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

Ladies and gentlemen, good day, and welcome to the Power Mech Projects Limited Q2 FY '21 Earnings Conference Call hosted by Nirmal Bang Equities Private Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Chirag Muchhala from Nirmal Bang Equities. Thank you, and over to you, sir.

Thank you. Nirmal Bang Equities welcomes you all to the Q2 FY '21 results conference call of Power Mech Projects Limited. The management is represented by Mr. S.K. Ramaiah, Director, Business Development; and Mr. J. Satish, CFO. 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. Thanks, Chirag. This is Satish here. Good afternoon. Good afternoon, all. I'm happy to host the earnings call for quarter 2 and H1 2021. We will take a few minutes to update on recent developments. And thereafter, we can go for your questions. The performance for quarter 2 and H1 is exceptional in nature in the history of Power Mech journey. As you all know, the impact of COVID continued on Power Mech's performance. Various challenges are seen across globe at multiple projects. As manpower [indiscernible] for Power Mech, execution demanded a lot of planning and also safety while executing the projects. In spite of a lot of planning, had challenges in the last few months. However, we can confidently say that worst is getting over for Power Mech and a lot of experience been gained how to work along with COVID. So things are getting implemented. [ So things ] are steadily improving, and we can see developments happening all the fronts. Hoping Q4 will be completely a normal quarter in the journey of Power Mech. The reported total income for quarter 2 FY 2021 is INR 347.55 crores. And the EBITDA is INR 40.49 crores negative. And the PAT is -- the reported PAT is INR 51.80 crores negative. Whereas if you see quarter 2 of last financial year, the total income was INR 535.45 crores. And the reported EBITDA was INR 71.14 crores and the PAT was INR 35.1 crores. And the revenue mix for quarter 2 is as follows. Erection business has contributed INR 87 crores plus. Civil around INR 100.18 crores. Operation and maintenance close to INR 145.85 crores. And the electrical business has added INR 10.59 crores. And other income close to INR 2.6 crores. And the revenue is almost short by INR 187.9 crores as compared to last year. And if you see like the mechanical business, which we have done at INR 87.873 crores, whereas last year, we did close to INR 181.68 crores. And the civil we did last year around INR 146 crores, while O&M contributed almost INR 170 crores and electrical was INR 34 crores. So there has been [ deep ] across all the segments. Similarly for the reported total income for H1 FY 2021 is a INR 624.4 crores, and the reported PAT was at [ 42.50 negative ] and reported -- sorry, the reported EBITDA is INR 52.5 crores negative, and the PAT is INR 84.30 crores negative. Similarly, if you see last year H1, the reported total income was INR 1,028 crores and EBITDA was INR 137 crores, and the PAT was almost like INR 63.5 crores. And in terms of segmental contribution, erection, we did close to INR 147.5 crores, whereas last year, we did close to INR 358 crores. And civil, it was 174, whereas last year it was 281 and O&M INR 260 crores -- INR 266 crores, whereas last year, it was almost like INR 311 crores. And electrical it's hardly INR 31 crores, whereas last year, it was INR 70.7 crores. There is significant fall in reported total income during the quarter and half year ended as compared to last year in spite of having strong order book on hand, the execution cycle got impacted adversely due to COVID impact is seen across all the projects. The revenue shortfall is mainly on account of lockdown as well as COVID-related issues, substantial dip is seen in mechanical, civil and electrical segment. The overall execution cycle as compared to quarter 1, quarter 2. Last year, the cycle has improved from 56% to 65% as compared to quarter 1 to quarter 2. And if you see the O&M business that is more or less was, in fact, except for the shutdown both because the customer did not allow to work because of the COVID restrictions. So O&M business operated at 86% level during quarter 2, whereas in quarter 1, it was almost like 85%, there is improvement. And this is expected to go up by quarter 3 to 96% or 95%, maybe by quarter 4, it is expected to 100% level. Similarly, if we exclude point of business, the other part we could able to operate at 55% to 60% level, whereas in quarter 1, it was close to 45%. So there has been improvement. And quarter 3, we're expecting this should touch to 90%, and quarter 4 may be normal. But if you see the overall execution level, we did close to 65% to 70%. There has been improvement close to 26% as compared to quarter 1 but as quarter 1, we did close to 56% of the last year performance. And this is expected to go to 90% execution level by quarter 3 and maybe quarter 4, it's going to be 100%, which is normal. In terms of performance, yes, there is improvement in O&M, which has grown by 21%. And if we exclude O&M and we see the performance, it has grown almost by 30%, and this is expected to grow by 40% by next quarter. The major projects impacted include like projects like [indiscernible] , which is based in Bangladesh. We have close to INR 840 crores of order book there. We have seen major