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Order book offers revenue visibility

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

* Q4FY21 revenue grew by 27% YoY backed by strong execution in O&M (29% YoY) and Civil business (75% YoY).

* Order book remains healthy at Rs7,333cr (3.9x FY21 revenue) led by strong inflow of Rs4,638cr in FY21, which provides revenue visibility for the next two to three years.

* EBITDA margin declined by 108bps YoY to 9.9% on account of higher cost of sales.

* PAT grew by 14% YoY led by higher other income & lower interest cost, partially offset by higher tax rate of 28.5% vs 13% in Q4FY20.

* Management expects execution to pick up in coming quarters as most of the projects are in the execution stage and also expecting Rs~5,000cr of order inflow in FY22.

* We reiterate Buy rating as the impressive order book and superior execution capabilities will drive earnings growth and we value the stock at a P/E of 7x FY23E earnings with a target price of Rs.894.

Civil & O&M business to drive growth

Q4FY21 revenue grew by 27% YoY to Rs755cr backed by strong execution in Civil business by 75% YoY and O&M (Operation & Maintenance) division by 29% YoY. The other verticals like Erection and Electrical division witnessed a de-growth of 12% & 15% respectively.

The company is in the process of diversifying its product mix to non-power segments like civil, electrical, railway etc. Civil & Electrical constitute 41% of revenue in FY21 compared to 35% in the previous financial year. The management expects execution to pick up as there are no slow-moving projects in their order book and guiding for a top-line of Rs2,500 to Rs3,000cr in FY22.

Order book remains strong

In FY21 the company received an order inflow of Rs4,638cr, registered a growth of 138% YoY backed by strong inflows in Civil business at Rs3,047cr (329% YoY). While order backlog increased by 60% YoY to Rs7,333cr which is 3.9x FY21 revenue, providing revenue visibility for the next two to three years.

The management expects Rs4,000 to Rs5,000cr of new orders in FY22 which will further aid growth visibility. O&M segment constitutes 49% of the order book with a margin profile of 17.5% to 18.5% in the domestic category and 22% to 24% in the International business. The company aims to expand its O&M business further which will help in generating a consistent long term revenue along with higher margins.

Margins to normalise

During the quarter EBITDA margin declined by 108bps to 9.9% due to higher cost of sales, but partially offset by lower staff cost and other expenses (as a % of sales). PAT for the quarter grew by 14.2% YoY to Rs36cr aided by higher other income (36% YoY) and lower interest costs (6% YoY). 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 10.5% to 11.7% in FY22E/ FY23E.

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 in FY22. Impressive order book and superior execution capabilities will drive earnings growth. Therefore, we reiterate Buy rating and value the stock at a P/E of 7x FY23E earnings with a target price of Rs.894.

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