FIM Report

8/13/2019 FIM Report

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CASE ANALYSISON

INITI L PUBLIC OFFERING

OF

BGR ENERGY SYSTEMS

(2009-2010)(Term Assignment on Financial Institution Market)

PGDM(PT)-II

Submitted to Prof. Soumya Guha Deb

Submitted byAvinash Kuldeep R.No:12

Bijay Kumar Jena R.No:14DNS Pandey R.No: 23

Jibananda Samal R.No: 31Manoj Kumar Pradhan R.No:37

Sanjib Kumar Sahu R.No:50Sovesh S Jena R.No:51


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ABOUT BGR ENERGY SYSTEM

The Company was originally incorporated in 1985, as a joint venture between GEA

Energietechnik GmbH, Germany and the Promoter, Mr. B.G. Raghupathy, to manufacture

and sell On-line Condenser Tube Cleaning Systems, Debris Filters and Rubber Cleaning

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

the range of product and services range in the Power and Oil & Gas industries. On June 28,

2007 the Company name was changed from GEA Energy System (India) Limited, to BGR

Energy Systems Limited.

BGR Energy carries on the business in two segments, the Supply of systems and Equipment

and Turnkey Engineering project contracting.

In the Turnkey Engineering project contracting business, the company engineer, manufacture,

procure, construct and commission projects in the Power and Oil & Gas sector, wherein it

take Turnkey responsibility to supply of a range of equipment and services, including the

civil works required for a project and other work as may be required under the contract for

such project.

The company executes Turnkey Contracts to supply the Balance of Plant ("BOP")

Equipment, Services and Civil works for Power Generation projects, in which it supply, from

a single source, the Balance of the plant, i.e. items other than the Boiler, Turbine and

Generator. Having successfully executed BOP contracts, it has begun to focus on

Engineering, Procurement and Construction ("EPC") contracts, in which it Design, Engineer

and Supply all of the equipment required for a Power Plant including the Boiler, Turbine and

Generator and Civil works. The Company is currently executing BOP and EPC contracts

tailored to customer demands. It also has an infrastructure business intended to provide

construction services and technology oriented projects to the infrastructure sector.

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


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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

ADVANTAGES & DISADVANTAGES OF IPO

ADVANTAGES:

- Increased Capital. A public offering will allow a company to raise capital to use for various

corporate purposes such as working capital, acquisitions, research and development,

marketing, and expanding plant and equipment.

- Liquidity. Once shares of a company are traded on a public exchange, those shares have a

market value and can be resold. This allows a company to attract and retain employees by


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offering stock incentive packages to those employees. Moreover, it also provides investors in

the company the option to trade their shares thus enhancing investor confidence.

- Increased Prestige. Public companies often are better known and more visible than private

companies, this enables them to obtain a larger market for their goods or services. Public

companies are able to have access to larger pools of capital as well as different types ofcapital.

- Valuation. Public trading of a company's shares sets a value for the company that is set by

the public market and not through more subjective standards set by a private valuator. This is

helpful for a company that is looking for a merger or acquisition. It also allows the

shareholders to know the value of the shares.

- Increased wealth. The founders of the company often have the sense of increased wealth as

a result of the IPO. Prior to the IPO these shares were illiquid and had a more subjective

price. These shares now have an ascertainable price and after any lockup period these shares

may be sold to the public, subject to limitations of federal and state securities laws.

DISADVANTAGES:

- Time and Expense . Conducting an IPO is time consuming and expensive. A successful IPO

can take up to a year or more to complete and a company can expect to spend several

hundreds of thousands of rupees on attorneys, accountants, and printers. In addition, the

underwriter's fees can range from 3% to 10% of the value of the offering. Due to the time and

expense of preparation of the IPO, many companies simply cannot afford the time or spare

the expense of preparing the IPO.

- Disclosure. The Securities and Exchange Board of India (SEBI) disclosure rules are very

extensive. Once a company is a reporting company it must provide information regarding

compensation of senior management, transactions with parties related to the company,

conflicts of interest, competitive positions, how the company intends to develop future

products, material contracts, and lawsuits. In addition, once the offering statement is

effective, a company will be required to make financial disclosures, public companies

required to file quarterly statements containing unaudited financial statements and audited

financial statements annually. These statements must also contain updated information

regarding nonfinancial matters similar to information provided in the initial registration

statement. This usually entails retaining lawyers and auditors to prepare these quarterly and

annual statements. In addition, a company must report


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certain material events as they arise. This information is available to investors, employees,

and competitors.

