Power Mech Projects – BUY

Top pick for 2023

18 January 2023

Growth set to accelerate over FY24-25 Company update

CMP Rs2187 Price performance (%)
Power Mech Projects is well-placed to deliver 36% revenue
Cagr over FY22-25, backed by large ~Rs154bn order book and 12-mth TP (Rs) 2371 (8%) 1M 3M 1Y
a demonstrated execution track-record. Diversified presence Market cap (US$m) 397 Absolute (Rs) (0.7) 19.8 120.8
bodes well for capitalising on improving award and spend Absolute (US$) 0.9 20.9 100.6
outlook in Railways, Water Supply, FGD retrofit and Metros — Enterprise value(US$m) 442
Rel.to Smallcap 1.7 18.7 127.6
even as the company expands share of stable O&M and mining Bloomberg POWM IN
Cagr (%) 3 yrs 5 yrs
MDO revenues. Stable margins and moderation in WC cycle Sector Capital Goods EPS (Rs) 4.5 16.5
should drive steady deleveraging over FY22-25. BUY.
Rs150bn OB provides visibility for strong growth over FY22-25: Shareholding pattern (%) Stock performance
Following 1H order win of Rs82bn (including the large Rs62bn FGD Promoter 63.7 Vol('000, LHS) Price (Rs., RHS)
Pledged (as % of promoter share) 0.0
retrofit order from Adani), Power Mech has won further orders worth 2,500 3,000
Rs15.3bn in 3Q. Estimated end 9MFY23 order book of Rs154bn with FII 4.9 2,000
DII 9.4 2,000
an execution cycle of ~3 years, provide strong revenue growth 1,500
visibility when looked in combination with steady execution track- 52Wk High/Low (Rs) 2385/809 1,000
1,000
record and client focus on execution. We estimate revenue Cagr of Shares o/s (m) 15 500
36% over FY22-25, backed by current order book. Daily volume (US$ m) 1.1 0 0

Jul-21

Jul-22

Nov-22
Nov-21
Sep-21

Sep-22
Mar-21
May-21

Mar-22
May-22
Jan-21

Jan-22

Jan-23
Diversified presence and right partnerships to support order Dividend yield FY24ii (%) 0.1
wins: End 1H order book was well-diversified across sectors such as Free float (%) 36.3
Power, Water Supply (JJM), Roads, Railways, Material Handling and Financial summary (Rs m)
O&M (Power, Non-Power) with Power Mech scaling up its pre- Y/e 31 Mar, Consolidated FY21A FY22A FY23ii FY24ii FY25ii
qualification needs aided by JVs. Spends and awards across these Revenues (Rs m) 18,841 27,105 35,312 58,312 68,812
sectors and in Mining, should remain strong all through 2023 and will Ebitda margins (%) 2.2 10.6 11.3 11.3 11.3
aid further wins. Right partnerships in Railways, Material Handling, etc.,
Pre-exceptional PAT (Rs m) (456) 1,390 2,022 3,875 4,856
position the company well for these awards. Additionally, steady uptick
Reported PAT (Rs m) (456) 1,390 2,022 3,875 4,856
in O&M base and targeted new Mining MDO projects — will increase
share of stable assured revenue base. Pre-exceptional EPS (Rs) (31.0) 94.5 137.3 263.1 329.7
Growth (%) NM NM 45.3 91.6 25.3
We estimate gradual deleveraging and healthy return ratios: PER (x) NM 23.3 16.0 8.4 6.7
While FGD orders will have slightly lower margins, overall margins
ROE (%) NM 14.3 17.5 26.5 25.6
should remain stable with lower sharing of margins for PQ purposes.
Combined with strong growth and timely payments for on-time Net debt/equity (x) 0.5 0.4 0.2 0.2 0.1
execution, this will drive steady deleveraging as well as uptick in EV/Ebitda (x) 87.9 12.6 8.8 5.5 4.4
return ratios to ~25% ROE. At 8.5x FY24 PER, the stock is priced Price/book (x) 3.6 3.1 2.6 2.0 1.5
attractively. OCF/Ebitda (x) 2.4 0.6 0.5 0.1 0.4
Source: Company, IIFL Research. Priced as on 17 January 2023
Anupam Gupta | anupam.gupta@iiflcap.com | |
91 22 4646 4641
 Power Mech Projects – BUY

