Power Mech Projects Limited (POWERMECH) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Power Mech Projects Limited Q1 FY '21 Earnings Conference Call, hosted by Nirmal Bang Institutional Equities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Chirag Muchhala from Nirmal Bang Institutional Equities. Thank you, and over to you, sir.

Yes. Thanks, Steve. Nirmal Bang Equities welcomes you all to the Q1 FY '21 earnings conference call of Power Mech Projects Limited. The management is represented by Mr. S.K. Ramaiah, Director, Business Development; and Mr. J. Satish, Chief Financial Officer. I now hand over the call to the management for their opening remarks, post which we can take questions from participants. Over to you, sir.

Yes, yes. Thanks, Chirag. Dear all, good afternoon. This is Satish. It is our pleasure hosting call for quarter 1 FY '20-'21. I hope and wish all of you and your family members are safe. The year 2020 is going to be an exceptional one in the history of Power Mech journey because of unprecedented pandemic COVID. The symptom and effect of the coronavirus fell through the last quarter of FY '19, '20 onwards. Power Mech being manpower-oriented company, there was less escape from physical presence of manpower at all places of our sites. In addition, the migration of manpower back to their native places made things more difficult for us. It was a disappointing year for Power Mech with restricted movements of men and material. We were struggling in keeping the project work moving, experimenting all possible ways to keep the momentum of the projects. The recent few months for FY '19-'20 and FY '20-'21, we're regrettably seeing underperformance because of the exceptional environment since most of our projects are manpower oriented, demanding close proximity with each other, which has resulted in a lot of planning while executing the projects. However, things are slowly but steadily improving, and the migrant workers have started reversal to site. Now the productivity is slowly getting back to normal tracks. We have reported total income of INR 276.85 crore during quarter 1 of FY '20-'21 and delivery mix is as follows: mechanical business has contributed close to INR 59.79 crores, which is 21.81% of the total income; civil has contributed close to INR 73.9 crores, which is almost like 27% of our total income; O&M has contributed close to INR 120 crores, which is almost like 44%; and electrical business has contributed INR 20 crores, which is close to 7%. And if you see quarter 1 of last year, FY '20, the mix was electrical business has contributed INR 177 crores, which was 36%; and civil business has contributed INR 135 crores, close to 28%; and O&M was INR 141 crores, which was close to 29%; and electrical business that -- the contribution was INR 37 crores, which was close to 8%. There is significant dip in the turnover of around 44% in reported total income during the quarter as compared to last year. And the revenue dip largely attributable to lockdown at various projects, except for operation and maintenance, projects like railway, irrigation and the project which is at Nigeria, Dangote. More or less operation and maintenance sites are operating except few shutdown works, which were not allowed to carry due to COVID restrictions. Projects like railway, irrigation and Nigeria work was going on for the entire period with limited resources in terms of manpower and material. The percentage of execution level of all sites during the quarter as compared to last year is around 56% only due to lockdown. And if we exclude revenue from operations and railway, irrigation and Nigeria project, the overall execution was hardly 30% as compared to last year. And you can see the revenue traction per month was close to INR 92 crores, including operation and maintenance revenue -- as against normal average revenue generation of INR 165 crores to INR 185 crores per month. Now the execution cycle is improving a lot. Further, if you feel like the reported EBITDA is INR 12 crores negative during the quarter, whereas during the last quarter the reported EBITDA was INR 66.17 crores. Similarly, the reported PAT is INR 32.59 crores negative during the quarter, whereas during the last year, quarter 1, the reported PAT was INR 28.4 crores. The company has put all efforts to minimize the cost across all the sites. In case of build-to-build contractors, there was no cost to Power Mech. We have around 8,700 people working across globe who are in our payroll and the manpower intensity is high