IPO Analysis & Valuation of BGR Energy

Financial Institutes and Markets
Financial Institutions and Markets

Project Paper
Evaluation of BGR Energy Offer Price
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TABLE OF CONTENTS
Q1 What are the benefits and costs you think BGR should take into consideration before taking
the decision to go public?...............................................................................................................5
Generic Advantages of Going for an IPO..................................................................................5
1.1.1 New Capital for the Company.......................................................................................5
1.1.2 Public traded shares for use in acquisition....................................................................6
1.1.3 Listed shares for use as remuneration...........................................................................6
1.1.4 Personal Wealth and Liquidity......................................................................................6
Drawbacks for going Public.......................................................................................................6
Financial costs of an IPO........................................................................................................6
Bad Market Conditions..........................................................................................................7
Managerial Cost of an IPO.....................................................................................................8
Share Price Emphasis.............................................................................................................8
Life in fishbowl......................................................................................................................8
Q2 Would you invest in this IPO? What are the risks of investing in this IPO? Make a choice
and explain.....................................................................................................................................9
BGR Energy Systems Ltd. IPO - Basis of Allotment (Summarized for Retail Category) ..12
Key Risks.................................................................................................................................13
BHEL has barred the company............................................................................................13
High Dependencies on Govt. Companies.............................................................................13
Currency Risks.....................................................................................................................14
High Debt/Equity Ratio........................................................................................................14
Low PAT Margin.................................................................................................................14
Contingent Liabilities...........................................................................................................14
Long Accounts Receivable Cycle.......................................................................................15
High Working Capital and Capital Expenditure Requirements..........................................15
Dilution in net tangible Book Value....................................................................................15
Future Sales of Equity Shares would cause the Equity Share Price to fall..........................16
Q3 Can the offer Price be justified?.............................................................................................17
3.1 DCF ANALYSIS...............................................................................................................18
3.2 P/E Method.........................................................................................................................28
Q4 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?..............................30
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FIGURES, GRAPHS, CHARTS & TABLES
Figure 1: Objectives of the issue....................................................................................................5

Figure 2: Components of Cost of Equity........................................................................................7
Figure 3:BGR Peer Comparison..................................................................................................10
Figure 4: FCFE for 18 months as on March 2007........................................................................11
Figure5: Poll results for IPO subscription....................................................................................12
Table 1: Final Allotment Basis.....................................................................................................13
Figure 6: List of Contingent Liabilities........................................................................................14
Figure 7: BGR Issue details..........................................................................................................18
Figure 8: Reinvestment Rates.....................................................................................................20
Figure 9: FCF Projections ...........................................................................................................20
Figure 10: WACC Components...................................................................................................23
Figure 11: Cost of Debt and Cost of Equity.................................................................................23
Figure 12: Free Cash Flow Calculations......................................................................................24
Figure12 : BGR Sensitivity Analysis...........................................................................................27
Figure 13: P/E Method.................................................................................................................28
Figure 14: Share Price Calculation by P/E Method.....................................................................28
Figure 15: BGR IPO details.........................................................................................................29
Figure 16: Historic Graphs of BGR Equity Price.........................................................................31
Figure 17: Anand Rathi Performance Graph................................................................................31
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ACKNOWLEDGEMENT
Would like to take this opportunity to convey my special thanks

to our FIM professor Professor Soumya Guha Deb and the
entire staff of XIM Bhubaneswar who made sure that we have
understood the topics well and created an environment of
learning during our stay in the campus.
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Q1 What are the benefits and costs you think BGR should
take into consideration before taking the decision to go
public?
Generic Advantages of Going for an IPO

The main objectives of this issue is for:
Figure 1: Objectives of the issue.
1.1.1 New Capital for the Company

