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Execution to ramp-up in H2FY22...

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

* Top-line registered a growth of 127% YoY in Q1FY22 mainly led by a ramp-up in execution in Civil (284% YoY) & Erection segments (129% YoY).

* Order book grew by 129% YoY to Rs16,348cr (7.3x TTM revenue) led by strong inflow of Rs9,637cr (incl. 9,294cr of mining order) in Q1FY22, which provides revenue visibility for the next to three to four years.

* EBITDA margin improved to 10.6% (vs –5% in the previous quarter last year) due to lower employee expenses and material costs.

* Higher other income (182% YoY) and the lower tax rate of 23.9% supported PAT to rose to Rs31cr YoY (vs. Rs33cr loss in Q1FY21).

* Management expects execution to ramp up going forward and guided Rs1,400cr of revenue in H2FY22 led by strong tender pipeline.

* We revised our rating to Accumulate Due to the recent uptick in the stock price and value the stock at a P/E of 7x FY23E earnings with a target price of Rs.939.

Execution back to pre-covid levels

Q1FY22 revenue grew by 127% YoY to Rs623cr backed by strong execution in Civil business by 284% YoY and Erection segment by 129% YoY (base effect). The other verticals like O&M and Electrical division registered a growth of 44% & 39% respectively. Non– power segment continues to remain the growth driver for the company.

The management expects good traction in execution as labour availability is more or less back to normal. The company has guided Rs700cr of revenue recognition in Q3FY22 and Q4FY22 and remain conservative in Q2FY22 due to execution delay on account of monsoon. Most of the projects are in the execution stage, we therefore, increase FY22/FY23 revenue estimate by 7%/4% respectively.

Robust order book

In Q1FY22, the order book witnessed a growth of 129% YoY to Rs16,348cr supported by 240% YoY increase in order inflow during the quarter to Rs9637cr (includes MDO orders of Rs9,294cr). The total order book is 7.3x trailing twelve months revenue and provides strong revenue visibilities in the coming years. The contract period for the new MDO (Mining Development & Operation) orders is for 25 years which includes two years of development period and revenue recognition from this project will start only from the third year.

The project is likely to add more than Rs400cr of revenue annually. The order in the key verticals like erection, electrical and civil remains muted due to delay in finalisation of orders. The company is currently tracking Rs10,000cr of orders from O&M, railway, road. The management hopes to finalise mineral processing EPC orders to the tune of Rs300cr to 350cr from NMDC and Hindustan Zinc in Q2FY22.

Margins to normalise

During the quarter EBITDA margin improved to 10.6% YoY (Vs. –5.0% in Q1FY21) on account of lower material cost and staff costs. Higher execution and margins resulted in earnings grew to Rs31cr (Vs. Rs33cr loss in Q1FY21). We expect margins to normalize in coming quarters due to ease in lockdown and shift in revenue mix to high margin O&M business and growth in non-power business. We expect margins to be in the range of 10.3% to 11.7% in FY22E/FY23E.

Valuation and Outlook

With strong order inflow, diversification to non power segment and increased focus in the O&M segment, we expect the company to be in its growth trajectory in FY22. We revised our rating to Accumulate due to the recent uptick in stock price and value the stock at a P/E of 7x FY23E EPS.

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