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Focus on O&M and Civil orders to drive growth

Power Mech Projects Ltd is a leading infrastructure-construction company based in Hyderabad with global presence.

* Company has an order backlog of Rs.7,353Cr (as on 16th Feb 2021), which shows revenue visibility for next 3 years.

* Company enjoys market leadership position in power O&M (Operations and Maintenance) and erection business with a market share of 55%-60%.

* Diversification of business to non power segment, especially civil (including railway, petro chemical, water etc) has helped the company to be in the growth track .

* We expect order backlog to grow at 14% with an average order intake of Rs.3,500Cr-4,000Cr per year.

* Revenue is expected to grow at a CAGR of 30% during FY21-23 and ROE to be at 16.3% by FY23E.

* We initiate coverage on POWERMECH with a BUY rating based on 6x FY23E earnings with a target price of Rs.727.

Market leader in power O&M and Erection business

PowerMech enjoys the leading position in power O&M and Erection business with market share of 55-60% in both the segments. Current order backlog in O&M segment is at Rs.820Cr and Erection segment at Rs.2,330Cr. Company aims to expand its O&M business further which will help in generating a consistent long term revenue along with higher margins. In erection segment, company has a track record of executing the first 2 Ultra Mega Power Plants (Mundra—Tata Power and Sasan– Reliance Power) and 19 Super Critical Power Projects in India.

Shift to non power segment

Company is in the process of diversifying its product mix to non power segments like civil, electrical, railway etc. The company has reduced its power mix from 77% of revenue in the beginning of FY19 to 59% in 9MFY20. It further plans to bring down the mix of power to 40% and increase non power to 60%. Major focus in non power orders will be on civil side including railways, water, petro chemical etc. This diversification has helped the company to gain new orders recently. Company plans for a revenue mix of 35% from O&M, 10% from railway, 15% from power, 15% from international, 5%-8% from electrical and remaining from other civil orders.

Working capital, a key factor to be watched

Company has reported decline in cash generation from operating activities from FY19 and a negative cash during FY20. It has resulted in a significant increase in debt level from FY20. Lower revenue recognition and increased receivables resulted in this working capital stress. However, the company has generated positive operating cash flow of Rs.52Cr as on Q3FY20. The improvement in working capital cycle will be a key factor to be watched.

Back in track from covid uncertainities

PowerMech Projects being a highly labour intensive business, were badly affected by the lockdown and restrictions in movement. All major projects were kept on hold. However, O&M projects stood as an exemption and contributed to the revenue generation. During Q1FY21, project executions were at 56% with O&M at 85% and other businesses at 45%. However, execution reached 100% level from December 2020 and expect to have a full fledged quarter from Q4FY21.

Valuation and Outlook

With strong order inflow, diversification to non power segment and increased focus in O&M segment, we expect the company to be in its growth trajectory from Q4FY21 as company reached full execution level in December. At current levels, the stock is available at a bargain. Considering these factors, we initiate coverage on Power Mech Projects with a BUY rating based on 6x FY23E earnings with a target price of Rs.727.

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