An initial public offering gives the typical private firms access to a larger
pool of equity capital than is available from any other source. Whereas
Venture Capitalists can provide perhaps $10- $40 million in funding
throughout a company’s life as a private firm, an IPO allows a forms to
raise many more times of this amount in a single Public Offering. A
typical US Public IPO on an average raised about USD 110 Million (as per
a statistics for the last 15 years). An infusion of equity not only permits
firms to pursue profitable investments but also improve their overall
financial conditions and provides additional borrowing capacity.
Furthermore, if the stock of these firms do well, companies will be able

to raise additional equity capital in future.
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1.1.2 Public traded shares for use in acquisition

Unless a firm has publicly traded shares, the only way it can acquire
another company is to pay cash. After going public, a firm has the option
of exchanging its own shares for that of the target firm. Not only does
this minimize cash outflow for the acquiring firm, but such a payment
method may be free from capital gains tax for the target firm’s owners.
This tax benefit may reduce the price that an acquirer must pay for a
target company.
1.1.3 Listed shares for use as remuneration

Having publicly traded shares allows companies to attract, retain and
provide incentives for talented managers by offering them share options
and other equity based remuneration. Going public also offers liquidity
to managers who were awarded options while the firms were private.
1.1.4 Personal Wealth and Liquidity

Normally entrepreneurs have all their personal and private wealth tied
up in their companies. By going public they get a chance to free up their
personal wealth and diversify in other portfolios.
In addition to the above benefits the act of going public generally results
in a blaze of media attention which often helps promote a company’s
products and services. Being a public company also increase the
prestige. However, the obvious benefits of an IPO must also be weighed.
Drawbacks for going Public
Financial costs of an IPO
Few entrepreneurs are truly prepared for just how costly the process of
going public can be in terms of out-of-pocket expenses and opportunity
costs. Total cash expenses of an IPO, such as printing, accounting and
legal services, frequently are will over $1 Million, and most of these
must be paid even if the offering is cancelled. Additionally , the
combined costs associated with the underwriter’s discount (usually 7
percent) and the initial under pricing of a firm’s stock (roughly 15
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percent in an average) represent a very large transfer of wealth from

current owners to the underwriters and to the new shareholders.
Figure 2: Components of Cost of Equity

The
The issue expense for BGR could be as high as 6% of the net proceeds
which turn out to be RS 21.978 Crore – 26.31 crores. This investment has
to be made even if BGR had to call back the issue or cancel the issue. In
addition, to the explicit cost of going public, there is also implicit cost in
going public – public issues being listed at a price much higher than the
Costs at IP
issue price, a phenomenon called IPO under pricing.
Also as per SEBI guidelines the mandatory costs works out to be
additional Rs 500,000 and it takes 3 – 4 weeks.
Bad Market Conditions

Apart form the costs of going public, other issues included possibility of
poor response from investors and the issue being listed below the issue
-Direct Cos
price. Companies like Wockhardt and Emaar MGF had to cancel their IPO
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due to poor market conditions and companies like Reliance Power has
seen their issue open at discount of 35% in the recent past.
About 50% of the Class of 2006 intial offerings was trading at break-even
or below their listed price in 2007. Big disappointments were Jet
Airways. Jet’s share price was trading at 30% off from its initial trading
price in Feb, 2005.
Managerial Cost of an IPO

As costly as an IPO financially, many entrepreneurs find the unending
claims made on their time during the IPO planning and execution process
to be even more burdensome. Rarely, if ever can CEOs and other top
managers delegate these duties, which grow increasingly intense as the
offering date approaches. There are also severe restrictions on what an
executive can say or do during the immediate pre-offering period.
Because the IPO process can take many months to complete, the cost of
going public in terms of managerial distraction is very high. Tope
executives must also take time to meet key shareholders before the IPO
is completed, and then forever thereafter.
Share Price Emphasis

