Power Mech Projects IPO – Should you invest?

Power Mech Projects IPO-Should you invest or notPower Mech Projects IPO – Should you invest?

Power Mech Projects IPO will open for subscription on 7th August, 2015. Power Mech Projects Limited is integrated power Infra Services Company.  Its revenues grown by 2.8 times in last 5 years. It earned over 5% consistent profits in the last 3 years. What are positive factors of Power Mech IPO? What are the hidden factors in Power Mech Projects IPO? Should you invest in this Power Mech Projects Ltd IPO or not?

About Power Mech Projects Limited

Power Mech Projects Limited, an integrated power infrastructure services company in India 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. Its operations include three principal business lines: (i) Erection Works; (ii) Operation & Maintenance Services; and (iii) Civil Works.

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Issue details of Power Mech Projects IPO

  • IPO opens: 7-August-2015
  • IPO closes: 11-August-2015
  • Face Value: Rs 10 per share
  • Price Band price: Rs 615 – Rs 640 per share
  • Minimum Shares: 20 shares and in multiples of 20 shares there-off
  • Minimum amount: Rs 12,300
  • Issue size: Rs 262 Crores
  • Lead Managers: Kotak Mahindra Capital Company Ltd
  • Listing: BSE / NSE
  • Download Power Mech Projects Limited IPO Prospectus from SEBI Website at this link

Purpose of the IPO

The Issue comprises a Fresh Issue and an Offer for Sale.

a) The proceeds of the Offer for Sale

  • The funds from the Offer for Sale (net of Issue related expenses for the Selling Shareholders) shall be received by the Selling Shareholders and  Company shall not receive any proceeds from the Offer for Sale.

b) Objects of the Fresh Issue

The activities for which funds are being raised by Company through the Fresh Issue after deducting the Issue related expenses for the Company are:

1. Repayment / pre-payment/ advance payment, in full or part, of certain borrowings availed by  Company and repayment of buyer’s credit and retirement of foreign letter of credit.

2. Funding working capital requirements of the Company; and

3. General Corporate Purposes

Company Financials (reinstated)

  • Company generated revenue of Rs 494.41 Crores for the year ended Mar-11 and Rs 1,361.52 Crores for the year ended Mar-15.  
  • Company posted a Profit of Rs 37.61 Crores for the year ended Mar-11 and a Profit of Rs 70.70 Crores for the year ended Mar-2015.
  • Its EPS for FY 2015 is Rs 57.48 and last 3 years average EPS of Rs 53.76.

Power Mech Projects IPO-Financials

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Reasons to invest Power Mech IPO

  • Good revenue growth in last 5 years. Its revenues increased by 2.8 times in last 5 years.
  • It earns consistent profits of over 5% in last 3 years.
  • Company’s  aggregate order Book as of March 31, 2015 was Rs. 3,406.27 Crore, comprising Order Book in the Erection Works, O&M Services and Civil Works businesses of Rs. 2302.87 crore, Rs.  590.43 crore and Rs.  512.97 crore respectively. This indicates strong order book and positive future outlook for Power Mech Projects.

Reasons not to invest in an Power Mech Projects IPO

  • In future, company may not be able to qualify for, compete and win projects, which could adversely affect its business and results of operations
  • Its Order Book does not represent its future revenues and actual income may be significantly less than the estimates reflected in its Order Book, which could adversely affect company results of operations.
  • Company is exposed to time and cost overrun risks on its lump-sum price and item rate contracts, resulting in reduced profits or losses.
  • Risks inherent to power sector projects could materially and adversely affect its business, financial condition and results of operations.
  • Its business is working capital intensive. If it experience insufficient cash flows to meet required payments on its debt and working capital requirements, there may be an adverse effect on its operations.
  • Company operations are subject to various operational risks that could expose it to material liabilities, loss in revenues and increase in expenses. They may also be subject to liability claims arising from defects in services provided by company.
  • Its operations are dependent on a large pool of contract labor and an inability to access adequate contract labor at reasonable costs at its project sites across India may adversely affect its business prospects and results of operations.
  • Company is involved in certain legal, regulatory and arbitration proceedings that, if determined against it, may have an adverse effect on its business, financial condition and results of operations.
  • Other risk factors (Internal and external) can be viewed in prospectus Page no. 16 onwards.

What are the future Opportunities in Power Sector?

Investments of Rs 6.6 trillion are projected to be made in the power sector over the next 5 years (2013-14 to 2017-18). The share of central sector is expected to improve to 34 per cent over 2014-18 as compared to 31 per cent over the past 5 years due to strong investments by central sector utilities in power generation and power transmission, respectively. On the other hand, share of state sector is expected to remain stable at 38 per cent. While the 50 generation segment will continue to account for the largest share of investments, it is expected to be lower at 50 per cent over the forecast period as compared to 62 per cent over the last 5 years. This segment is expected to witness an investment of around Rs 3.3 trillion between 2013-14 and 2017-18 of which the thermal power investment is anticipated to constitute a major share, followed by hydro power segment. Investments in the transmission segment are expected to grow robustly led by expansion plans in inter-state transmission lines over the next 5 years.

Such opportunities in power sector would help Power Mech Projects revenues to grow in coming years.

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Recommendation / Investment strategy

  • At a lower price band of Rs 615 and EPS for FY 2014-15 of Rs 57.48, P/E Ratio works out to be 10.17. At a lower price band of Rs 615 and weighted average EPS of Rs 53.76, P/E Ratio works out to be 11.4. Means, the company is asking lower price band of Rs 615 in between 10.17 and 11.4, P/E Ratio.
  • At an upper price band of Rs 640 and EPS for FY 2014-15 of Rs 57.48, P/E Ratio works out to be 11.13. At a upper price band of Rs 640 and weighted average EPS of Rs 53.76, P/E Ratio works out to be 11.6. Means, the company is asking upper price band of Rs 640 in between 11.13 and 11.6, P/E Ratio.
  • Its competitors L&T Ltd share price is trading at a P/E Ratio of 33.5 (Highest) and Sunil Hitech Engineers Ltd at P/E Ratio of 4 (Lowest) and industry average is 21.7. Hence, the upper price of Rs 640 per share is reasonably priced.
  • Power Mech Projects Limited revenues are showing good improvement in last 5 years. It generated consistent profits for 3 years over 5%. I would have been excited if margins are on higher side. Promising opportunities in power sector and strong order book of this company makes this IPO attractive. Investors should invest in Power Mech Projects Ltd IPO from long term perspective where they can reap good benefits.

Disclaimer: I have an interest in investing in this IPO. The idea of giving positive and negative factors to investors in this article is to create awareness and education about this IPO. One should NOT constitute this as investment advice to buy or not to buy. Please consult your investment advisor before you invest in such high risk investment options.

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Power Mech Projects IPO – Should you invest


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