Figure 1: Healthy order wins in 9MFY23, led by FGD orders from Adani Figure 4: End 9MFY23 order book provides strong growth visibility for FY24-25
(Rs bn) Order book (LHS) Book to bill (RHS) (x)

Order Inflow (Rs bn) 4.8 4.7

3.9 4.0
3.3
2.6 2.6 2.8 2.8
90 2.5
148 154
46 42 89
28 74 73
19 15 18 21 20 43 53
35 35 37

9MFY2
FY21
FY15

FY16

FY17

FY18

FY19

FY20

FY22

FY20

Y23ii
FY15

FY16

FY17

FY18

FY19

FY21

FY22

1HFY

3QF
23
3
Source: Company, IIFL Research Source: Company, IIFL Research *Order book excludes the Rs90bn 25yr mining MDO project

Figure 2: Large wins for FGD retrofit has driven order inflow in 9MFY23
Date Project Order size (Rsmn) Figure 5: Order book is well-diversified across domestic Infra, with PQs built over past
few years
Dec’22 FGD retrofit - Adani Group 6,080
Dec’22 Wagon repair workshop - JV order 3,066 O&M Electrical
Dec-22 O&M order - Dangote refinery, Nigeria 1,195 Material Other civil 7% 0%
handling 9%
Oct-22 Depot & workshop - Bangalore Metro Rail 4,994
2%
Aug-22 15 FGD retrofit- Adani Group 61,632
Jun-22 Multiple small orders 5,220 Railways
Source: Company, IIFL Research 1%
Power ETC +
Roads FGD
Figure 3: ~Rs461bn of FGD projects yet to be awarded
8% 52%
Capacity - GW
Total installed base 209 Water
Base needing FGD retrofit 169 19% Non Power ETC
Contracts awarded till date 91.5 2%
Balance for award 77.5 Source: Company, IIFL Research
Value of balance award Rs461bn
Source: Company, IIFL Research

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 Power Mech Projects – BUY

Figure 6: Partnerships/JVs to aid penetration in Railways, Mineral and Material Expanding O&M opportunities across sectors and geographies
Handling
• Powermech is handling O&M for 68.4GW of thermal capacity across
44 plants in utility, CPP, process and industrial sectors.

• Breakthrough foray for state sector, NTPC, KPCL, SCCL and NMDC
should help expand addressable market for public entities.

• Recent export O&M project win for Dangote oil refinery in Nigeria
marks presence overseas. It is also looking at opportunities in MENA
region.

• Existing water distribution project and FGD projects on completion

would open up additional O&M opportunities domestically, apart
from conscious effort in new sectors of refineries, steel plants,
aluminium plants iron ore, handling plants and other process
Source: Company, IIFL Research industries.

• Company is also expanding scope of work handled to cover

Figure 7: The company is looking at expanding Coal MDO operations to ~15mtpa comprehensive model and KPI-based delivery to enhance wallet
output, for building a steady base of revenue and cashflows share.

Figure 8: Power Mech has demonstrated stable execution rate over past many years
(Rs m) Revenues (LHS) Revenue / Starting OB (%)
40,000 60
35,000
50
30,000
40
25,000
20,000 30
15,000
20
10,000
10
5,000
Source: Company, IIFL Research 0 -
FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23ii
Source: Company, IIFL Research

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 Power Mech Projects – BUY

Figure 9: We estimate a strong 36% revenue Cagr over FY22-25 Figure 11: Execution and timely payments should enable normalisation of WC cycle,
(Rs m) (%) driving cashflows and deleveraging
Revenues (LHS) YoY growth
80,000 80 (Rs m) Net debt (LHS) ND/E (RHS) (x)
5,000 0.6
70,000
60 4,500
60,000 4,000 0.5
50,000 40 3,500 0.4
3,000
40,000 2,500 0.3
30,000 20 2,000
1,500 0.2
20,000
- 1,000
10,000 0.1
500
0 (20) - -

FY23ii

FY24ii

FY25ii
FY14

FY15

FY16

FY17

FY18

FY19

FY20

FY21

FY22

FY23ii

FY24ii
FY18
FY13

FY14

FY15

FY16

FY17

FY19

FY20

FY21

FY22
Source: Company, IIFL Research
Source: Company, IIFL Research

Figure 10: We expect stable ~11.3% Ebitda margin as slightly lower FGD margins are Figure 12: Valuation table
offset by higher margin in other segments Valuation (Rsmn)
(Rs m) Ebitda (LHS) Margins (%) (RHS) (%) FY24 PAT 3,875
10,000 14.0 PER (x) 9.0
12.0 Equity valuation (mn) 34,875
8,000 No of shares 14.7
10.0
6,000 Price target (Rs/share) 2,371
8.0
Source: Company, IIFL Research
4,000 6.0
4.0
2,000
2.0
0 -