Owners/ managers of private companies frequently operate their firms in
ways that balance competing personal and financial interest. This
includes seeking profits, but frequently also includes employing family
members in senior positions and other forms of personal consumption.
Once a company goes public, however, external pressures build to
maximize share prices. Furthermore, as managerial shareholdings fall.
Managers become more vulnerable to losing their jobs, either through
takeover or through dismissal by the board of directors.
Life in fishbowl
Public shareholders have the right to a great deal of information about a
firm’s internal affairs. Releasing this information to shareholders is as
good as releasing this to competitors and potential acquirers as well.
Managers must disclose specially in the IPO prospectus how and in what
markets they want to compete – information that is obviously valuable to
competitors. Additionally, managers who are also significant
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shareholders are subject to binding disclosure requirements and face

serious constraints on their ability to buy or sell company shares.
Q2 Would you invest in this IPO? What are the risks of

investing in this IPO? Make a choice and explain.
As per the calculations in Q 3 the Fair value of BGR Share is 409.03 (DCF
Method) and as per P/ E Ratio Industry average method it is 407.95.
Hence based on those calculations it seems the share is slightly
overpriced. It was listed at Rs 801 in BSE and Rs 840. 3 days high was Rs
989 in BSE and 3 days low as Rs 801 in BSE. Hence, it seems at that
juncture in Jan 2008 it was a good bet to buy BGR Shares.
As per some analysts at the price band of Rs. 425 to Rs.480, the issue is
priced expensively with the PE of 102.40x at the lower band and 115.66x
at the upper band considering the EPS of Rs.4.15 on its FY07 earnings.
The company’s peers like BHEL and ABB are currently trading at a PE of
47x and 74x respectively. However, the company has a strong order book
and the company is also expected to benefit from the fast growing
industry. Its order book, which is almost 6.4 times its FY07 annualized
revenues, if executed over the next two-three years will provide
significant top line and bottom line growth. Thus we recommend
SUBSCRIBE to the from long term perspective.
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Valuations
Peer Comparison
Figure 3:BGR Peer Comparison
The PE of the company is high as compared to most of its peers which

makes the issue expensive. However the RoNW of the company is high as
compared to its peers and the company should try to maintain it.
FREE CASH FLOW TO EQUITY DISCOUNT MODEL

Free Cash Flow to Equity (FCFE) = Net Income ‐ (Capital Expenditures
‐
Depreciation) ‐ (Change in Non‐cash Working Capital) + (New Debt
Issued ‐ Debt Repayments)
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Figure 4: FCFE for 18 months as on March 2007
The free cash availability to the shareholders is positive which is a good

sign and gives an indication about the good liquidity of the company in
the short term as well as in medium term. However the free cash flow
available to the company is positive mainly because of the increase in
long term debt. As on March 31, 2007, about 73% of the income came
from government entities. Most of the projects taken up by the company
are for government and large Indian and international power, oil and gas
or energy utilities. Dealing with government means delay in payments
leading to higher debtors and higher working capital cycle.
However in 2007 the overall mood in the market for any Power, infra,
and other similar offerings had been very positive and
A poll conducted on December 15th 2007 showed that 48% of the polled
people were eager to invest in BGR which meant although the
Which of these IPOs would you invest in?
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Total Votes: 80
Figure5: Poll results for IPO subscription.
Final Allotment was done on the following basis as on January 1, 2008
BGR Energy Systems Ltd. IPO - Basis of Allotment (Summarized for Retail
Category)
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No. of
No. of Sh Allotted Ratio
Sh Applied
14 14 1:48
28 14 1:24
42 14 3:47
56 14 4:47
70 14 5:46
84 14 3:23
98 14 7:46
112 14 4:23
126 14 9:46
140 14 5:23
154 14 11:46
168 14 6:23
182 14 13:46
196 14 31:100
Table 1: Final Allotment Basis
Key Risks
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.
High Dependencies 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.
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Currency Risks
The company operates in 42 countries. It is exposed to exchange rate
risks. Currency volatility can impact operational performance of the
company.
High Debt/Equity Ratio

The company has a debt/equity ratio of nearly 2.5. 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 operation performance of the company as it leads to higher interest
expense. In an increasing interest rate scenario this might further hurt
the company.
Low PAT Margin