in spite of all our best efforts in direction of the cost and flexibility for controlling the complete manpower cost. Moreover, majority of our subcontractor cost include manpower component, which is high, this to some extent attributed additional cost. There is substantial reduction in operational cost with dip in revenue generated in terms of absolute number [ fixed setup ] cost, which was INR 86 crores, if you see the immediate preceding quarter, and that has come down to INR 69 crores. Similarly, admin expenses from INR 7.9 crores to INR 7.2 crores ETC as compared to the immediate preceding quarter Q4 FY '19-'20. There is decrease in depreciation cost due to reduction of CapEx. However, the finance cost continues to be higher comparatively with the increase of borrowings to fill the working capital gap. The reason being delay of some of the receivables and final bills in addition to the additional cost which we incurred because of the COVID. Reported loss of INR 2.69 crores towards share of loss from JV, mainly on account of additional cost towards Saudi project. We had similar problems being experienced because of the COVID. The company has spent almost like INR 5 crores -- which is additional towards air ticket, traveling, remobilization of the site, safety, food, ETC due to COVID. And this cost is a nonrecurring and exceptional onetime item. So this has attributed additional cost of another INR 5 crores during this quarter. So due to lower productivity with fixed setup cost resulted in dip of both EBITDA as well as PAT margins. The lower productivity could not adjust the minimum set of expenses that has resulted in lower EBITDA as well as PAT. Further, moving to the balance sheet items, the receivables stands at INR 450 crores as against INR 542 crores during quarter 4 of FY '20 and the inventory level continues to be at INR 120 crores and RM, retention money and SD continue to be around INR 300 crores. And the peak borrowing of the company went up to INR 590 crores because we have to bridge the gaps between our collections to payment, and there were some delays in the collections because of the COVID and all. So we have to restructure the working capital loan. So the peak loan went up to INR 590 crores. And the peak net borrowing went up to INR 460 crores. As on today, the gross debt level has come down to INR 560 crores as against INR 590 crores, and the net borrowing has come down to INR 430 crores. The same was around INR 385 crores as on 31st March. Now it has come down to -- it has gone up to INR 430 crores. The same is expected to further come down during the year. The company is expecting almost like INR 140 crores of finance bids where we did not spend a single INR 1 like products like Unchahar, Suratgarh, Raichur and AMTZ Andhra for Andhra Pradesh. Took some time, we have been expecting this payment last 4 to 5 months. But, fortunately, the good part is the bills -- the finance bills are cleared and now it has moved to the finance and treasury. So these are expected at any time. So these 4 projects itself will contribute close to INR 130 crores of finance bills, and the spendings are nothing, so fixed amount will help lots in terms of execution of our projects as well as reduction of loan by at least INR 100 crores during the year. And despite many challenges, the interesting part is Power Mech secured orders close to INR 2,836 crores during FY '20-'21 till date. And if you see, [Technical Difficulty] during the last year, for the entire 12 months, the order book addition was INR 1,952 crores. So we have done a commandable job. And we have still 6 months to go. We are expecting another INR 1,500 crores of orders to be added during the next 6 months, especially both from O&M and mechanical and international. So with the current order backlog of INR 7,137 crores, the company can -- comfortably can execute turnover in the range of INR 200 crores to INR 225 crores per month. So the revenue generation traction to improve from INR 130 crores, INR 140 crores per month to INR 200 crores to INR 220 crores. So there is a comfortable order backlog and there is very strong visibility and what is important is the environment to execute the projects. We are seeing the traction of per month turnover improving, which was then INR 90 crores. Now it has moved to almost INR 140 crores, INR 150 crores, and this we are expecting to gradually move up to INR 220 crores per month. I request Mr. Kodandaramaiahji to add few more developments on our business development. Yes. Thank you, sir.

