Hyderabad-based Power Mech Projects’ IPO has opened today for subscription which will allow retail investors to bid for 14.94 lakh shares. Investors can bid in the IPO, which is priced in the range of INR615-640 per share, till 11 August. 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 IPO will reduce its shareholding to just 3.75 lakh shares.
Analysts at various brokerage houses have sounded positive reviews, although most have highlighted that this is a long term story. Here are some of the views:
Analysts at ICICIDirect.com recommend subscribing to the IPO for listing gains. “The company has priced its issue at a reasonable valuation of 13.2x P/E on FY15 post issue diluted EPS of INR48.6. The debt gearing at PMPL is relatively lower with FY15 debt: equity at 0.7x and average cash flow from operations at ~ INR22.7 crore over FY12-15,” wrote the brokerage house in a research note adding that stretched working capital cycle and high client concentration are some of the concerns.
“Power Mech is available at discount to its listed power-focused engineering, procurement and construction (EPC) peers on adjusted price to earnings ratio basis at the upper band of the issue price,” said analyst at Angel Broking in a note recommending investors to “subscribe” with a 12-month investment horizon. The brokerage house mentioned the company’s strong earnings visibility, better return ratios and lower valuation were the factors behind the positive rating.
Analysts at Reliance Institutional Equity research also have a positive view on the IPO. “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 and healthy returns over the next few years. We recommend a SUBSCRIBE to the issue.” The brokerage house believes Power Mech Projects is favorably placed to gain annual maintenance contracts following a rise in installed base of IPPs (Independent Power Producers) in recent years.
Some of the issues plaguing the power sector are structural in nature. The business is capital intensive and this has been one of the factors behind the shrinking margins of Power Mech Projects. IPO Central shares the concerns regarding the company’s high reliance on few clients for revenues and long working capital cycle. We believe the company has done a good job of keeping the IPO’s pricing in line with the fundamentals; however, there may be better opportunities for investors going forward.