Contingent Liabilities
Contingent Liabilities worth Rs 437.85 crores were outstanding for

the company as on March 31, 2007, as not provided for.
As of March 31, 2007, they had contingent liabilities in the

following amounts, as disclosed in their restated consolidated
financial statements:
Figure 6: List of Contingent Liabilities
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Long Accounts Receivable Cycle
Company’s accounts receivable cycle is relatively long, exposing it

to higher client credit risk.
The accounts receivable cycle is fairly long due to the nature of

the business and operations. During the years ending September
30, 2002, 2003, 2004, 2005, and the 18 months ending March 31,
2007 the cycle ranged from 90 days to 180 days, which makes the
business more susceptible to market downturns and client credit
risk.
High Working Capital and Capital Expenditure Requirements
They have a very high working capital and capital expenditure

requirements. If they experience insufficient cash flows or are
unable to borrow funds to meet working capital, capital
expenditure and other requirements, there may be adverse effect
on the operations.
Dilution in net tangible Book Value.
As the issue price of the Equity Share is higher than the book value
per Equity Share, purchasers in this Issue will immediately
experience a substantial dilution in net tangible book Value.
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Future Sales of Equity Shares would cause the Equity Share

Price to fall
Upon completion of this issue BGR will have 72,000,000 outstanding
Equity Shares. Of these shares 13,456,000 Equity Shares offered
will be freely tradable without restrictions in the public market.
The holders of approximately 43,200,000 Equity Shares,
representing approximately 60% of the issued and outstanding
Equity Shares, who will be entitled to dispose of their shares
following the expiration of a one-year Indian statutory ‘lock-in’
period. Sales of a large number of our Equity Shares by
shareholders, especially the Promoters, could adversely affect the
market price of the Equity Shares. Additionally, any future equity
issue by BGR, including issuances of stock options, or any
perception by investors that such issuances might occur, may lead
to the dilution of investor shareholding in the company or affect
the market price of the Equity Shares and could impact the ability
to raise capital through an Issue of securities.
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Q3 Can the offer Price be justified?
Following is the calculations based on FCF method, to justify the Offer

Price.
BGR Energy System Ltd – IPO
BGR IPO - opened for subscription on 28 June, 2007 and closed on July 03, 2007.
About the Company:
Business Profile
BGR provides products and services to sectors like power, oil and gas, and also has
presence in other high growth sectors like infrastructure, petrochemicals, etc. BGR
operates through two broad business verticals, 1) industrial products i.e. supply of
systems and equipments and 2) turnkey engineering project contracting. BGR
provides turnkey solutions for the Balance of Plant (BOP) part of projects.
Issue Details :
Fresh Issue 4,320,000

Offer for Sale 4,816,000
Reserved for employees 500,000
Net Issue to public 8,636,000
Issue Size 9,136,000
Pre and post‐Issue Equity Shares:
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Shareholding pattern Pre-Issue Post-Issue

No of shares % No of
shares %
Promoter and 64,800,000 100.0 58,544,000 81.3
promoter group
Pre-IPO investors 0 0.0 4,320,000 6.0
Public 0 0.0 8,636,000 12.0
Employees 0 0.0 500,000 0.7
Total 64,800,000 100.0 72,000,000 100.0
Figure 7: BGR Issue details

IPO VALUATION:
3.1 DCF ANALYSIS

INTRODUCTION:
In simple terms, discounted cash flow tries to work out the value of a company
today, based on projections of how much money it's 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.
For example, let's say someone asked you to choose between receiving Rs100 today
and receiving Rs100 in a year. Chances are you would take the money today, knowing
that you could invest that Rs100 now and have more than Rs100 in a year's time. If
you turn that thinking on its head, you are saying that the amount that you'd have in
one year is worth Rs100 today - or the discounted value is Rs100. Make the same
calculation for all the cash you expect a company to produce in the future and you
have a good measure of the company’s revenue. There are several tried and true
approaches to discounted cash flow analysis; we will use the free cash flow to firm
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approach commonly used by Street analysts to determine the "fair value" of

