to forward the names and details of
IPOs graded by them on a monthly basis to SEBI for uploading on their website for public
information. The IPO grading approved by CRAs will form part of the prospectus for the IPO.
In case a company is not satisfied with the grade assigned by the grading agency, it has no
choice. The company does not have a choice in accepting or rejecting the grade. The company
has to get the IPO grading from at least one agency. The IPO grade given by at least one agency
is required to be disclosed in the prospectus.IPO grading is different from an investment
recommendation. Investment recommendations are expressed as 'buy', 'hold' or 'sell', and are
based on a security-specific comparison of assessed 'fundamentals factors' (business prospects,
financial position etc), and 'market factors' (liquidity, demand-supply etc) with its price. On the
other hand, IPO grading is expressed on a five-point scale and is a relative comparison of the
assessed fundamentals of the graded issue to other listed equity securities.
As an IPO grading does not take cognizance of the price of the security, it is not an investment
recommendation. Rather, it is one of the inputs for an investor in the decision-making process.
It is to be noted that a better IPO grading may not be a guarantee for healthy long-term returns
for the investor. This is evident from the fact that many companies that entered the primary
market with a good rating in the last two years are now trading well below their offer prices. An
analysis of the current market valuation of the companies, which came out with public offerings
since 2007, shows that irrespective of the grades given, a major chunk of them had wealth
erosion of up to 70 percent. Many IPOs with 'Grade 4' are trading at a price lower than that of
their offer price. So, investors need to take investment decisions based on other factors as well
rather than just solely relying on grading.
As on date the following four credit rating agencies are registered with SEBI.
a. Credit Analysis & Research Ltd (CARE)
b. ICRA Limited
c. CRISIL
d. FITCH Ratings
Q: 5 Track the performance of BGR after it got listed in the secondary market. Comment
critically on the performance immediately after listing and in the long run.
A: The performance of BGR on listing day was phenomenal with the stock returning almost
double the investment .

It debuted at a premium of 75% 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%. It hit an intra-day high of Rs 940 and a low of Rs 801 before
closing the day at Rs 901.30. The weekly high-low price chart of BGR from its debut on January,
2008 till the week ending 1st October 2009 displays the following pattern.
1200
1000
800
HIGH
600
LOW
400
200
0
-1 08
9
4/ 08
4/ 08
10 8
2/ 08
2/ 09
3/ 09
10 9
-0 008
-0 08
-0 08
-0 09
-0 09
-0 09
00
3 / 00
1 / 00
30 / 20
29 / 20
27 / 20
29 / 20
28 / 20
28 /20
20
20
20
20
20
/2
2
2
2-
5-
8-
1-
2-
5-
8-
1/
7
4/
29
It is clearly evident from the above graph that BGR has been under severe pressure to
perform on the stock bourses since its debut. This has much to do with the valuations of the
company as being projected during its IPO issue. However, it is also a matter of fact that the
entire world economy & the stock exchanges bled heavily on the back of the US sub-prime
crisis as well as the credit crunch since January 2008, (sending the entire globe into a spiral)
& India was no exception to it. The overvalued counters in the Indian stock exchanges got
hammered mercilessly & there was no respite for the investors holding onto those stocks.
BGR was definitely one of the most expensive stocks in its category in the industry & thus
bore the brunt of the sharp correction. The above graph depicting the co-movement of Nifty &
BGR clearly shows that while Nifty had corrected around 67% up to March 2009, BGR had
almost corrected by 89% in the same period.
However, 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 stood at Rs 9,039 crore & 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 Quarter ending June 2009 for the financial
year 2008-2009 compared to Rs 17.23 crore in Quarter ending June 2008. Sales rose 1.38
Percent to Rs 311.07 crore in Quarter ending June 2009 for the financial year 2008-2009
compared to Rs 306.83 crore in Quarter ending June 2008. The Board has also recommended a
dividend of Rs 3 per equity share of Rs 10 in between this period.
The stock is running today at a price of Rs. 496, with its 52wk H/L at Rs. 549.90 & Rs. 107.00
respectively. From the lowest price of the stock in 9th March 2009, because of the good earning
potential of the company, the PE has got better & better & since then, its stock price is
continuously rising. The current PE of the stock is at 31.09, which is much acceptable according
to the industry standards & the long-term investment prospects definitely look very promising.
*****

BGR Energy Final Project by Ayodhya Paikaray

Diunggah oleh

Informasi Dokumen

Judul Asli

Hak Cipta

Format Tersedia

Bagikan dokumen Ini

Bagikan atau Tanam Dokumen

Opsi Berbagi

Apakah menurut Anda dokumen ini bermanfaat?

Apakah konten ini tidak pantas?

Hak Cipta:

Format Tersedia

BGR Energy Final Project by Ayodhya Paikaray

Diunggah oleh

Hak Cipta:

Format Tersedia

Project report on Financial Institution & Markets Group -2,PGDM – PT(WK),2008-11

BGR Energy Systems Limited

About the Company

(India) Limited, to BGR Energy Systems Limited.

100% Book Building Issue

Issuer BGR Energy Systems Limited

shares by Mr. B. G. Raghupathy and Mrs. Shashikala Raghupathy.

infrastructure business intended to provide

advanced technology to services in complex infrastructure projects.

The Company consists of seven complementary businesses, including:

megawatts ("MW"), and which completed its first contract in 2002.

plants typically under 100 MW which began operating in 2006.

India and abroad, and which began operating in 2001.

which began operating in 1994.

• Environmental Engineering business, which designs manufactures and provides

Petrochemical plants, and which began operating in 2003.

1. Project management expertise.

3. Diverse design and engineering capabilities.

5. Experienced management team.

and grow its business:

2. Expand the international businesses and operations.

3. Increase the focus on the oil and gas businesses.

5. Continue to develop its technological collaboration and relationships in various businesses.

Objective of the Public Issue

Estimated Cost (in Rs.

1. To augment the long term working capital requirements 214.50

2. To establish manufacturing and assembling facilities 82.60

3. To fund the expenditure for general corporate purposes -

• % of Share holding of Public will be 12% in the post-issue period.

• % of Share holding of Employees will be 0.7% in the post-issue period.

• % of Share holding of Pre-IPO investors will be 6% in the post-issue period.

company’s clients, which could adversely affect its results of operations.

condition and results of operations.

exposed to significant pricing risks that could cause it to incur losses.

over the awarding of new contracts and, as a result, payment dates.

projects business. In addition, the company’s power projects business is substantially

derives a significant portion of its income.

the currency exchange risks.

other risks of doing business in those countries.

31, 2007, as not provided for.

countries, and natural calamities.

1. Enhancement of the company’s public profile

among the company’s business partners.

2. Enhanced loyalty of key personnel / Employees

company allows development of employee motivation schemes based on partial

help the company to attract and retain valuable employees.

3. Access to capital to fund growth / Cash Infusion

both organic growth (modernization and upgrade of production facilities, implementation

or maturity periods could be unreasonably short. In such circumstances, an IPO becomes

capital and boosts the investment credibility of the business.

5. Enhanced access to liquidity:

to lend more money and extend credit to publicly traded company.

7. Maximum value of the company

Normally, an IPO is an offer to a large number of institutional and retail investors to

8. Extra assurances for partners, suppliers and clients

and organizational capabilities as compared to those of a non-transparent private

for a successful completion of an IPO.

9. Superior efficiency of the business

as well as critical evaluation of the efficiency of the entire business.

management time and effort) on the part of the company.

BGR has to incur huge expenses for IPO.

the money raised.

• Billable hours of attorney’s fees.