challenges in terms of managing the manpower lever, which exposes transportation. Similarly, we had similar challenges in Kaleshwaram project in Ramayampet. [indiscernible] Maharashtra and also some of the cross-country pipeline both in Maharashtra and Gujarat. Though the company remodeled at various sites, challenges have seen at all various projects post [indiscernible] like quarantine which stopped on account of COVID, extra safety measures imposed by the customers. Managing the migrant labor, movement of labor. These are the challenges which we have never come across. So these all we could say like nonrecurring in nature, of course. Now we have learned how to work with COVID maybe things may not be more difficult as it used to be not 4 or 5 months. Similar as you've seen like the reported EBITDA and PAT, it got substantially suppresses because of the execution cycle was slow. So the major reasons which attributed this downfall is like to the idle manpower cost. In spite of required execution, we ended up with [ saving ] the manpower because like the manpower based empowerment is quite strong in its [ plants ]. So directed manpower cost attributed a large expense for Power Mech. On top of that Visa expenses like international projects during COVID times lockdown imposes and manpower has to be removed from this site because of so many issues. And those [ types ] manpower, we have taken remobilized that added a lot of cost in terms of [indiscernible] traveling, transportation cost on account of mobilization. And a lot of safety measures are taken at various sites, so that added additional cost, of course, these are going to be nonrecurring. The company has deployed the resources during quarter 2 to the normal levels, including demand for equipment materials [indiscernible]. How about various challenges continued across sites in execution. Power Mech has large employee base working across globe in spite of all best efforts in reduction of the cost, had less flexibility for complete manpower cost. Moreover, [ many of ] our subcontractors costs include manpower costs. [indiscernible] There is substantial reduction in [indiscernible] cost [ with the dep in revenue generation ] in terms of absolute numbers like staff cost, admin expenses, etc. as compared to immediate preceding quarter Q4 FY '19/'20. There is also a small dip in the decrease in cost because not much CapEx has been spent. Finance cost, of course, quarter 2, quarter 1, it continued to be higher quarter 2, it's more or less in line with quarter 2 because a lot of measures have been taken to control the finance cost. Comparatively, as compared to last Q1 last year, Q1 and Q2 is a bit high. But however, things are confirmed now, it is going to be decreasing trend with the decrease of the debt. The company has spent additional cost over 8 ticket traveling mobilization we are going to be nonrecurring and acceptable onetime item cost. Moving to the balance sheet items. The receivables stands at [ INR 430 crores ], whereas it was INR 542 crores as of March 31, 2020. Inventory level continued to be at INR 120 crores, and returns and money continued to be at INR 300 crores, more or less in line with March 31 numbers. [indiscernible] good development is like the peak borrowing of the company went up to INR 590 crores due to delayed receipts from customers. And the peak net borrowing went up to INR 460 crores, however, as of today, the gross debt level [indiscernible] INR 590 crores -- INR 590 to INR 550 crores. And the net debt level has come down from INR 460 crores to INR 380 crores. This is substantial reduction during this difficult environment. And we are hoping this should further come down. Today, we have got close to INR 170 crores of deposits with the bank. So we have kept some sort of contingency liquidity with the company to take care of the growth as well as unforeseen events. So this gives a lot of confidence for our execution because [indiscernible] is very important in this [indiscernible] environment. And one of the positive development is the company has generated positive cash flow from operation during this tough time, and we are expecting this to continue. By year-end, it's going to be positive as far as the operational cash flow is concerned. So this will help us in terms of reduction of debt. And as you all know, the company has not availed any moratorium from any of the banks during this difficult time. Despite many challenges and a tough time. We could able source very good quality orders beyond our target, we added close to INR 2,836 crores of orders. And as you all know, during last year, we did close to INR 1,950 crores, so this is a strong [indiscernible] and strong [indiscernible] for our execution for the next 3 years. And we have another 5 months to go, we're expecting comfortably to add INR 1,500 crores to INR 1,600, crores including the orders, which are at very advanced state. If all things go, we may start disclosing some of the big orders over the next 30 days. Backlog of INR 6,792 crores, the company's comfortably improving the turnout conversion now from INR 170 to INR 220 crores per month under the normal circumstances. Execution was expected to improve gradually to INR 220, INR 230 crores per month. That is what our target. And we are hopeful of doing this. Now I request Mr. Kodandaramaiah sir to add 2 more developments.