companies.
The Forecast Period:
Growth Rate:
BGR is expected to grow at to have CAGR of 80 % (source: Emkay Research) for the
period 2007-09 and 50% in 2010 & 25% in 2011 (source: IDBI Capital). We take fixed
growth rate accordingly for DCF valuation for coming 6 years.
Reinvestment Rate:
If we relax the assumption that the only source of equity is retained earnings, the
growth in net income can be different from the growth in earnings per share.
Intuitively, note that a firm can grow net income significantly by issuing new equity
to fund new projects while earnings per share stagnate. To derive the relationship
between net income growth and fundamentals, we need a measure of how
investment that goes beyond retained earnings. One way to obtain such a measure is
to estimate directly how much equity the firm reinvests back into its businesses in
the form of net capital expenditures and investments in working capital.
Growth Rate (in Earnings) = Equity Reinvestment Rate* ROE (if ROE remains same
throughout)
Equity Reinvestment Rate = Growth Rate / ROE
ROE = 48% (source: case given)
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Year 2007‐08 2008‐09 2009‐10 2010‐11 2011‐12

Growth Rate 80% 80% 80% 50% 25%
ROE 48% 48% 48% 48% 48%
Reinvestmen 166.67% 166.67% 166.67% 104.17% 52.08%
t Rate
Figure 8: Reinvestment Rates
Forecasting Free Cash Flows:
Free cash flow is the cash that flows through a company in the course of a quarter or
a year once all cash expenses have been taken out. Free cash flow represents the
actual amount of cash that a company has left from its operations that could be used
to pursue opportunities that enhance shareholder value - for example, developing
new products, paying dividends to investors or doing share buybacks.
Free cash flow = EBIT (1‐tax) – [EBIT (1‐tax) × Reinvestment Rate]
EBIT (1‐tax)nth year = EBIT (1‐tax)n‐1 year × (1 + growth rate)
Rs in mn
Current Year
2007‐ 2008‐ 2010‐ 2011‐
2006‐07 (12 2009‐10
08 09 11 12
months)
Expected Growth
80% 80% 80% 50% 25%
Rate
EBIT(1‐ Tax) 528.67* 951.61 1712.9 3083.33 4624.83 5781.03
Equity
Reinvestment 166.67% 166.76% 166.67% 104.17% 52.08%
Rate
FCF Equity (634.54) (1142.0) (2055.6) (192.85) 2770.27
* source: case given(proportionately converted from 18 months to 12 months)
Figure 9: FCF Projections
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A wide variety of methods can be used to determine discount rates, but in most
cases, these calculations resemble art more than science. Still, it is better to be
generally correct than precisely incorrect, so it is worth your while to use a rigorous
method to estimate the discount rate. A good strategy is to apply the concepts of the
weighted average cost of capital (WACC). The WACC is essentially a blend of the cost
of equity and the after-tax cost of debt.
Cost of Equity (Re):
Unlike debt, which the company must pay at a set rate of interest, equity does not
have a concrete price that the company must pay. But that doesn't mean that there
is no cost of equity. Equity shareholders expect to obtain a certain return on their
equity investment in a company. From the company's perspective, the equity holders'
required rate of return is a cost, because if the company does not deliver this
expected return, shareholders will simply sell their shares, causing the price to drop.
Therefore, the cost of equity is basically what it costs the company to maintain a
share price that is satisfactory (at least in theory) to investors. The most commonly
accepted method for calculating cost of equity comes from the Nobel Prize-winning
capital asset pricing model (CAPM), where:
Cost of Equity = RF + Beta (Rm-Rf)
Rf - Risk-Free Rate - This is the amount obtained from investing in securities

