ICRA has assigned an IPO Grade 3,indicating average fundamentals, to the proposed IPO of BGR Energy Systems Limited (BGR). 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. IPO Grade 3 represents average fundamentals.

The IPO Grade 3 assigned by ICRA reflects BGR’s established track record in implementing BOP contracts for power projects, its inhouse 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 support its competitive advantage in 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 itsbusiness. 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 Boilers, Turbines and Generators (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 verruns, given the anticipated growth in business volumes, would remain critical factors from the grading perspective.

Company Profile

BGR was originally incorporated in 1985 under the name GEA Energy System (India) Limited as a joint venture between GEA Energietechnik GmbH (GEA) of Germany and Mr.B.G. Raghupathy to produce and sell energy products such as on- line condenser tube cleaning systems,debris filters, and rubber cleaning balls used in thermal and nuclear power plants. On June 28, 2007, the name of the company was changed to the current BGR Energy Systems Limited.

In 1993, Mr. .G.Raghupathy and members of his family became the sole shareholders of BGR with the joint venture (JV) partner GEA exiting the business of the energy products mentioned, globally. BGR then entered into a series of technical collaborations and sourcing arrangements with foreign licensors to expand its portfolio of products. BGR is primarily into two business segments: (i) turnkey EPC contracts for either BOP or entire power plants; and (ii) industrial products, that is supply of systems and equipment such as heat exchangers, pressure vessels,condensers, high frequency resistance welded finned tubes,deaerators, and pipeline equipment used in the power, oil and gas,refinery, petrochemicals, and process industries.

BGR has a manufacturing facility at Panjetty near Chennai for air-fin coolers. It also has manufacturing facility at Panjetty near Chennai or products such as heat exchangers, pressure vessels,reactors, columns, surface condensers and finned tubes through its subsidiary Progen Systems and Technologies Limited (Progen).
During 2006-07 (period of 18 months ended March 2007), BGR reported operating income of Rs. 7751.3 million and PAT of Rs. 389.5 million.