Thanks, Satish, and thanks to Chirag and the team. What Satish has explained in detail about the present position on the sales turnover and the order book position and the other issues involved, obviously, we have to carry forward in the second quarter end and then next 2 quarters. The positive thing should be the backlog has increased substantially. Very important and good projects have come in the pipeline. That is a very positive thing. And in this regard, the [new unit installation ] business, it has picked up because of the new orders we picked up from BHEL in Yadadri, INR 155 crores 2x660 (sic) [ 5x800 ] megawatt and then in Buxar from LMB, that is L&T's subsidiary, 2x660 megawatt. These 2 are about INR 176 crores. Then apart from this, there were a couple of orders in the non-power sector also and that added about INR 556 crores for this current quarter. And the backlog has gone up from INR 2,054 crores at the end of the last year to INR 2,550.5 crores, and that is -- backlog improvement is almost 25% compared to last year. Now in the O&M side also, one of the key features inside of the downtrends in this COVID period is that nearly about 15 O&M contracts, because of the uncertainty of extension and all those things, the customers extended the existing contract by 6 months, 1 year, 1.5 years, 2 years like that, that has given a substantial -- adding up the backlog of the orders in O&M side. And then -- that is about INR 262 crores apart from the maintenance jobs. We have done about 15 O&M job extensions, existing contracts, about 8 repair and maintenance jobs and shutdown jobs. That is how the sum of INR 262 crores has come for the present quarter across all sectors of the business in the O&M side. And the total backlog now stands INR 1,136.4 crores, that is a jump of 15% compared to last year's backlog of INR 995.9 crores. So that is a positive thing. Electrical, lot of efforts are being there. And the latest information is that -- of course, we have not ordered any new addition into the order book in the first quarter, perhaps the second quarter end now we have to see [indiscernible] circle for a substation worth about INR 85 crores. We [ have placed L1 ] this information come as yesterday. Therefore, we should look at the future in the electrical business. Then on the civil side, there have been major developments. What I can look at it is that the opportunities what was offered at Yadadri 5x800 megawatt substantial. That added almost INR 450 crores of civil works in the main plant, balance of plant. And then there was add-on jobs in the Rail Vikas Nigam Limited in the Vijayawada division for certain jobs. For 3 packages, we got it about INR 113 crores. This was a major addition. And there was a new effort on the roads, which we selected in Hassan and in Mizoram. These 2 added about INR 1,100 crores. That is with the arrangement of another agency. We are having arrangement for project execution through them. So this is the development of the civil side. And O&M, I've explained. Therefore, the total backlog of INR 7,136 crores, there is an improvement compared to last year, INR 4,574 crores, with the power sector business coming at 60%, and the non-power is about 40%. And there can be development, as Satish said, further we are looking because the opportunities what we are tracking across various sectors in spite of the present condition is around INR 20,000 crores odd. And INR 1,500 crores addition of orders, perhaps good orders, we'll be selecting it. There are opportunities in JSW for the expansion jobs in Bellary. They revived that expansion plan. We are already doing about INR 325 crores of work in JSW at Dolvi and Bellary. We are expecting another INR 65 crores job shortly there. And we are going to put up a new blast furnace there. And then other axillary systems, and that should throw up opportunities of nearly about INR 1,000 crores. Since we are established there, and we expect the customer, so far payments are not an issue, we'll purchase some more opportunities because we are there. Then, as far as the international business is concerned, there is obviously -- opportunities are coming down in the Middle East because of the present condition of the oil business. And we are making efforts with ongoing projects around nearly INR 750 crores of jobs, we are looking for that. But the outcome has to be seen down the line. In the case of O&M, there is a further development. Bara projects has been taken over by Tata. That project is coming for extension in the case of O&M side, about INR 100 crores. The deal has been firmed up. And then NTPC Solapur for a main plant operation and maintenance, about INR 30 crores job, there also we've done the bidding. That should be in the pipeline. And other jobs in non-power sector -- sorry, in the non-power sector, with Vedanta and all, we are expecting, therefore another INR 150 crores of O&M jobs are in the pipeline. For both the O&M and the present condition and the new initiatives taken in the steel and the electrical side, perhaps, about INR 300 crores of order should be in the pipeline in the next 1 month. Therefore, the focus will ultimately shift to how to convert these orders. As Satish has rightly said, we may not have much of issues further. We will build up good order backlog, but the challenge will be execution. The present challenge is obviously manpower planning. And in the second quarter end, perhaps, we have reached a level of about 60% of manpower planning compared to what was the pre-COVID level. 15,000 was the total manpower strength in various sites. Of course, O&M, it has not affected much. But on the construction side, both installation jobs and then electrical jobs, civil jobs, it has affected. For once, we hope to bring up the levels to 80%, 90%, perhaps the turnover should improve. And then the new projects which we are going to start, Buxar INR 176 crores, that is awarded, that we have to start in a month. Then the Yadadri job, 5x800 megawatt is a single setup where we are going to execute INR 810 crores of civil, structural and mechanical installation jobs. So that should give us a substantial revenue INR 30 crores to INR 40 crores per month. And then the ongoing job with Bangladesh, that is INR 860 crores, with INR 600 crores of civil works and balance is mechanical and balance are plant work, where we have completed about INR 180 crores, that should come on the stream, on a full stream. And then Nigeria, $76 million for the Dangote, that there is no impact of the COVID. The work is going on. And we are obviously looking at the many of the other projects also which were to complete. For example, Bhusawal, we are expecting INR 280 crores of civil and structural. Then Ramayampet Canal worth INR 350 crores, 30% work is completed, balance we have to complete it. Then Gudiwada-Machilipatnam Railway line, almost 95% is completed. The ongoing completion of work in [ Bordhi ] 3x660 megawatt about INR 240 crores, then JSW both at Dolvi and Bellary for 330 crores. And then pipeline jobs about INR 346 crores. These are the main focus will be there to augment the -- to increase the revenue in the coming quarters. And we have to depend a lot on how the -- how fast the manpower augmentation takes place. We don't have any issue on the other resources like E&P and equipment and construction equipment that as company is self-sufficient. This is the construct we have to work as fast as possible, then perhaps things should look up. Thank you very much.