- Decisions based upon Stock Price. Management's decisions may be effected by the market

price of the shares and the feeling that they must get market recognition for the company's

stock.- Regulatory Review. The Company will be open to review by the Securities and Exchange

Board of India (SEBI) to ensure that the company is making the appropriate filings with all

relevant disclosures.

- Falling Stock Price. If the shares of the company's stock fall, the company may lose market

confidence, decreased valuation of the company may affect lines of credits, secondary

offering pricing, the company's ability to maintain employees, and the personal wealth of

insiders and investors.

- Vulnerability. If a large portion of the company's shares are sold to the public, the company

may become a target for a takeover, causing insiders to lose control. A takeover bid may be

the result of shareholders being upset with management or corporate raiders looking for an

opportunity. Defending a hostile bid can be both expensive and time consuming. Once a

company has weighed the advantages and disadvantages of being a public company, if it

decides that it would like to conduct an IPO it will have to retain a lead underwriter to sell the

securities, an attorney to assist in the preparation of a registration statement, and auditors to

prepare financial statements.


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BALANCE SHEET:

INVESTMENT RATIONALE:

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 by2030 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.


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YEAR 2007 2008 2009 2010 2011 2012 2013Growth Rate 80% 80% 80% 80% 80% 80% Projected CashFlow Next SixYears (WithSupernormalGrowth)

9.2 16.56 29.808 53.6544 96.57792 173.8403 312.9125

YEAR 2014 2015 2016Growth Rate 15% 15% 15%Projected CashFlow on the 7thYear (NormalGrowth) tillperpetuity

359.8493 413.8267 475.9007 Perpetuity.

Cost of EquityIn SML approach R e = R f + (R m R f )

R f = 7 % & Market Risk Premium = 9 % as given in the Exibit-10.Systematic risk of the market is taken by taking the average value of the of thecomparable company is as given below

COMPANY BHEL 1.1041

Alstom 1.0521L&T 1.1138

Thermax 0.5945 ABB India 0.8079 Areva T&D 0.8422

Siemens 0.9182Crompton Greaves 0.888

Average Value 0.9151

R e = 7 + 0.9151*9 = 15.2359%

We have taken the two stage growth model with 80% (g1)growth rate for next six years and

then a normal growth rate of 15% (g2)till perpetuity.

Hence Present Value of Future Cash Flow = P 0=D1/(R-g 1) x [1-((1+g 1)/(1+R) 6)] + P 6/(1+R) 6

Where P 6= D7/(R-g 2) = D 0 (1+g 1)6 (1+g 2)/ (R-g 2)

Thus P 6= 1525.432

PV of Future Cash Flow = P 0=16.56/(0.1523-0.8) x [1-(1.8/1.1523) 6] + 1525.432/1.1523 6

= 997.534 Cr


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Different credit agencies adopt different factors while grading an IPO. However, there are

some common areas that are looked into while grading an IPO. These include, apart from the

above mentioned points, the quality of the company's management, its corporate practices, its

legal compliance status and litigation history, and the new projects of the company, the risks

and opportunities involved.

IPO grading does not take into consideration the issue price of the security.

IPO grade indicates

There is a mixed response to the question of how far the ratings could help a retail investor in

making an informed decision about subscribing to an IPO. Globally, there are no ratings of

equity instruments as it is not considered a good idea for there is a joint ownership and an

accepted trend of sharing the losses and gains.

There is more logic in the case of grading a debt instrument as the grading would reflect the

company's ability to repay the principle and the interest. Further, IPO grading does not

include the all important pricing of the shares during the process.

Some experts feel that just taking into consideration the fundamentals, corporate governance

and risks and opportunities in the IPO grading neither means safety of investment nor

appreciation of capital. There is also a feeling that the IPO grading is just a subjective grade

which shouldn't be the case. They opine that there should also be a brief summary of the offer

documents.

On its part, the Sebi has time and again reiterated that ratings are only for supplementary

information and a higher grade does not necessarily mean that it is a recommendation for

subscription. IPO grading does not include pricing or the subsequent gains or losses that the

IPO would make in the future.