Yes. Thanks, Satish, and thanks, Chirag. Thanks to everybody. Good afternoon. In continuation of what Satish has given his pitch on the various aspects of the company's operations up to quarter 1 and quarter 2. On the business development side and the marketing side, as we rightly said, even though we had a blank -- [indiscernible] position in the first quarter, but quarter 2 has been exceptionally good of the INR 2,836 crores of order booking. That has propelled the backlog of the orders the INR 6,791 crores. And the salient feature has been the growth in the ETC segment. The mechanical works by 20%, taking into account the backlog, [indiscernible] conversion quarter 2 also. The O&M around INR 262 crores. Now after the conversion improvement in the second quarter, it stands at the same level or on the same level as for the backlog we had in the end of the last year, March 2020. Electrical, there has been a reduction in the backlog by about 10% to INR 266 crores. Civil, there is a drastic improvement. From INR 1,227 crores to INR 3,070, crores almost 45% increase -- sorry, they are a total bad at this point. The point is that how we are going to go from here afterwards. The challenge for the company is obviously, to put more people on the job and find their necessary resources additional resources and bringing back the manpower. In fact, as Satish has rightly said, the 85% of the resource management has happened the second quarter and will further go up. In fact, today, the non indirect employees the worker, the spend has gone up to 15,000. And maybe it is away by 1,000 to 2,000 away from the peak strength, what we used to have the pre-COVID level. That should give us the confidence, quarter 3 and quarter 4, the projects achieving 90% and 100% of our target should be possible. Now coming to the -- some of the development. In fact, the [ order flow ] continues to be quite good to us. And we have to pick and choose the orders and also the customers. Particularly, we expect [indiscernible] orders into O&M sector, which is very key for us. Recently, 2 major orders have been changed with the [indiscernible] to 660 megawatt INR 100 crores. And then a major diversification to Tata Steel, [ Bhushan Steel ], [indiscernible] [ Bhushan Steel ], a non-power sector for INR 70 crores. Then [indiscernible] distribution substation were over INR 70 crores, we have taken recently. And JSW Steel, we have added INR 163 crores to our total order book of INR 330 crores there, both at Dolvi and [indiscernible] plants. Now the [ process had ] been more of domestic sector than in the international sector. The power to non-power ratio has been now 60% is on the power sector, including O&M, ETC business and non-power is about 40%, and domestic sector, the backlog is INR 5,596 crores, a 82.4% of the total backlog of the order and the international portion is 17.6%, about INR 1,200 crores. Now what do we expect down the line is that? In fact, we should looking at the March and the next 2 quarters and some of the opportunities which will [indiscernible] in non-power sector, in the O&M sector, in the ETC business, perhaps plus INR 2,000 crores of orders should not be an exaggeration. It is in the horizon because many of them are in the final stages of, close to [indiscernible] the L1 position. And that should help us to propel the total order backlog to almost INR 8,000 crores by end of the year. Now the major feature of this improvement in the order backlog should be on the O&M business. In fact, we expect the O&M backlog should almost reach INR 1,700 crores to INR 1,800 crores and the ETC business to increase by about 35% to 40%. And the civil there is going to be substantial increase with the recent orders we have taken in the road sector, about INR 700 crores and also a major project we are looking at drinking water distribution in the UP state. For expecting the normal conversion in the next 2 quarters, quarter 3 and quarter 4, based on the budget projections. Perhaps the backlog of INR 8,000 to INR 8,500 crores is not achievable and that is where the company has to position how to focus more on the conversion and profitability and the utilization of the assets. That has been the -- that should be the major focus. Now coming to some of the major works, what we are executing is that it is now in the pipeline. By the way, we are doing INR 86 crores. About 25% of the work has been completed in Bangladesh. There was disruption. And now it is coming back to normal. Yadadri, Telangana, this has been a major thrust in the first 2 quarters, nearly INR 800 crores are out of our book in the civil, structural and mechanical jobs. They are completed by 12%. Now the market is in full progress. A lot of resources are available and it's more near to Hyderabad that is helping us to focus it and get a better output under resource management in that particular site. [indiscernible] structural work, 40% work has been completed, Bastar new order we have taken from L&T in Bihar state INR 176 crores, we have just commence the mobilization. And then [ Dangote's ] job is going on very well, $76 million for [indiscernible] through the Dangote refineries, almost 65% of the work has been completed. And then JSW, Bellary and Dolvi, together INR 400 crores, we have completed 40% of the work, and then the new orders we are taking. So it comes on the [ piping ]side. And then cross country pipeline, about 50% of the works have been completed. Now taking into these aspects, hoping that normalization referring fast and particularly the manpower deployment will come back to the pre COVID level. We have to perhaps do far more additional manpower by end of fourth quarter to see that the new order backlog conversion takes place and new resources are mobilized for that. And that is a challenge for the company. And perhaps it is the conversions, we should improve the top line and also the bottom line. Thank you very much.