Can we open for Q&A?

Yes, please.

[Operator Instructions] The first question is from the line of Sanjay Dam from Old Bridge Capital.

Sir, so at the end of 15th September, the order backlog that you have, so O&M is okay at 16%, rest of it is like, it's very large cushion out of civil and then erection where, I guess, the ramp-up will be very, very gradual. So when you talked about -- so on the one hand, you give us 2 sense, one was that INR 90 crore of monthly execution would kind of ramp up to INR 140 crore a month and then by the turn of the -- by the end of the fiscal, maybe you will see it going up to INR 230-odd crore of monthly execution. And -- that was one. And on the other hand, you gave us several projects where the execution was on and O&M part obviously is there, but the other projects wise, okay. So if you could -- so when I come back to the vertical wise order backlog, so how do you see the mix for FY '21, sir, by the end of the year, out of this order backlog when you execute? So what is the mix that you...

I think -- yes, thanks, Sanjay. I think with the O&M as part of the power business and the new orders we have secured in the power sector, both in civil and mechanical from BHEL and Yadadri and the ongoing jobs in the power sector in Bhusawal and other places, perhaps there will be some improvement in the power sector ratio of the business compared to non-power. Of course, it depends on how much the ramp-up can be done in the civil side -- civil non-power side. Finally, the railway is about INR 130 crores of new jobs we have taken and the road project. That may perhaps come in the later of the third quarter. Therefore, I see an upsurge in the revenue turnover in the case of power sector because of the projects what I mentioned. And the issue will be, obviously, to ramp up the manpower because all these projects are established. What I said was Yadadri, the total order booking is about plus INR 800 crores, the Bangladesh INR 860 crores and then the Bhusawal INR 280 crores and the new job we have to start at Buxar INR 176 crores. And then rest I told you. Therefore, there will be more focus on the power sector jobs, then that should improve the position subject to manpower, how fast we can augment it.

On top of that Sanjayji, this -- the O&M pipe, we are expecting to go up by at least by INR 400 crores, INR 500 crores backlog by year-end. And international, we could not do much because of delays due to COVID and all. That is going to be, again, both O&M and international. That, we are expecting to add another INR 700 crores. So the year-end closing order book, the pie will be like 18% to 19% O&M; and close to 38% to 40% will be civil; mechanical maybe 36%, 38%; and electrical maybe 5% to 6%. That's how the mix we are expecting.

