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The promoters’ average cost of holding (of 64.75%) is less than Rs 5 a share. The private equities, affiliated to one of the lead managers to the offer, Motilal Oswal, are facilitated to get more than Rs 130 cr (from the offer for sale of 85% of their holding) against their total investment of only Rs 40 cr in 2009 (average cost being less than Rs 160 a share). The cost of the so called public shareholders, who were allotted shares at Rs 10, has been reduced to far below the par value through three bonus issues. Compared to these, the current offer price (Rs 615-640) is too heavy to hold after the lapse of the lock-in period.
| OFFER AT A GLANCE | |
| Name | Power Mech Projects Ltd |
| Public Offer | Fresh Issue of 21.28 lakh shares and Offer for Sale of 21.41 lakh shares of Rs 10 each |
| Offer % on Total Equity | 29% on Rs 14.71 cr |
| Post-IPO Promoter Stake | 64.75% |
| Offer Price | Between Rs 615 and Rs 640 |
| Offer Amount | Rs 263 cr to Rs 273 cr |
| Application Quantity | 20 & Multiples of 20 |
| Bid/Offer Opens | 07-Aug-15 |
| Bid/Offer Closes | 11-Aug-15 |
| Listing | BSE and NSE |
| IPO Rating | Nil |
| Book Running Lead Managers | Kotak Mahindra Capital, IIFL Holdings, Motilal Oswal Investment Advisors |
| Registrars | Karvy Computershare |
The IPO
The present issue consists of fresh issue of 21.28 lakh shares from the company and offer for sale of 21.41 lakh shares by four existing shareholders – two private equity funds and two public shareholders. India Business Excellence Fund I, a public limited life company registered under the laws of the Republic of Mauritius, is offloading 16,89,300 shares. India Business Excellence Fund, a unit scheme of Business Excellence Trust, a trust created under the (Indian) Trust Act, represented by its trustee IL&FS Trust Company, is offering 438,700 shares. The public shareholders viz. P Srinivasa Rao and D Aakashnag (represented by his guardian D.S. Rao) are selling 6,500 shares each.
The offer of 42.69 lakh shares of Rs 10 each is made through the book building route with a price band between Rs 615 and Rs 640. The issue constitutes 29% of the paid-up capital (Rs 14.71 cr) of the company. Investors should apply for a minimum of 20 shares and multiples of 20 thereafter. Whereas Kotak Mahindra Capital, IIFL Holdings and Motilal Oswal Investment Advisors are appointed as book running lead managers, Kotak Securities, India Infoline and Motilal Oswal Securities are acting as syndicate members.
IPO Object
The main objects of the IPO are to facilitate the sale of shares by the selling shareholders and fund the working capital requirements (Rs 105 cr) of the company besides achieving the benefits of listing on the stock exchanges.
Grading
The company has not sought rating for its IPO.
Genesis
The Hyderabad-based Power Mech Projects Ltd (PMPL) was promoted in 1999 by a first generation entrepreneur, Sajja Kishore Babu (52) who holds a bachelor‘s degree in technology from Nagarjuna University. PMPL initially undertook works in overhauling and maintenance of gas turbines. Three years later it got into erection of boilers and steam turbine generators.
The company reportedly got its first annual maintenance contract of a combined cycle dual fuel based power plant in 2004. In 2007 PMPL graduated to undertake erection, testing and commissioning (ETC) of a 500 MW boiler and auxiliaries. Since then it has been undertaking major ETC works of power plants.
Until 2006 the company tapped Rs 1 cr at par through `allotments’ to many individuals, including public shareholders. In 2007 it came out with a bumper 2:1 bonus thereby taking the capital to Rs 3 cr. In 2008 the promoters subscribed Rs 2 cr and some public shareholders chipped in Rs 1 cr – all at par value which was followed by another bonus issue in the ratio of 1:2.
In 2009 PMPL entered into an agreement with two private equity funds affiliated to the investment banker Motilal Oswal namely India Business Excellence Fund I (Mauritius) and India Business Excellence Fund (Domestic) and raised Rs 40 cr by way of convertible preference shares/debentures. Currently, the promoters’ stake of 75.7% is held by twelve members including HUF. The two PE funds have 19.89% and the balance 4.41% is held by 559 individuals, who are classified as public shareholders.