considered free from credit risk, such as government bonds from developed
countries. The interest rate of government bonds is frequently used as a proxy for
the risk-free rate. (Given: 7%)
ß - Beta - This measures how much a company's share price moves against the
market as a whole. A beta of one, for instance, indicates that the company moves in
line with the market. If the beta is in excess of one, the share is exaggerating the
market's movements; less than one means the share is more stable. We take Beta of
industry average i.e beta of 0.915.
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(Rm – Rf) Equity Market Risk Premium - The equity market risk premium (EMRP)
represents the returns investors expect, over and above the risk-free rate, to
compensate them for taking extra risk by investing in the stock market. In other
words, it is the difference between the risk free rate and the market rate. (Given:
9%)
Cost of Debt (Rd):
As companies benefit from the tax deductions available on interest paid, the net cost
of the debt is actually the interest paid less the tax savings resulting from the tax-
deductible interest payment. Therefore, the after-tax cost of debt is Rd (1 -
corporate tax rate).
AS per FORMULA Rd = 14.15%
Interest Expense X (1 – Tax Rate)_______________________
Amount of Debt – Debt Acquisition Fees + Premium on Debt – Discount on Debt
Weighted Average Cost Of Capital (WACC):
The WACC is the weighted average of the cost of equity and the cost of debt based
on the proportion of debt and equity in the company's capital structure. The
proportion of debt is represented by D/V, a ratio comparing the company's debt to
the company's total value (equity + debt). The proportion of equity is represented by
E/V, a ratio comparing the company's equity to the company's total value (equity +
debt). The WACC is represented by the following formula:
WACC = Cost of Equity + Cost of Debt
= E/V x Re + Rd x (1 - corporate tax rate) x D/V.
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E/V 0.25 Rf 7%
Corporate Tax 33% Rd 14.15% Beta 0.915
D/V 0.75 Rm 16%
Figure 10: WACC Components
Cost of Debt Cost of Equity

D/V x Rd(1 - corporate tax rate) E/V x [Rf + Beta (Rm-Rf)]
0.75x0.1415x0.67 0.25x(0.07+0.9151x0.09)
7.11% 3.80%
Figure 11: Cost of Debt and Cost of Equity
WACC = Cost of Debt + Cost of Equity = 10.9%
Present Value:
The present value of a single or multiple future payments (known as cash flows) is
the nominal amounts of money to change hands at some future date, discounted to
account for the time value of money, and other factors such as investment risk. A
given amount of money is always more valuable sooner than later since this enables
one to take advantage of investment opportunities. Present values are therefore
smaller than corresponding future values.
When future cash flow of the company is divided by the discount rate, we get the
present value of that predicted years cash flow.
(Present Value)n = (Predicted cash flow)n / (1+ discount rate)n
Where, n = year
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Rs in mn
2007‐08 2008‐09 2009‐10 2010‐11 2011‐12

Free Cash Flow (634.54) (1142.0) (2055.6) (192.85) 2770.27
2 3 4
Discount Rate 1.109 1.109 1.109 1.109 1.1095
Present Value (572.17) (928.55) (1507.11) (127.5) 1651.45
Figure 12: Free Cash Flow Calculations
TERMINAL VALUE
Perpetuity Growth Model:
The Perpetuity Growth Model accounts for the value of free cash flows that continues
into perpetuity in the future, growing at an assumed constant rate. Here, the
projected free cash flow in the first year beyond the projection horizon (N+1) is
used.
We have assumed perpetuity growth rate for BGR as 6%
Beyond 2012 BGR is expected to grow at 6% p.a i.e. at its perpetuity rate, hence net
income for the year 2013 will be:
Net income of 2012 × (1+ perpetuity growth rate)
= 5781.03 × (1+0.06)
= Rs. 6128.0 mn
Reinvestment rate after 2012 (Terminal Point):
Reinvestment rate = Perpetuity Growth rate / Return on Equity
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Here, return on equity is rate at which company expect to get returns on its
investments after terminal point i.e. 2012.
Return on equity will drop to the stable period cost of capital of 10.9%.
Reinvestment rate (terminal point) = 6/10.9
= 55%
Free cash flow = EBIT (1‐tax) – [EBIT (1‐tax) x Reinvestment Rate]
Therefore,
Free cash flow 2013 = 6128 – [6128 x 0.55%]
= Rs. 2757.6 mn
Gordon Growth Model:
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There are several ways to estimate a terminal value of cash flows, but one well-worn
method is to value the company as a perpetuity using the Gordon Growth Model. The
model uses this formula:
Free cash flow of the year after the terminal year