Yes. And you always were at around 8,500 workforce at the site. Did I get that right?

No, 15,000. See, 9,000 and all...

We have on roll is 8,700 people now. And off roll, we have like maybe another 7,500, 8,000.

So currently, you are at what extent of your normalized levels?

60%.

60% by number of employees, is it?

No. One is the direct -- indirect labor and one is the direct labor. I'm talking about the -- direct labor, there is no issue. Indirect -- sorry, indirect labor is not an issue. Direct labor, all sites, what we are manning that site, O&M, there's not much of impact, we are managing it. But on the construction side of both the civil, mechanical jobs and electrical jobs, the present manpower is what he says about 8,500. That we have to ramp up to 15,000 and maybe another 1,000 or odd for the new jobs. That is what is the requirement now.

So the on roll may go up to another 1,500, not more -- 1,000 to 1,200, not more than that?

Correct.

Okay. So the others have to go up actually?

The people who have gone back -- those who have gone to the native places, they have to come back. That is the main thing.

Sure. And the working capital days, how do you see it by the end of the year? How do you -- in terms of number of days of net working capital, how do you see that?

Sir, maybe by year-end, more or less, it will remain in line with 30% of 2020 plan because slightly, we have seen a little bit of [ realization ] delay from most of the customers because of COVID and all. Now last 1.5 months, the things are improving. So the net current days may come down to close to 160 or 165 days from 180 days. And if the final bills what we have targeted for INR 150, INR 160 crores, if that comes, maybe it may come down to 130 or 125 days.

Okay. Okay. And in terms of the collection so far, I mean, it's now about mid-September has gone by. So if I look at the collections that you've done as a proportion of what was outstanding, so how would it compare versus last year?

Sir, if you see like the average collection used to be at close to INR 175 crores to INR 180 crores. But if you see quarter 4, that normally is the peak, that has gone up to INR 200 crores to INR 220 crores. Okay. But if you take the enter year for -- normalized entire year, last year, it was close to INR 165 crores to INR 170 crores. And that has come down to INR 120 crores to INR 130 crores. Now it's picking up to INR 160 crores, INR 165 crores. And this should go up to INR 220 crores by the next 1 or 2 months. A few months, we have experienced even INR 90 crores to INR 100 crores. That has gone to INR 130 crores, INR 135 crores. Now slowly we're seeing it's improving to INR 150 crores, INR 165 crores. So it should go up to INR 200 crores -- INR 200 crores, INR 220 crores, which will be more than last year.

The next question is from the line of Dhruv from HDFC Asset Management.

[Audio Gap] does it exclude the O&M or that is included?

The correction, sir?

The 8,500 number that you mentioned, the employee count...

That includes O&M.

That includes O&M?

That includes O&M, sir. 8,700 people including O&M.

Okay. And sir, if you have to exclude O&M because I believe O&M is quite steady, and that will continue for you. If you have to exclude O&M, just to understand where the level is currently, can you share that number? Is it possible?

Sir, close to 3,800 people are working in O&M, sir.

Okay. Okay. 3,800 in O&M. So that number remains broadly similar to last year. So the remaining I can calculate based on...

Perfect. Yes.

Sir, you have won decent orders in the period. Given the situation, it's quite commendable. Sir, anything you can share on how should we think of the margin profile and the working capital profile in these wins? Can it be similar or better versus what we are generally doing? Or anything else we should think of?

Yes. Sir, in terms of -- see, we are not quoting any projects which are below 14%, 14.5%, okay? O&M or international, that is going to be slightly higher. Except these 2 orders which we have quoted in the road project because we have been trying to get some entry last 2 years because we wanted to keep a small presence in this sector and that too in EPC not as a HAM. Now these 2 projects, we have done complete ring-fencing with one of our identified associate. We'll be executing the project and we'll be overseeing. So there is no investment in terms of working capital or assets from Power Mech as such. So it will be completely back-to-back model. And all is -- we have done arrangement where we need to work with a single-digit number for these 2 projects. Except these 2 projects, rest all are like more or less 12% to 13% plus in civil. And with like mechanical, it's 14%, 14.5%. Below that, we are not at all quoting. International 15%, 16%. Below that, we're not quoting, sir.