Business profile
The 16-year old PMPL presents itself as an integrated power infrastructure services company providing comprehensive erection, testing and commissioning of boilers, turbines and generators (ETC-BTG) and balance of plant (BOP) works, civil works and operation and maintenance (O&M) services. The company’s operations include three principal business lines: (i) Erection Works; (ii) Operation & Maintenance Services; and (iii) Civil Works. In fiscal 2012, 2013, 2014 and 2015, revenue from Erection Works was Rs 588 cr, Rs742 cr , Rs 891 cr and Rs 910 cr respectively, representing 83%, 79%, 74% and 67% respectively, of the company’s total revenue.
The company’s O&M Services business includes annual maintenance contracts (AMCs), other repairs, renovation and modernization (R&M), residual life assessment (RLA), scheduled shutdowns, retro-fits, as well as overhauling, maintenance and up-gradation services for power plants. Since commencement of O&M business in 1999, PMPL claims to have engaged on more than 400 O&M contracts. The company reportedly provides comprehensive O&M services, principally for power projects, in India and abroad. In fiscal 2012, 2013, 2014 and 2015 revenue from O&M Services was Rs 42 cr, Rs 76 cr Rs 1,39 cr and Rs 276 cr respectively, representing 6%, 8%, 12% and 20% respectively of the total revenue.
The company’s Civil Works business commenced in fiscal 2011 and provides various civil and construction jobs for the main plant and BOP requirements including excavation, piling, concreting, architectural and building works. In fiscal 2012, 2013, 2014 and 2015 revenue from Civil Works business was Rs 70 cr, Rs 110 cr, Rs 166 cr and Rs 175 cr, respectively representing 10%, 12%, 14% and 13% respectively of the total revenue.
PMPL reportedly has a strong equipment base including material handling equipment, cranes, transportation equipment, welding equipment, batching plants, concrete pumps, boom placers, dozers, modern laboratory testing machines, inspection, measuring and testing equipment (IMTE) and condition monitoring equipment. As of June 30, 2015, the company had 261 cranes, ranging from 10 tonne to 300 tonne in capacity.
Financial Performance
Between fiscal 2011 and 2015, PMPL’s total income increased at a CAGR of 29% from Rs 494 cr to Rs 1372 cr, while profit after taxation, increased at a CAGR of 17% from Rs 37.61 cr to Rs 71.40 cr. Nevertheless, RONW has dropped from 31% in fiscal 2012 to 20% in fiscal 2015 and ROCE has slumped from 33.6% to 21.7% during this period. Further net cash flow from operations has shrunk from Rs 52 cr in fiscal 2011 to less than Rs 4 cr in 2015.
As per the offer document, PMPL had an aggregate Order Book of Rs 3406 cr at the end of March 2015, comprising of Erection Works, O&M Services and Civil Works of Rs 2303 cr, Rs 590 cr and Rs 513 cr respectively. However, the aggregate value of the Erection Order Book also included certain suspended projects (i.e. contracts on which no operations had been conducted for a period of more than six months because of various factors) amounting to Rs 190 cr.
As per the offer document, PMPL had an aggregate Order Book of Rs 3406 cr at the end of March 2015, comprising of Erection Works, O&M Services and Civil Works of Rs 2303 cr, Rs 590 cr and Rs 513 cr respectively. However, the aggregate value of the Erection Order Book also included certain suspended projects (i.e. contracts on which no operations had been conducted for a period of more than six months because of various factors) amounting to Rs 190 cr.
For PMPL’s size of operations, the equity base is very small at Rs 12.58 cr which is now proposed to be hiked to Rs 14.71 cr. The company’s reserves stood at more than Rs 342 cr yielding an impressive book value of Rs 282 per share.
| POWER MECH PROJECTS' FINANCIAL TRACK | |||||
| (Amount in lakh) | Mar-15 | Mar-14 | Mar-13 | Mar-12 | Mar-11 |
| Gross Income | 137198 | 121108 | 94041 | 70913 | 49442 |
| Oper. Margin (%) | 12.2 | 12.9 | 13.1 | 17.8 | 17.6 |
| Interest | 2943 | 2661 | 1679 | 1302 | 814 |
| Depreciation | 3678 | 3284 | 3358 | 3864 | 2425 |
| Tax | 3498 | 3853 | 2527 | 2583 | 1892 |
| Net Profit | 7140 | 6810 | 5117 | 5241 | 3761 |
| Net Op. Cash Flow | 386 | 2675 | 1807 | 4205 | 5156 |
| Equity Cap | 1258 | 1094 | 1075 | 1075 | 1075 |
| Reserves | 34238 | 26282 | 19361 | 14368 | 9245 |
| Net Block | 20025 | 18485 | 17713 | 17323 | 12560 |
| Borrowings | 23632 | 16682 | 11520 | 8893 | 5539 |
Valuation & Concern
By proposing a price band of Rs 615-640 PNPL is vying a market cap of more than Rs 900 cr. The company’s present net worth (Rs 355 cr) and bottom line (Rs 71 cr) may perhaps warrant such valuation. But, the current valuation of industry peer like BGR Energy may advise caution to bid PNPL at Rs 615. BGR, which sub-contracts certain works to PMPL, is currently discounted 8.2 times its earnings, 0.7 times the book value and 0.3 times the revenue. Moreover, BGR currently offers an attractive dividend yield of 2.4%. Compared to BGR, PMPL is priced more than 12 times its earnings, 2.5 times the book value and 0.7 times revenue. And, PMPL’s current dividend base gives a yield of only 0.2% on the offer price.
