IPO Central Analysis: Power Mech Projects’ INR273.2 crore IPO

Power Mech Projects has finalized pricing for its initial public offering (IPO) which will remain open for subscription between the dates 7 – 11 August. The latest IPO in the Indian market will allow retail investors to bid for 14.94 lakh shares. Hyderabad-based Power Mech Projects is an integrated power infrastructure services firm offering 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. It operates in three principal business lines namely, Erection Works, Operation & Maintenance (O&M) Services, and Civil Works. Here are the crucial details about the public issue:

IPO Central undertook the elaborate task of analyzing and reviewing nearly 600 pages of its red herring prospectus (didn’t we say we just love you making money) to find out if the IPO is any good. Here is what we dug out:

Selling shareholders

Out of the total 42.69 lakh shares, 21.41 lakh shares will be sold through an offer for sale (OFS) by existing shareholders including India Business Excellence Fund, P Srinivasa Rao, and D Aakashnag. Among these shareholders, India Business Excellence Fund plans to sell 21.28 lakh shares. Part of Motilal Oswal private equity, India Business Excellence Fund holds a total of 25.02 lakh shares in the company (slightly below 20%) and the OFS will reduce its shareholding to just 3.75 lakh shares.

Financial performance

Quite a robust performance from Power Mech in the top-line department as its revenue grew consistently in the last five years (big thumbs up from us). Growth in profit after tax has also been solid and except the dip in FY 2012/13, it has been going up (thumbs up). We made use of our superior excel skills to scratch bit more and figured out that margins are shrinking pretty consistently (thumbs down). In fact, the net margin in FY 2014/15 was lowest in the last five years and it was full 240 basis points less than the comparable figure in FY 2010/11.

Source: Power Mech Project’s Red Herring Prospectus

Move over to balance sheet and the picture is not so rosy here too. Long term borrowings have followed a declining trend and stood at a mere INR24.5 crore in FY 2014/15. However (we just love the twist), it may be just a mirage as short term borrowings have swollen from INR9.3 crore to a humungous INR197.9 crore in the time frame. There is no double thumbs down at IPO Central but 2.1% of annual sales in interest costs is simply on the higher side.

Use of IPO funds

The good news is that the company plans to use almost all the proceeds for working capital. This is another way of saying debt repayment (flavor of the season) as most of its borrowings are short term in nature. In the prospectus, the company said it plans to use INR105 crore for funding working capital requirements while the remaining amount will be used for general corporate purposes. As we said, this is a big chunk of the total proceeds of INR130.87 crore at the lower end of the price band. It is important to highlight that the company has scaled down its expectations from the draft red herring prospectus (DRHP) filed with the Securities and Exchange Board of India (SEBI) in October 2014. Power Mech Project was earlier planning to use INR120 crore towards working capital while INR24.5 crore were earmarked as repayment of long term borrowings. This is hardly surprising as companies routinely make such small tweaks in their IPOs.

Read Also: Power Mech prices INR262.5 crore IPO, issue opens on 7 August

Client concentration

Power Mech Projects has an impressive list of clients which includes Thermax Engineering, NTPC, Bharat Heavy Electricals Limited (BHEL), Doosan Power Systems, Adani Power, and among others. Revenue from its top five clients as a percentage of total was 60.1%, 64.7% and 56.5% in FY 2013, 2014 and 2015 respectively. Revenue dependence on the biggest client is quite high as the company received 29.98%, 34.15% and 26.84%, respectively, of its total revenue from operations in these years.

Valuation

At the lower end of the price band, Power Mech Project’s shares are valued at a price earnings ratio of 10.7 while the upper end stretches valuations to 11.1 times. This is significantly less than most of its industry peers which includes BGR Energy Systems, Techno Electric and Engineering, and Larsen & Toubro. However (once again), most of these competitors have better margins.

Should you invest?  

Considering that most of the companies which tapped the primary market this year have kept steep pricing, Power Mech Project’s IPO comes across as moderate. However, power sector is a cash guzzler and can break the back of even well-managed enterprises. Now, we are not trying to take anything from Power Mech Project. In fact there must be a reason that Motilal Oswal invested in the company but we do not like the idea of a prominent investor almost completely exiting the position while margins are declining (desperation may be the right word). We believe investors can do better with their hard earned money as lot more interesting IPOs will be available in coming months.

Since we love finding trivia, here is one – Power Mech Project paid INR5.6 crore to founder, chairman and managing director S. Kishore Babu in FY 2014/15.