Okay. Okay. Sir, the back-to-back model orders that you mentioned, how much is that total worth -- total orders worth?

These 2 projects itself close to INR 1,000 crores, and...

Sir, here it is, we are basically -- sorry, go ahead.

Yes. We will not be even deploying the assets or any working capital to these 2 projects. It will be complete back-to-back ring-fenced projects. Being a starting -- because this -- they are the first 2 projects where we are going to be, though, we have done multiple road works in multiple power projects that may add to 1,000 kilometers, but as a stand-alone contract, this being the first project, we went through a JV partner. So there, we have to take a small hit which may be a single-digit number in terms of EBITDA margin.

Okay. Okay. All right, sir. And sir, you will not be investing working capital. It is just the employee -- employee force that you will be deploying. That would be the -- our activity, right?

Sir, we have identified the road profile where we'll deploy some of the senior people. We'll be representing the customer as well as overseeing the project. But the cost will be charged to them because that is the arrangement. What will happen is, like the EBITDA what we get, that is going to be like PBT for me.

Got it. Got it. Perfect. And sir, you mentioned the borrowings have increased to about INR 560 crores, if I'm not wrong. The closing borrowings are INR 560 crores, right?

Yes.

And the INR 100 crores release that you're expecting from AP. If that happens, then your gross borrowing should reduce to about INR 400-odd crores by the end of the year?

Sir, the peak borrowing went up to INR 597 crores and that has come down to close to now INR 540 crores, INR 550 crores. And if you -- we have close to INR 140 crores of deposits. So net if you see it's INR 400 crores plus. Now what we are working is -- because see, projects like Bangladesh or like the recent Yadadri of INR 800 crores or like the Bhusawal and the Buxar and all, it's more like our regular network activity, we are not envisaging any sort of investment in terms of CapEx or [TNP]. So it's going to be a self-sustained project. We don't need as much of working capital. So what we need maybe INR 20 crores, INR 25 crores towards ramping up all the projects. Now we have done almost INR 10 crores, INR 15 crores. We may need another INR 10 crores to come to the normal level. So this is not a big amount. Now, the biggest picture is the Unchahar like NBPL, where like the joint venture of BHEL and Suratgarh, it's again BHEL, Raichur and AMTZ Andhra Pradesh, all 4 put together is going to be INR 120 crores to INR 130 crores. And the development if you see this is [ not where to ] last quarter is, the bills have moved to the finance because it takes long time. By the time it's clear from the site level, then the technical, then the audit, then it goes to the finance. And especially in case of Andhra, the environment is completely different. The bills are not moving to finance because of so many constraints. So the good part is, now they're certified, they have cleared and they're put in the treasury. That they have done the allocation part, it's now the government to decide the release [Audio Gap]. If all things happen, this may add INR 130 crores or INR 150 crores of surplus cash to the system.

Okay. Got it. Got it. Sir, probably last 2 questions. Sir, the Yadadri project seems a big portion for you. We are looking at -- in electricity, we are looking at volume decline and the state DISCOM health is also a bit of worry. Do you think -- are you seeing -- probably hearing anything that they are probably going slow on the project, should that be a worry for us?

No, they are quite aggressive there because BHEL has fully ramped up. In fact, the mechanical structural part, 50,000 tonnes upper we are going to do, they've placed orders for the entire thing. Boilers, they have placed orders for 2 boilers. And then civil, they have placed orders for about INR 430 crores. As far as the Telangana government is concerned, they are committed to this project as on today. I don't think there is any issue on that because after all this project takes another 2, 2.5 years to start giving the first unit commissioning. By that time, things should improve. That is how the calculation is, that we don't anticipate any sort of hindrances in implementing this project. It's an important project for us.