Best share to buy 2021: Power Mech Projects

Power Mech is an integrated infrastructure services company incorporated in 1999 that provides comprehensive erection, testing and commissioning of BTG, BoP, industrial units, civil works and operation and maintenance (O&M) services. It is the largest O&M service provider to po wer plants in India, with 110 ongoing projects. In the civil works domain, Power Mech undertakes various civil, structural, and construction works. The company has diversified into other sectors like Railway works, electrical distribution works, Oil & Gas piping work, mechanical works at steel & other non-power sector as well. Recently, Power Mech won a large coal mining MDO project for 25 years. Sajja Kishore Babu is the Chairman and MD.

Power Mech Projects stock has a market capitalisation of USD 170 million and is considered as a capital goods company. The promoter shareholding is 63.7% without any pledging. Foreign Institutional Investor (FII)s hold 2.9%, while Domestic Institutional Investors (DII)s hold 10.2% in the company.  The company has given over 96% return in the last one-year period. The earnings per share (EPS) has grown 26.6% on compound annual growth rate (CAGR) basis, while the same is 9.5% when calculated rom a 5 years perspective.  

Why to buy Power Mech Projects stock?

Power Mech Projects is well placed to deliver 13% revenue and 14% PAT CAGR over FY20-23ii, backed by the current Rs70.5bn order book (3.2x book-to-bill) and improved execution seen in the past few quarters. Diversification into new sectors (metals, railways, electricals, material handling) is paying off in terms of order wins, further aided by technology partnerships. While margins will moderate, better execution and WC focus will support FCF and deleveraging going forward. At 6.4x FY23 PER, the stock should see rerating on strong delivery.

Recommendation: Power Mech Projects (Current Market Price – Rs 845, 1 year target - Rs 1063, upside potential -26%)

Power Mech’s solid order book to boost growth

Power Mech Projects ended 1QFY22 with a core order book (OB) of Rs70.5bn – 3.2x trailing 12mth revenue. Given execution period of 2.5-3years, this provides strong growth visibility for FY22-23. Company targets ~Rs40-45bn worth of further order wins from metals, railways, electrical & road sectors which will grant added visibility. Key highlights include Company’s first public-sector O&M contract win, from Singareni Collieries, and strong traction in the non-power sector (metals, railways, electricals, O&G pipelines, material handling, etc).

Power Mech sees good revenue and profit growth expected

While Covid-19 took a toll on FY21 revenue, quarterly revenue of ~Rs7bn seen in 4Q21/1Q22 lends comfort on execution capabilities and supports our FY20-23 revenue Cagr expectation of 13%. We expect consolidated Ebitda margin to be lower than historical levels, as civil works from new segments contribute a larger share to revenue. Overall, we estimate Ebitda Cagr of 10% over FY20-23. We have not built-in any contribution from the recently-won, Rs93bn, 25-year mining MDO contract from CCL, as initial years would entail spends on development.

Power Mech's execution likely to better last six months performance

With easing of Covid19 related restrictions, Power Mech’s execution sharply improved to Rs7.55bn (+27% YoY) in 4QFY21. The healthy momentum sustained in 1QFY22, with revenues of Rs6.23bn (+126% YoY). We are building in 36.7% YoY revenue growth (on low base) to Rs25.8bn in FY22, followed by Rs31.3bn (+21.6% YoY) in FY23ii. This builds in healthy execution of the expanded order book. Power Mech has established necessary infrastructure as well as management bandwidth to execute Rs6-8bn worth of projects on quarterly basis. Power Mech has also established credentials and pre-qualifications to execute large projects without partnering with other contractors. This should aid future project wins as well as improve margins to some extent.

Power Mech's mine development contract with Coal India to help revenues after 2-3 years

Power Mech Projects has won the 25-year mine development & operator (MDO) contract for Kotre Basantpur Panchmo OCP from Central Coalfields (a Coal India subsidiary), worth Rs92.94bn. The project has been awarded to a consortium in which Power Mech will have 74% share while AMR India will have the balance 26% share. The SPV (KBP Mining Pvt) will have material handling expertise of Power Mech and greenfield project development skills of AMR India.

The MDO contract comprises of mine infrastructure development, removal of overburden, extraction of coking coal, processing, crushing and transportation of coal to CCL’s washery along with carrying out R&R and other incidental activities. A total of 105mt of coal would be extracted over the 25 years, with peak annual output of 5mt along with a take-or-pay contract. Total overburden removal during the project phase is likely to be over 539MBCM.

Of the 1,100ha of land requirement, 840ha has already been acquired, with the balance likely to be acquired soon. Management expects to receive all approvals and commence ground activity in 6- 8 months. The 25-year concession period includes 2 years of mine development, with an option of extending it by another 10 years. Management estimates total capex of Rs2.8bn over the next two years and will be funded through debt and equity at the SPV level. Equity contribution by the SPV is likely to be ~Rs800-850m, of which Power Mech will contribute 74%.

At peak, it is expected to add annual revenue of Rs4bn, with a healthy Ebitda margin of ~18-19%. Overall, we see gradual deleveraging Power Mech’s net debt stands at Rs3.3bn as at end-1QFY22. While healthy cash generation should support some deleveraging, incremental investments in the coal MDO project over the next two years (development phase of the mine) would limit overall debt reduction. We expect net debt to witness marginal reduction in FY22 on YoY basis, before rising in FY23ii, to fund coal MDO capex.