Q1FY24 Review: Power Mech Projects: Healthy Q1; strong growth outlook

11 Aug 2023 , 03:02 PM

In Q1, Powermech reported healthy 29% PAT growth, supported by 16% revenue growth, improving margin at 11.5% and flat finance charges. With mgmt being confident of 37-40% execution on the starting OB, FY24 should see ~40% revenue growth. Contribution from 2 Coal MDO contracts would mean growth should hold steady at 35%+ levels till FY26. Debt will inch up to fund the capex for both MDO projects, but leverage at 0.26x in FY26 will still be comfortable. Analysts of IIFL Capital Services cut FY24 EPS by 10%, as they fine-tune revenue base. Retain BUY. 

In-line Q1; confident on 36-40% execution rate for FY24: 

Powermech delivered revenue growth of 16% in Q1, with continued improvement in Ebitda margin to 11.5% (highest since FY20-end), with on-track execution and absence of payments to JV partners for PQs. The company started FY24 with an order book of Rs137bn, including ~50% contribution for FGD projects from Adani. Management guided to an execution rate of 37-40% for FY24 i.e., revenue of Rs50-55bn. Execution for FGD projects should ramp up in H2 with engineering phase in process currently. Beyond FY24, visibility remains strong with OI target of Rs100bn for FY24. 

Coal MDO contracts to boost growth from FY25/26: 

Powermech has 2 large coal MDO contracts – Rs93bn 25yr order from CCL and the recently won Rs300bn 28yr contract from SAIL. Management expects both these contracts to start contributing revenue from Q4FY24, with revenue likely to jump from Rs1bn in FY24 to ~Rs12bn in FY26. Including escalations, the peak revenue should be Rs17-18bn annually. Margins should be better than the 17-18% margins seen for the O&M business. Including revenue run rate of ~12bn from the O&M business, this would translate to Rs30bn of stable annual revenue. 

Step-up in capex seen; leverage to remain under control: 

While capex for the core EPC business remains low at Rs500mn, FY24-26 would see Rs12bn capex at the 2 74%-owned SPVs. Financing will be tied up at the SPV level. This will drive up consolidated debt from the current Rs5bn to over Rs9bn by FY26. ND/E would inch up as well, but should remain comfortable at 0.26x.