Chirag, now you can have this question and answer session.

[Operator Instructions] The first question is from the line of [ Kota from Keynote Capital ].

You have already mentioned in your comment that you will reach the INR 230 crores execution per month by the end of Q4. So let's say that you achieve, as you said at the end of your comments, at the end of the year, you would be probably looking to add more labor. Let's say you achieve that target as well. What should be your top line target for the next 2 to 3 years annual top line target?

For Q3 it's almost like expected to be in the range of 85% to 90% of last year. And maybe Q4 will be a completely normal quarter for us because now the development of manpower is quite important in the local condition. Now what is important is like if you see our backlog order book to the conversion, it always used to be 40% level. And the backlog, if you take INR 4,000 to INR 4,500, the conversion rate always used to be INR 2,000 crores plus. And we are expecting the backlog's going to be INR 7,000 to INR 7,500 crores plus by year-end. If I take 35% conversion, it's going to be large growth. So I see [ 2020 ] is a very comfortable number per month, which is going to be [ substance ] but it may go up.

Okay. Okay. I think I get a fair level of understanding. Also, sir, to get a little bit of understanding on your debt. From what I understand that most of your debt is working capital debt so as you increase your top line, will there be a need to take additional debt?

Yes. So today, it's like more or less, is all the working capital loans. The idea is like to focus more on the final bills because we are expecting close to INR 180 crores, INR 190 crores of final bill. Last 6 months, if you see the trend, first 3 to 4 months during this year, we added almost INR 80 to INR 85 crores of additional debt because of liquidity pressure due to COVID because there were some [indiscernible] from the customers in consideration with bills and all. But however, the trend has come down in the month of August, September and October. Because of that, debt of INR 590 crores has come down to INR 550 crores. Apart from that, we would able to accelerate some of our receivables and final bills. So today, we have kept close to INR 170 crores of fixed deposits of that close to INR 60, INR 70 crores are free, which we can use for this [indiscernible] . So if you see, technically, the net debt level has come down substantially. So the idea is to bring it down further, use if at all required for the growth from the final bills and the receivables, not from the borrowings, that is just the plan.

Okay. Okay. And sir, even if we consider a peak rate of INR 590 crores, your actual cost of debt is comparatively higher. Can I understand what leads to the higher cost of debt?

Yes. So the -- for our size of business, what is important also the bank nonfund limited. We had limits of close to INR 1,000 crores, and we have been increased to INR 1,400 crores. Of that, the utilization has gone up to INR 700 crores, INR 750 crores because our order book base has gone up. So that cost not only includes the interest cost. It also includes the BG Commission LC charges and also renewal charges. The order book, which is still INR 4,500 touched to close to INR 7,000 crores. So because of that original BG commission charges, [indiscernible] charges and renewal charges and announcement in the limits, that added additional cost.

