Buy Power Mech Projects; target of Rs 599: Centrum

Power Mech Projects Ltd (PMPL) reported weak numbers for Q2FY17 owing to delays in project mobilization. Revenue was up 0.9% YoY to ₹320 crore, while net profit declined by 10% to Rs 16 crore. EBITDA margins contracted by 63bps to 12.9%. Lower contract execution expense (down 1,312bps to 56.6%) was off-set by higher employee (up 845bps to 16.8%) and raw material (up 543bps to 11.9%) cost. PMPL continues to enjoy a healthy order book of Rs 3,503 crore (2.5x FY16 revenue). The management in its post result conference call has guided for order inflows worth Rs 2,600 crore and revenue growth of 4% for FY17. Based on the order inflow guidance for FY17, the management expects revenue growth of 20% in FY18.

Post our Q1FY17 result update (on Sept. 16, 2016), the stock is down 3%. Business mix change and increasing focus on O&M segment, will help ease working capital pressure and generate better free cash flows. We believe the benefits of the same would be back ended and reflect in the company’s performance from FY18 onwards. Given the decent set of financials, expected improvement in working capital along with attractive valuation of 6.2x P/E and 3.1x EV/EBITDA (FY18E), we maintain our Long Term Buy rating, with a target price of Rs 599, valuing it at 8x FY18E EPS.