In fact, more than the lower discounting of industry peers, a major challenge that the IPO investors may have to confront in due course is the extremely low cost of holding of the existing shareholders. The promoters’ average cost of holding is less than Rs 5. After the offer for sale, the private equities’ cost would be negative for their residual holding. The cost of the present public shareholders too is far below the par value. Under such circumstances, the current offer price (Rs 615-640) is unlikely to sustain in the secondary market after the lapse of the lock-in period.
Besides steep pricing, PMPL also faces perception issues. In December last year, the IT department reportedly conducted search operations at the residences of the promoters, company offices and summons were issued to the promoter-CMD (Kishore Babu) to appear before the tax authorities. A total of 22 incidents of loss of life and 2 incidents of injury have occurred at PMPL’s work sites during fiscal 2014 and 2015 resulting in payment of compensation of Rs 1.71 cr.
The shareholders’ agreement between PMPL and the private equity funds have been amended thrice which implies that the company could not fulfill the aspirations of the private equity investors. There are more than 550 individuals who have been allotted shares at par by the company under the public category between 1999 and 2008. When placements with public are banned, how did PMPL rope in so many individuals? Also, when the earnings and intrinsic value of the shares were much more, how come the shares were offered at par?
| HOW POWER MECH PROJECTS COMPARES | ||||||||
| POWER INFRA- | MCAP | P/E | P/BV | P/R | P/NB | OPM | YLD | CLP |
| CONSTRUCTION | (Rs Cr) | (x) | (%) | (Rs) | ||||
| Techno Electric | 3,020 | 28.7 | 3.3 | 3.8 | 2.9 | 26.2 | 0.8 | 529 |
| BGR Energy | 898 | 8.2 | 0.7 | 0.3 | 4.5 | 12 | 2.4 | 124 |
| POWER MECH -HI | 941 | 13.2 | 2.6 | 0.7 | 4.7 | 12.2 | 0.2 | 640 |
| -LO | 905 | 12.7 | 2.5 | 0.7 | 4.5 | 12.2 | 0.2 | 615 |
(Source: India Aarthik Research)
Lead Managers’ Track
For the Rs 263-273 cr IPO, PMPL has hired the services of three investment bankers namely, Kotak Mahindra Capital, IIFL Holdings and Motilal Oswal Investment Advisors. For the promoters, big names may help marketing the public issue. But, will they underwrite decent returns to the investing public? Incidentally, none of the three merchant bankers have a reassuring record.
In last five years, Kotak Mahindra has lead-managed 24 IPOs of which 10 are currently quoting below the offer price. While jubilant, priced at 140, has fetched fabulous returns (1197%) in five years, Techpro Systems, offered at Rs 355 have inflicted a capital loss of 98% on the investors. There is no denying the fact that 2010-vintage IPOs Gujarat Pipavav, Eros International and Bajaj Corp managed by Kotak too gave commendable returns. But, on the other side Vascon Engineers and Jaypee Infra floated in the same year caused a capital loss of 85% to the IPO investors.
