Recommendation from Construction engineering company

This column gives you scrip chosen by the research team during the fortnight that is fundamentally strong and expected to give good capital appreciation over a time period of 1 year.

POWER MECH PROJECTS: IN A POSITION OF POWER

HERE IS WHY

✓Strong order book
✓Diversification into now-power segments
✓Long-term revenue visibility

Power Mech Projects Limited is one of the leading infrastructure-construction companies based in Hyderabad, with a global presence. Established in 1999, it undertakes ultra-mega power projects, super-critical thermal power projects, sub-critical power projects, hydroelectric projects, operation and maintenance of running plants and entire civil works for power plants. It operates in eight different verticals: industrial construction, infrastructure construction, industrial services, overseas business (operation and maintenance), electrical transmission and distribution, water and hydro power, manufacturing and heavy fabrication and mining.

Power Mech Projects has recently bagged a record number of five flue gas desulphurisation (FGD) projects from Adani Group, aggregating to ₹6,163 crore for 15 FGD retrofits in coal-based units. The Central Electricity Authority (CEA) has identified 169,000 megawatt (MW) of existing coal-based plants with 448 out of 209 units along with 100 MW of installed base with 593 units needing FGD retrofitting. 

It has been awarded a mine development and operation project from Central Coalfields Limited (CCL), a subsidiary of Coal India Limited, aggregating to ₹9,294 crore over the contract period. Out of the total order book of Power Mech Projects of ₹25,000 crore, about 35 per cent order book is filled with mining-related projects. The company’s strategic foray into railways, water projects, roads, coal mining, cross-country pipelines, material handling and manufacturing is leading to a widening focus from power to nonpower sectors

The current order book is composed primarily of 39.4 per cent power segment and 60.8 per cent non-power segment. The sales of the company have been growing at a CAGR of 15.16 per cent while the net profit for the same period grew by 16.45 per cent for the five years ending FY22. The company delivered strong results in Q2FY23 with an increase of 43.02 per cent in revenue on YoY basis which stood at ₹771.37 crore. However, on QoQ basis, it grew only by 3.32 per cent. The operating profit of the company stood at ₹86.27 crore which increased 54.47 per cent on YoY basis and 6.17 per cent on QoQ basis.

The stock of the company is currently trading at a TTM PE of 19.23 times and the price-to-book value is 2.89. The company’s return of equity and return on capital employed are at 15.28 per cent and 18.41 per cent, respectively. It has reserves of ₹1,136 crore with a strong balance-sheet. The order book position as of September 30, 2022 was ₹24,076 crore as compared to ₹8,001 crore as of September 30, 2021, with an order book to gross billing ratio of 7.8x at the trailing 12 months’ revenue, providing the company with medium to long-term revenue visibility. 

With the addition of large orders in the FGD and water segments, the order book has nearly doubled in the last one year. We anticipate an improvement in the company’s margin as a result of a robust order pipeline, strong execution across most verticals and efforts to improve the electrical business segment. The promoters of the company have been increasing their stake in the business and this is a positive sign. Will all the right growth ingredients in place and given the fact that the government’s focus on strengthening the power sector is strong, we recommend BUY.