Source: Company, IIFL Research

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 Company snapshot Power Mech Projects – BUY

Background: Incorporated in 1999, Power Mech is an integrated Infrastructure Services company providing 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 Power
plants in India. 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 sectors as well.
Recently, Power Mech has won a large Coal Mining MDO project for 25 years.

Management
Name Designation FY22 revenue mix FY22 order book breakup
Sajja Kishore Babu Chairman & MD Electrical, ETC, 9%
4% ETC, 19% O&M, 7%
Murugesan Rajendran COO
Electrical,
S K Kodandaramaiah Director-Business Development 1%
Mining,
51%

O&M, 30% Civil, 32%

Civil, 47%
Customers: BHEL, L&T, GE, JSW Steel, Vedanta, Adani
Key competitor: Indwell, Steag, TechnoElectric, Simplex

P/E EV/Ebitda
Assumptions
Y/e 31 Mar, Consolidated FY21A FY22A FY23ii FY24ii FY25ii 12m fwd PE Avg +/- 1SD 12m fwd EV/EBITDA Avg +/- 1SD
Revenue growth
ETC work (40.4) 16.7 19.0 254.8 31.8 26.0
(x) (x)
Civil work 11.4 87.7 38.0 26.4 11.1 90.0
22.0
O&M services 2.0 21.8 20.5 23.7 8.3 75.0
18.0
Source: Company data, IIFL Research 60.0
14.0
45.0
10.0
30.0
15.0 6.0

0.0 2.0
Aug-15 Feb-17 Aug-18 Jan-20 Jul-21 Jan-23 Aug-15 Feb-17 Aug-18 Jan-20 Jul-21 Jan-23

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 Power Mech Projects – BUY

Financial summary
Income statement summary (Rs m) Balance sheet summary (Rs m)
Y/e 31 Mar, Consolidated FY21A FY22A FY23ii FY24ii FY25ii Y/e 31 Mar, Consolidated FY21A FY22A FY23ii FY24ii FY25ii
Revenues 18,841 27,105 35,312 58,312 68,812 Cash & cash equivalents 668 1,526 1,258 339 982
Ebitda 419 2,860 4,008 6,589 7,776 Inventories 1,147 1,377 2,032 3,195 3,771
Depreciation and amortisation (358) (369) (420) (600) (650) Receivables 5,335 6,666 8,707 14,378 16,967
Ebit 61 2,491 3,588 5,989 7,126 Other current assets 13,143 14,091 17,489 24,886 29,367
Non-operating income 163 173 120 140 150 Creditors 5,126 5,393 8,707 14,378 16,967
Financial expense (793) (795) (860) (780) (730) Other current liabilities 3,306 4,844 6,307 10,415 12,291
PBT (568) 1,870 2,848 5,349 6,546 Net current assets 11,861 13,423 14,472 18,004 21,829
Exceptionals 0 0 0 0 0 Fixed assets 1,774 1,803 1,983 2,083 2,133
Reported PBT (568) 1,870 2,848 5,349 6,546 Intangibles 26 25 25 25 25
Tax expense 113 (462) (826) (1,444) (1,650) Investments 298 367 367 367 367
PAT (455) 1,408 2,022 3,905 4,896 Other long-term assets 0 0 0 0 0
Minorities, Associates etc. (1) (18) 0 (30) (40) Total net assets 13,959 15,618 16,847 20,479 24,354
Attributable PAT (456) 1,390 2,022 3,875 4,856 Borrowings 5,093 5,271 4,250 4,000 3,000
Other long-term liabilities (182) (88) (88) (58) (18)
Ratio analysis Shareholders equity 9,049 10,434 12,684 16,537 21,371
Y/e 31 Mar, Consolidated FY21A FY22A FY23ii FY24ii FY25ii Total liabilities 13,959 15,618 16,847 20,479 24,354
Per share data (Rs)
Pre-exceptional EPS (31.0) 94.5 137.3 263.1 329.7 Cash flow summary (Rs m)
DPS 0.0 1.5 1.5 1.5 1.5 Y/e 31 Mar, Consolidated FY21A FY22A FY23ii FY24ii FY25ii
BVPS 615.1 709.3 861.1 1122.6 1450.8 Ebit 61 2,491 3,588 5,989 7,126
Growth ratios (%) Tax paid 113 (462) (826) (1,444) (1,650)
Revenues (13.0) 43.9 30.3 65.1 18.0 Depreciation and amortization 358 369 420 600 650
Ebitda (84.5) 583.0 40.1 64.4 18.0 Net working capital change 501 (703) (1,317) (4,453) (3,181)
EPS (134.7) (404.9) 45.3 91.6 25.3 Other operating items (47) (22) 0 0 0
Profitability ratios (%) Operating cash flow before interest 986 1,673 1,865 692 2,945
Ebitda margin 2.2 10.6 11.4 11.3 11.3 Financial expense (793) (795) (860) (780) (730)
Ebit margin 0.3 9.2 10.2 10.3 10.4 Non-operating income 163 173 120 140 150
Tax rate 19.9 24.7 29.0 27.0 25.2 Operating cash flow after interest 356 1,051 1,125 52 2,365
Net profit margin (2.4) 5.2 5.7 6.7 7.1 Capital expenditure (151) (352) (600) (700) (700)
Return ratios (%) Long-term investments 31 (68) 0 0 0
ROE (4.9) 14.3 17.5 26.5 25.6 Others (246) 71 251 0 0
ROCE 1.6 18.0 22.8 32.8 32.5 Free cash flow (9) 702 776 (648) 1,665
Solvency ratios (x) Equity raising 0 0 0 0 0
Net debt-equity 0.5 0.4 0.2 0.2 0.1 Borrowings (72) 178 (1,021) (250) (1,000)
Net debt to Ebitda 10.6 1.3 0.7 0.6 0.3 Dividend 0 (22) (22) (22) (22)
Interest coverage 0.1 3.1 4.2 7.7 9.8 Net chg in cash and equivalents (81) 858 (268) (920) 643
Source: Company data, IIFL Research Source: Company data, IIFL Research

