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Power Mech Projects IPO - To Buy or Skip

About the company and promoter background

Power Mech was originally incorporated on July 22, 1999 as a private limited company by the name Power Mech Projects Private Limited under the Companies Act, 1956. Company was later converted into a public limited company as Power Mech-Projects Limited and a fresh Certificate of Incorporation was issued on October 16, 2007. Sajja Kishore Babu (MD and Chairman) Sajja Kishore Babu holds a bachelor‘s degree in technology from Nagarjuna University, Andhra Pradesh, India. He is the first generation entrepreneur, responsible for the Company‘s growth and business development since its inception. He has several years of experience in the power sector including construction and O&M. He has been instrumental in completing major projects including sub-critical units in scheduled time.

Power Mech Projects, incorporated in 1999, is an integrated power infrastructure services company based at Hyderabad in Telangana. The company provides comprehensive erection, testing and commissioning of boilers, turbines & generators (ETC-BTG), balance of plant (BOP) works, civil works and operation & maintenance (O&M) services. Since then, the company has established long-term relationships with various major EPC companies and power utilities. It has also developed a significant equipment base including material handling equipments. As on June 30, 2015, equipment base included 261 cranes, ranging from 10tonnes to 300tonnes in capacity. Company has strong financials - its total income increased at a CAGR of 29.0% from Rs4,944mn in FY11 to Rs13,719mn in FY15, while PAT increased at a CAGR of 17.3% from Rs376mn in FY11 to Rs714mn in FY15. We recommend a SUBSCRIBE to the issue.

Investment Arguments 

Integrated power infrastructure services: Power Mech, an integrated power infrastructure services company providing ETC-BTG and BOP works, civil works and operation & maintence (O&M) services. As far as ETC business is concerned, Company is well placed, and when the policy environment improves coupled with improving infrastructure spending, we believe the power sector investment will see significant improvements. Being an AMC services provider for power plants in India with highest market share, we expect the business to grow significantly owing to the major increase in the installed base of IPPs (Independent Power Producers) in recent years. Strong order book: Company has a strong order book of Rs34,063mn (as on March 31, 2015), which comprises of erection works, O&M services and civil works businesses of Rs23,029mn, Rs5,904mn and Rs5,130mn, respectively; thus providing revenue visibility. Established track record: Company has established a track record of successfully executing ETC-BTG and BOP contracts for large power projects including 800MW unit super-critical projects. It had also engaged itself on ETC-BTG projects for the first two ultra-mega power projects in India as well as for 16 super-critical power projects in India (as on June 30, 2015). Company developed long term relationships with various clients.

Outlook and Valuation 

At the price band of Rs615-640, Issue is priced at P/E of 12.7x and 13.2x on its FY15 diluted EPS. Based on our back-of-the-envelope calculation, Power Mech is valued at 10.3/10.7x FY17E EPS, which we feel is reasonably valued given its dominant position in the power EPC business. With strong outstanding order book coupled with execution capabilities, Power Mech will continue to deliver high profitability & healthy returns over the next few years. We recommend a SUBSCRIBE to the issue.

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