Company background: Power Mech Projects (Power Mech), incorporated in 1999, was founded by Mr Kishore Babu. Over the years, Power Mech has emerged as the leading integrated power infrastructure services player at a pan-India level. The company is in the business of providing Erection, Testing and Commissioning (ETC) of Boilers, Turbines and Generators (BTG) and Balance of Plant (BOP) works. Also, in recent years Power Mech has built capabilities in Civil Works and power plant Operation and Maintenance (O&M) services.
Order book/LTM sales at 2.4x: Power Mech, as of FY2015-end, was sitting on an order book (OB, excluding suspended projects) of Rs3,216.6cr, which is 2.4x its FY2015 revenues. PowerMech is L1 in Rs800cr worth of orders, thereby taking the current OB to over Rs4,000cr. This gives strong revenue visibility. Notably, most of the order wins are repeat business from clients like BHEL, NTPC and other SEBs.
Strong earnings growth to be seen during FY2015-17E: At the backdrop of order inflow growth and average execution cycle of 25-36 months (for O&M contracts execution cycle stretches to 36 months), we expect Power Mech to report a strong 15.3% top-line and 24.2% bottom-line CAGR during FY2015-17E.
Comfortable D/E ratio: Power Mech enjoys a better working capital (WC)/sales ratio compared to its peers. In FY2015, Power Mech reported WC/sales ratio of 21.1% (vs an average of 34.7% of two of its closest industry peers - Sunil Hitech and TechnoElectric Engineering). Also, O&M services tend to have a shorter WC cycle. Owing to shorter WC cycle, Power Mech has been able to maintain its debt/equity ratio at a comfortable level of 0.6x (as of FY2015-end). With Rs105cr of IPO proceeds to be used towards retirement of debt, we expect the D/E ratio to further decline, going forward.
Valuation: PowerMech is poised to deliver a healthy growth on the top-line as well as the bottom-line front with improvement in award activity outlook. Considering the outstanding OB, earnigs growth prospects, comfortable D/E ratio and attractive valuations (PowerMech is available at discount to its listed power-focused EPC peers on Adj. P/E basis even at the upper end of the issue price band). we advise investors with a 12-month investment horizon to SUBSCRIBE to this issue.