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 Power Mech Projects – BUY

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 Power Mech Projects – BUY

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Key to our recommendation structure

BUY - Stock expected to give a return 10%+ more than average return on a debt instrument over a 1-year horizon.

SELL - Stock expected to give a return 10%+ below the average return on a debt instrument over a 1-year horizon.

Add - Stock expected to give a return 0-10% over the average return on a debt instrument over a 1-year horizon.

Reduce - Stock expected to give a return 0-10% below the average return on a debt instrument over a 1-year horizon.

Distribution of Ratings: Out of 258 stocks rated in the IIFL coverage universe, 136 have BUY ratings, 4 have SELL ratings, 89 have ADD ratings, 3 have NR ratings and 26 have REDUCE ratings

Price Target: Unless otherwise stated in the text of this report, target prices in this report are based on either a discounted cash flow valuation or comparison of valuation ratios with companies seen by the analyst as
comparable or a combination of the two methods. The result of this fundamental valuation is adjusted to reflect the analyst’s views on the likely course of investor sentiment. Whichever valuation method is used there
is a significant risk that the target price will not be achieved within the expected timeframe. Risk factors include unforeseen changes in competitive pressures or in the level of demand for the company’s products. Such
demand variations may result from changes in technology, in the overall level of economic activity or, in some cases, in fashion. Valuations may also be affected by changes in taxation, in exchange rates and, in
certain industries, in regulations. Investment in overseas markets and instruments such as ADRs can result in increased risk from factors such as exchange rates, exchange controls, taxation, and political and social
conditions. This discussion of valuation methods and risk factors is not comprehensive – further information is available upon request.

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 Power Mech Projects – BUY

Date Close price Target price Rating

Power Mech Projects: 3 year price and rating history
(Rs) (Rs)
(Rs) Price TP/Reco changed date 19 Sep 2022 1558 2358 BUY
3,000 24 May 2022 1019 1406 BUY
2,500 02 Sep 2021 846 1063 BUY
2,000
1,500
1,000
500
0
Sep-20

Sep-21

Sep-22

Jan-23
May-20

May-21

May-22

Nov-22
Jan-20
Mar-20

Jan-21
Mar-21

Jan-22
Mar-22
Jul-20

Nov-20

Jul-21

Nov-21

Jul-22

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