Power Mech Projects: Positively charged :Business Line

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Reasonable valuation, a strong order book and a good execution track record make the initial public offer of Power Mech Projects (PMP) attractive. The company provides infrastructure services to the power sector. Investors with a high risk appetite and a perspective of two-three years can consider subscribing to the issue.

The price band of ₹615- 640 discounts the company’s consolidated 2014-15 earnings by 12.6-13.1 times on post-issue equity basis. This valuation is on par with peers such as Sunil Hitech Engineers and at a discount to forward integrated players such as BGR Energy, which trades at around 19 times its trailing 12-month earnings.

The company and offer

PMP provides erection, testing and commissioning services for boilers, turbines, generators and other segments in a power plant (65-70 per cent of revenue).

The company also undertakes civil works (10 per cent), and operations and maintenance (O&M) services (20 per cent) for these plants. Till date, it has provided ETC services for over 100 projects, including two ultra-mega projects and 16 super-critical projects.

It has also been engaged in over 400 O&M contacts. Clients include BHEL, NTPC, Doosan, Adani Power and L&T – Thermal Power BU.

Through the issue, PMP plans to raise ₹263-273 crore, of which ₹132-137 crore will be earmarked for an offer for sale from the promoters. The rest will be used for working capital purposes.

Sanguine outlook

The power sector has been facing several headwinds in recent times. Hiccups in land and environmental clearances and in the availability of fuels such as coal and gas have been affecting capacity additions. The increasing financial burden of private developers and multiple problems of power distribution companies haven’t helped either.

PMP though is on a strong wicket. As of March 31, 2015, it has an order book of about ₹3,400 crore, with execution mostly on track except for a project worth about ₹190 crore. The robust order book places the company in a sweet spot, with the same covering the company’s consolidated sales for the year ended March 2015 by over two times.

Secondly, the company is looking at expanding its O&M services, which are more profitable and less dependent on new capacity additions. From about 20 per cent now, PMP expects O&M services to contribute about 30 per cent to revenues two-three years down the line.

While civil works and erection service earn about 10-12 per cent margins respectively, O&M margins are much higher at 20 per cent. Most of the opportunity in the O&M space originates from IPPs (independent power producers). PMP’s track record of providing erection and O&M services to its existing IPP client base, will stand it in good stead to acquire new customers.

Third, things are looking up for the power sector in terms of higher coal production by Coal India in the last few months, reforms in fuel linkages, setting up of railway lines for coal evacuation, and steps taken towards restructuring of distribution companies in some states.

After a slowdown last year, orders from central and state utilities are gathering steam. The Ministry of Power estimates 17,346 MW of thermal capacity addition to take place this year. PMP expects capacity additions to continue at a pace of around 16,000 MW per annum in the next couple of years.

Financials

At ₹1,366 crore for the year ending March 2015, net sales have grown at an annual average of about 29 per cent from fiscal 2011 to fiscal 2015. Net profits grew at 17.4 per cent annually on an average in this period (it was ₹71.4 crore for fiscal 2015).

Operating margin last year was a healthy 12.5 per cent. The company has low debt-to-equity ratio of 0.64 times and comfortable interest cover of 4.6 times.