(Discount Rate –Perpetuity Growth Rate)
The formula simplifies the practical problem of projecting cash flows far into the
future.
Therefore,
Terminal Value = (2757.6 × 100)/(10.9-6)
= Rs 56277.55 mn
Present value of = 56277.55 / (1.109)6

Terminal year
= Rs. 30251.43mn
Calculating Total Enterprise Value:
Total Enterprise = Sum of Present value for 5 years + Present value Of

Terminal Year + Cash – Debt
= 28767.57 + 929.02 – 246.4
= Rs. 29450.17 mn
Fair value = Rs 29450.17 mn
Number of outstanding shares = 72 mn
Fair value of the BGR per share = Rs 409.03
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Hence as per the above calculations BGR cost of share is almost Fairly
priced. (As per the DCF method). As per other methods like Perr
comparison it seems that BGR was over priced.
SENSITIVITY ANALYSIS
Sensitivity analysis is the investigation of how the projected performance

varies along with changes in the key assumptions on which the
projections are based.
The sensitivity analysis of the above DCF model can be done as follows:
DISCOUNT RATE
PERPETUITY 10.5% 10.9% 11.5%
GROWTH 5% 430.135 403.65 364.62
RATE 6% 435.67 409.03 369.79
7% 438.33 415.16 370.72
Figure12 : BGR Sensitivity Analysis
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3.2 P/E Method

P/E Ratio Ratio EBIT (1‐Tax) For 2006 ‐2007
(12 Months pro rata basis)
Industry Highest 74.4
Industry Lowest 43.5
Industry Average 56.24 528.67 Million
BGR Energy Highest 102.4
BGR Energy Lowest 115.66
Figure 13: P/E Method
P/E Ratio Ratio Enterprise No of Shares Fair Value of
Value (Mn) BGR / share
(Rs)
Industry
74.4 39333.048 546.29
Highest
Industry
43.5 22997.145 319.405
Lowest
Industry
56.24 29372.4008 72 million 407.95
Average
BGR Energy
102.4 54135.808 751.89
Lowest
BGR Energy
115.66 61145.972 849.25
Highest
Figure 14: Share Price Calculation by P/E Method
BGR IPO
Particulars Figures
Issue Open Dec 05, 2007 - Dec 12, 2007
Issue Type 100% Book Built Issue IPO
Issue Size 9,136,000 Equity Shares of Rs. 10
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Issue Size Rs. 438.53 Crore

Issue Price Rs. 425 - Rs. 480 Per Equity Share
Listing At BSE, NSE
Listing Price 801.0 (BSE), 840.0 (NSE)
3 Days High 989 (NSE)
3 Days Low 801 (BSE)
DCF Valuation 409.03
P/E Valuation at Industry Avg 407.95
P/E Valuation at BGR Energy 849.25
Highest
Figure 15: BGR IPO details
It is observed that as per both the DCF Method and P/E ratio (Industry
Average) the price comes in the range of 407.95 – 409.03. Hence this
seems to be slightly overpriced. As per P/E method also it appears to be
overpriced.
However if we consider BGR Energy Highest P/E Ratio the value comes to
849.25 which is very close to the listing price of BGR Energy at NSE.
 The BGR IPO had performed pretty well.
 It had been subscribed by 119.54 times (oversubscribed 118.54
times).
 Retail category has been subscribed by only 46.8934 times
(oversubscribed by 45.8934 times).
 Non Institutional investor category in the BGR IPO had been
subscribed by over 153.0816 times (oversubscribed 152.0816 times)
 The QIB category had been subscribed by 161.6744 times
(oversubscription ratio: 160.6744 times).
Page 29
Q4 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?
Based on calculations in Q3 it is a good bet to invest in this IPO. It was