An IPO grading along with the disclosure agreement in the prospectus, the risk factors andthe pricing of the IPO should be equally considered before arriving at a decision for

subscription.


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MONTHLY RETURN 1ST FEB'08 to 1ST OCT'09

-8

-6

-4

-2

0

2

4

6

8

10

1 2 3 4 5 6 7 8 9 10 11 12 13 1 4 15 16 17 1 8 19 20 21

MONTHLY RETURN

MONTHLY RETURN FOR THE FIRST MONTH AFTER LISTING

Date Prev Close Open Price Close Price Daily Return03-Jan-08 480 840 901.45 87.8020833304-Jan-08 901.45 905 903.55 0.23295801207-Jan-08 903.55 914 886.65 -1.8704000908-Jan-08 886.65 945.55 838.5 -5.4305532109-Jan-08 838.5 750 819.85 -2.224209910-Jan-08 819.85 840 779.9 -4.8728425911-Jan-08 779.9 793 785.05 0.66034106914-Jan-08 785.05 774.8 775.8 -1.178268915-Jan-08 775.8 780 779.55 0.48337200316-Jan-08 779.55 768.6 737.95 -5.3364120317-Jan-08 737.95 753 752 1.9039230318-Jan-08 752 779 728 -3.1914893621-Jan-08 728 723 661.45 -9.1414835222-Jan-08 661.45 550 546.95 -17.310454323-Jan-08 546.95 570 601.35 9.94606454

24-Jan-08 601.35 616 599.35 -0.3325850225-Jan-08 599.35 616.25 648.9 8.26728956428-Jan-08 648.9 650 619.6 -4.5153336429-Jan-08 619.6 622 617.2 -0.3873466830-Jan-08 617.2 619.5 610.5 -1.0855476331-Jan-08 610.5 611 625.7 2.4897624901-Feb-08 625.7 616.5 612.45 -2.11762826

2.399601769


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MONTHLY RETURN FOR 22 MONTHS AFTER ONE MONTH OF LISTINGDate Prev Close Open Price Close Price Daily Return

01-Feb-08 625.7 616.5 612.45 -2.11762825603-Mar-08 532.3 520 498.35 -6.37798234101-Apr-08 341.9 345 352.55 3.114945891

02-May-08 443.8 443.8 452.6 1.982875169

02-Jun-08 344.8 351.7 328.95 -4.59686774901-Jul-08 221.2 223 214.65 -2.961121157

01-Aug-08 311.4 307.95 306.8 -1.47719974301-Sep-08 305.55 302.2 300.2 -1.75094092601-Oct-08 239.15 250 241.4 0.94083211403-Nov-08 152.3 157 159.8 4.92449113601-Dec-08 122.5 124 122.85 0.28571428601-Jan-09 145.05 146 149.65 3.17132023402-Feb-09 150 147.1 149.4 -0.402-Mar-09 137.3 137.2 132.1 -3.78732702101-Apr-09 142.55 144.05 153.35 7.576289021

04-May-09 180.2 185.3 185.6 2.99667036601-Jun-09 342.05 348.5 345.45 0.99400672401-Jul-09 325.85 327 321.85 -1.227558693

03-Aug-09 345.9 345.9 348.75 0.82393755401-Sep-09 496.6 503.65 479.85 -3.37293596501-Oct-09 454.6 451.6 448.3 -1.3858337

-0.125919669

CONCLUSION:It can be seen from the price calculation that the share price is Rs.170.97 by PE multiplier

method by taking the PE ratio of industry wt. average and average EPS. The price is

Rs.138.54 if calculated by DCF methods by taking beta value of similar industry. Hence the price band of 425-480 seems to be quite high as compared to the similar company in the

industry as seen from the PE multiplier method. If we take the price by DCF method it is still

lower than the offered price.

The grading given by ICRA to the BGRENERGY IPO was 3, which is of average

fundamental, that is quite contrary to the high offered price.

The daily return of the stock after listing in NSE during first 30days was around 2.4% and the

monthly return for 22months period, starting from 01months after listing was -0.12%. This

entire market performance trend with low values suggests that the stock of the company isnot performing well.

The average IPO grade of 3 by ICRA as well as the low share price as calculated from PE

multiplier method and DCF method is in agreement with the low return of the company in the

stock market.

Hence the stock price is overvalued.

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