By Geetanjali Kedia
Power Mech Projects is entering the primary market on Friday 7th August 2015, with a public issue of 42.7 lakh equity shares of Rs. 10 each, in the price band of Rs. 615 to Rs. 640 per share. The issue, comprising fresh issue of 21.3 lakh shares and offer for sale of 21.4 lakh shares, represents 29.02% of the post-issue paid up capital of the company. While the issue aims to raise Rs. 263 crore to Rs. 273 crore, at the lower and upper end of the price band respectively, nearly half of it is the offer for sale component. The issue will close on Tuesday 11th August.
Hyderabad based Power Mech Projects is a ‘mechanical contractor’ undertaking erection and commissioning of turbines, generators and boilers, operation and maintenance services, as well as civil works to the power sector, mainly in India, with international operations (Middle East, Africa, South Asia) accounting for less than 10% of revenues. Nearly two-thirds of revenue comes from erection work from clients such as BHEL, NTPC, Adani Power, L&T, GE Power, BGR Energy, Thermax, Siemens and Reliance Infra.
Company’s order book as of 31st March 2015 stands at Rs. 3,406 crore, which includes Rs. 190 crore worth of projects relating to erection work, that have been suspended for over six months. It is quite ‘strange’ and ‘unusual’ to see suspended work being included in the order book, just to inflate the same. While 16% of the total order book is international, balance is domestic. Also, focus of the company is on both, mechanical and civil contract, with sole aim of earning, even if this is not the forte of the company.
Although, company’s FY15 consolidated revenue rose 13% YoY to Rs. 1,372 crore, profit before tax (PBT) remained stagnant YoY at Rs. 107 crore, indicating the fragile and weak nature of business. Moreover, revenue is concentrated among a handful of clients, with top 5 clients accounting for 56% of FY15 revenue, while the largest client alone contributed to 27% of the revenue pie. No doubt, there was pressure on margins!
During FY15, EBITDA margins slipped to 12.6%, from 13.8% in FY14. However, due to deferred tax credit of Rs 3 crore in FY15, net profit showed a marginal rise, exactly of Rs. 3 crore, from Rs. 68 crore in FY14 to Rs. 71 crore in FY5, leading to an EPS of Rs. 57.48, on equity of Rs. 12.58 crore, and consolidated net worth of Rs. 355 crore.
Being a long tenure working capital business, consolidated total debt rose to Rs. 236 crore, as of 31-3-15, up from Rs. 167 crore, as of 31-3-14. Its working capital position also deteriorated in FY15, with outstanding debtors increasing by 31% (at a rate higher than the topline growth of 13%) to Rs. 195 crore, while short term loans and advances rising 35% to Rs. 261 crore, as of 31-3-15. Although company has cash of Rs. 68 crore as of 31-3-15, it is looking to raise further funds solely to meet working capital needs to the tune of Rs. 105 crore, via fresh issue of equity shares, through this IPO. Thus, higher business will come at the cost of higher working capital requirements.
Motilal Oswal PE had invested Rs. 40 crore in the company, in November 2009 and currently holds 19.89% stake at a value of Rs. 160 per share. It is looking to exit a majority stake, and post IPO is likely to hold barely 2.58% in the company. No wonder then that Motilal Oswal is one of the BRLMs to the issue! However, this BRLM gives shivers in the spine and reminds one of the IPO of Resurgere Mines & Minerals, been managed by the same BRLM, with investment from Fund of the same house, which is now ruling at less than Re. 1 (Rs. 3 after giving bonus effect) against issue price of Rs. 270, made some 7 years back. Hope, this does not repeat here, as this IPO looks to have been structured to merely facilitate major exit for this 6 year old investment. Current promoter holding of 75.70% will reduce to 64.75% post IPO.
Coming onto the macros, domestic power sector is undergoing one of its worst phases, and the outlook over next 12 to 24 months, are still hanging in the dark. Sadly, Indian power sector still remains powerless - despite feedstock issue getting resolved, due to poor off-take by dis-coms, due to their pathetic financials, which in turn is leading to a slow capex cycle or logjam, as seen in our Parliament.
Grey market activity is seen to have commenced, as indicated by the market players, mainly by the circles close to management. Reports indicate that grey market premium has almost halved to about Rs 85 per share, from Rs. 175 at the start of the week.
Low margins without any hopes of ramp up in operations, for next 12 months, company may have to compromise on margins, as also, need to extend its working capital cycle, which is usual in case of sectors seen as laggards or struggling to survive, making the business extremely unattractive. We suggest that one can give the issue a miss, to focus on other booming small and mid cap ideas now in the secondary market.
Disclosure: Not applying in the IPO.