listed at Rs 801 in BSE and Rs 840. 3 days high was Rs 989 in BSE and 3
days low as Rs 801 in BSE. Hence, it seems at that juncture in Jan 2008 it
was a good bet to buy BGR Shares.
Finally BGR Energy Systems Limited IPO got Oversubscribed by the

following:
QIBs: 161.67 times

Non Institutional Investors: 153.08 times
Retail: 46.89 times
Employees: 1.46 times
Overall: 119.54 times
Page 30
Figure 16: Historic Graphs of BGR Equity Price
Figure 17: Anand Rathi Performance Graph
Page 31
As in the above graphs it can be seen the share prices of BGR maintained
at around Rs 800 above listing. But when the sensex crashed in 2008
prices of BGR energy also fell at the same or similar rate and hovered
around 150 mark. After 2009 (after sings of recovery), prices of BGR
started recovering at a faster rate and is now traded at above Rs. 500. It
may be noted that BGR energy systems has a recommendations of
leading research houses like IDBI Capital, Anand Rathi, Asit C Mehta,
Jaypee Capital Services. From the past trends of BGR and as per the
Predictions of Analysts in 2007 the IPO Price can be considered to be
reasonable.
Page 32

IPO Analysis & Valuation of BGR Energy

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Financial Institutes and Markets

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FIGURES, GRAPHS, CHARTS & TABLES

Figure 1: Objectives of the issue....................................................................................................5

Would like to take this opportunity to convey my special thanks

Generic Advantages of Going for an IPO

Figure 1: Objectives of the issue.

1.1.1 New Capital for the Company

Furthermore, if the stock of these firms do well, companies will be able

1.1.2 Public traded shares for use in acquisition

1.1.3 Listed shares for use as remuneration

1.1.4 Personal Wealth and Liquidity

Drawbacks for going Public

Financial costs of an IPO

percent in an average) represent a very large transfer of wealth from

Figure 2: Components of Cost of Equity

Bad Market Conditions

Managerial Cost of an IPO

Share Price Emphasis

shareholders are subject to binding disclosure requirements and face

Q2 Would you invest in this IPO? What are the risks of

Figure 3:BGR Peer Comparison

The PE of the company is high as compared to most of its peers which

FREE CASH FLOW TO EQUITY DISCOUNT MODEL

Figure 4: FCFE for 18 months as on March 2007

The free cash availability to the shareholders is positive which is a good

Which of these IPOs would you invest in?

Figure5: Poll results for IPO subscription.

Final Allotment was done on the following basis as on January 1, 2008

Table 1: Final Allotment Basis

High Dependencies on Govt. Companies

High Debt/Equity Ratio

Low PAT Margin

Contingent Liabilities worth Rs 437.85 crores were outstanding for

As of March 31, 2007, they had contingent liabilities in the

Figure 6: List of Contingent Liabilities

Long Accounts Receivable Cycle

Company’s accounts receivable cycle is relatively long, exposing it

The accounts receivable cycle is fairly long due to the nature of

High Working Capital and Capital Expenditure Requirements

They have a very high working capital and capital expenditure

Dilution in net tangible Book Value.

Future Sales of Equity Shares would cause the Equity Share

Q3 Can the offer Price be justified?

Following is the calculations based on FCF method, to justify the Offer

BGR Energy System Ltd – IPO

About the Company:

Fresh Issue 4,320,000

Pre and post‐Issue Equity Shares:

Shareholding pattern Pre-Issue Post-Issue

Figure 7: BGR Issue details

3.1 DCF ANALYSIS

approach commonly used by Street analysts to determine the "fair value" of

The Forecast Period:

Equity Reinvestment Rate = Growth Rate / ROE

ROE = 48% (source: case given)

Year 2007‐08 2008‐09 2009‐10 2010‐11 2011‐12

Figure 8: Reinvestment Rates

Forecasting Free Cash Flows:

Free cash flow = EBIT (1‐tax) – [EBIT (1‐tax) × Reinvestment Rate]

EBIT (1‐tax)nth year = EBIT (1‐tax)n‐1 year × (1 + growth rate)

Figure 9: FCF Projections