| KOTAK MAHINDRA CAPITAL-MANAGED IPOs | ||||
| COMPANY NAME | IPO | IPO | CURNT | GAIN |
| DATE | PRICE | PRICE | % | |
| Manpasand Beverage | 24-Jun-15 | 320 | 378 | 18 |
| Adlabs Entertainment | 10-Mar-15 | 180 | 161 | -11 |
| Ortel Communication | 03-Mar-15 | 181 | 194 | 7 |
| Speciality Restauran | 16-May-12 | 150 | 162 | 8 |
| Future Consumer | 25-Apr-11 | 10 | 17 | 69 |
| Muthoot Finance | 18-Apr-11 | 175 | 192 | 10 |
| Tata Steel | 19-Jan-11 | 610 | 256 | -58 |
| Coal India | 18-Oct-10 | 245 | 443 | 81 |
| Prestige Estates | 12-Oct-10 | 183 | 222 | 21 |
| Oberoi Realty | 06-Oct-10 | 260 | 258 | -1 |
| Tecpro Systems | 23-Sep-10 | 355 | 8 | -98 |
| Eros International | 17-Sep-10 | 175 | 588 | 236 |
| Gujarat Pipavav | 23-Aug-10 | 46 | 220 | 379 |
| Bajaj Corp | 02-Aug-10 | 132 | 444 | 237 |
| SKS Microfinance | 28-Jul-10 | 985 | 578 | -41 |
| Hindustan Media | 05-Jul-10 | 166 | 243 | 46 |
| Jaypee Infra | 29-Apr-10 | 102 | 14 | -86 |
| Nitesh Estates | 23-Apr-10 | 54 | 18 | -68 |
| NMDC | 10-Mar-10 | 300 | 102 | -66 |
| Rural Electrificat | 19-Feb-10 | 203 | 279 | 38 |
| Hathway Cable | 09-Feb-10 | 48 | 50 | 3 |
| NTPC | 03-Feb-10 | 201 | 135 | -33 |
| Vascon Engineers | 27-Jan-10 | 165 | 24 | -85 |
| Jubilant Foodwork | 18-Jan-10 | 145 | 1,881 | 1197 |
* After adjusting to stock splits (Source: India Aarthik Research)
SEBI’s disclosure norms might favour IIFL Holdings as the investment banker handled just one IPO (Manpasand Beverages) in last three years. Manpasand, which went public in June 2015, is currently quoting at a premium of 18% over the offer price. Nonetheless, the fact is, in its previous avatar as India Infoline, the same investment banker handled five public issues between July 2007 and April 2010. Of these, whereas Talwalkars (Apr-2010) and Cox & Kings (Nov-2009) have fetched 133% and 88% capital appreciation respectively, Nu Tek India and Omnitech Infosolutions have inflicted a colossal capital loss of 99% and 95% respectively on the investing public.
| IIFL HOLDINGS-MANAGED IPOs | ||||
| CO NAME | IPO | IPO | CURNT | GAIN |
| DATE | PRICE* | PRICE | % | |
| Manpasand Beverages | 24-Jun-15 | 320 | 378 | 18 |
| Talwalkars Better | 21-Apr-10 | 128 | 299 | 133 |
| Infinite Computer | 11-Jan-10 | 165 | 209 | 26 |
| Cox & Kings | 18-Nov-09 | 165 | 310 | 88 |
| Nu Tek India | 29-Jul-08 | 48 | 0.57 | -99 |
| Omnitech Infosolut | 19-Jul-07 | 105 | 5 | -95 |
* After adjusting to stock splits (Source: India Aarthik Research)
The third investment banker, Motilal Oswal, who will probably be the biggest beneficiary (other than promoters) of PMPL’s public issue being the sponsors of the two large selling shareholders of the present offer for sale, has not handled any public issues in last three years to comply with the SEBI disclosure norms. However, in the previous five years, the investment banker had associated with eight IPOs which have put up a mixed show on the trading screen. While last four IPOs floated between 2009 and 2011 are quoting above the offer price today the previous four, entered the market during 2007 and 2008, are languishing below the offer price. In other words, whereas the best performer, Tree House, has fetched 197% over 4 years, Resurgere Mines, Shriram EPC and Zylog Systems have eclipsed more than 90% of the investment value.
| MOTILAL OSWAL-MANAGED IPOs | ||||
| CO NAME | IPO | IPO | CURNT | GAIN |
| DATE | PRICE* | PRICE | % | |
| Tree House Edu | 10-Aug-11 | 135 | 400.7 | 197 |
| Ashoka Buildcon | 24-Sep-10 | 108 | 184.95 | 71 |
| MBL Infra | 27-Nov-09 | 180 | 269.7 | 50 |
| Pipavav Defence | 16-Sep-09 | 58 | 60.2 | 4 |
| Resurgere Mines | 11-Aug-08 | 90 | 0.81 | -99 |
| Archidply Ind | 11-Jun-08 | 74 | 58.55 | -21 |
| Shriram EPC | 29-Jan-08 | 330 | 32.95 | -90 |
| Zylog Systems | 20-Jul-07 | 175 | 6.54 | -96 |
| * After adjusting to bonus & stock split | ||||
(Source: India Aarthik Research)
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