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Execution to pick-up in H2FY22...

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

* Q1FY22 revenue grew by 56% YoY, however, it was below our estimate as the execution was impacted due to the rainy season. While the Civil & Erection segments sales grew by 121% YoY/ 117% YoY.

* Though the company didn’t bag any orders in Q2FY22, the order book remains robust at Rs15,809cr, which is 6.5x TTM revenue (incl. 9,294cr of mining order).

* EBITDA margin stood at 10.7% (vs –12.3% in the previous quarter last year) due to 1742bps improvement in gross margin.

* Higher other income (130% YoY) and the lower tax rate of 20.8% supported PAT to rise to Rs27cr YoY (vs. Rs55cr loss in Q2FY21).

* Management expects execution to pick-up in H2FY22 and has targeted to achieve Rs2,600cr of revenue in FY22 with 12.5 to 13% margins.

* With the robust order book and an expectation of strong execution in the coming quarters, we revise our rating to Buy and value the stock at a P/E of 7.5x FY23E earnings with a target price of Rs.1,163.

Q2FY22 execution impacted due to rainy season

Q2FY22 revenue grew by 56.2% YoY to Rs539cr, however, it was below our estimate as the execution was largely impacted due to the rainy season. While Civil and Erection segments witnessed strong execution with a growth of 121% YoY/117% YoY. The other verticals like O&M and Electrical division registered a growth of 29% & 21% respectively. Non–power segment continues to remain the growth driver for the company. The management expects the execution to pick-up in H2FY22 and has guided to achieve a top-line of Rs2,600cr in FY22. Since most of the projects are in the execution stage, we expect revenue to grow at a CAGR of 28% over FY21-FY23E.

Order book provides visibility

Despite the company not bagging any orders in Q2FY22, the order book remains robust at Rs15,809cr (includes MDO orders of Rs9,294cr). The total order book is 6.5x trailing twelve months revenue which provides strong revenue visibilities in the coming years. The management is expected to add Rs 3,500cr to Rs4,000cr of orders in FY22. The order in the key verticals like erection, electrical and civil remains muted due to delay in finalisation of orders. The company is looking for opportunities worth Rs10,000cr in energy, infra, metals, railway, mineral sectors. The management hopes to finalise two major projects on mineral processing EPC orders from NMDC in the coming quarters.

Margins to improve

During the quarter EBITDA margin improved to 10.7% YoY (Vs. –12.3% in Q2FY22) on account of 1742bps YoY improvement in gross margin to 29.1%. Given an expectation of higher execution in H2FY22, the management highlighted that EBITDA margin to normalize to 12.5 to 13% in FY22. Additionally, shift in revenue mix to high margin O&M business and growth in non-power business also support the margin estimate. We, therefore, improved the margin estimate to 12.1%/12.5% for FY22/FY23 respectively. The PAT stood at Rs 27cr (Vs. Rs55cr loss in Q2FY21)

Valuation and Outlook

With a strong order book, 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, therefore, revise our rating to Buy and value the stock at a P/E of 7.5x FY23E EPS

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