Okay. Great. And sir, I think in FY '19 annual report, you've mentioned that according to the capabilities, then you would concurrently be handling 55 sites plus 41 O&M projects. Is that capability still the same? Have you increased? How is it?

No, to be honest, if we exclude the O&M time, there was a time that where we used to work parallelly 70, 75 projects. Now that number, we have consciously brought down because we wanted to target now decent-sized projects, not the smaller projects. So though we have the bandwidth to execute at a time 80, 90 projects, excluding the O&M, but the strategy is to have 60 or 65 projects not beyond that or bring it down further because the size of projects which we are thinking of, maybe at decent level size, may not be a smaller size. For example, like Yadadri, it's almost like INR 800 crores. [ Maitri ], it's almost INR 840 crores. Bangladesh, then Nigeria, it's close to INR 500 crores. Okay. The quantum and the ticket size, we are focusing so that the numbers should come down. So we focus more on limited projects. That is the idea.

[Operator Instructions] The next question is from Pratiksha Daftari from Aequitas.

Sir, I wanted to understand how does our execution compare month-on-month basis say from in the last 2 months for Q2? And now how are we seeing the -- how is it improving this quarter? And also, how are collections playing out in -- on a month-on-month basis?

Yes. Madam, if you see quarter 1, if I break into month wise, April and May, the execution cycle is to be around INR 75 crores to INR 85 crores, and June, it went -- it went up to INR 95 crores to INR 100 crores plus. But this traction moved to quarter 2, it went up to on average INR 110 crores per month. So whereas from -- if I see September was -- obviously, it was slightly more as compared to previous months. But now we are seeing this trend is moving to INR 160 crores, INR 165 crores now maybe October, we may end up October, November, we may end up INR 171 crores on INR 175 crores that we wanted to push it up to INR 220 crores. And thereafter, it should go -- again, go up because the order book is so strong that we need to then go beyond INR 250 crores.

Right. And how about collection, sir?

Collections, if you take the average for first quarter, it's close to INR 110 crores to INR 130 crores per month. Second quarter is around INR 155 to INR 165 crores. Third quarter, we are expecting close to INR 170 crores per month, and it should go up. So that front is good. If you see the collection to the execution, the collection is always better, that helped us to bring down the debt level.

Right. And so when it comes to our expenses, you said a lot of expenses. So what I understand is that our execution was not -- had slowed down, but our expenses remained more or less at same levels as compared to last year. So how much of these expenses would be one-offs and are we seeing any nonrecurring expenses because of COVID or because of safety measures in Q3? Like how has that played out between Q2 and Q3?

Yes. See our expense being quarter 1, we have brought down substantial deployment of the resources, assuming that COVID restrictions and so many other restrictions. Q2, we thought we'll have full [ Sing ] execution cycle, assuming that we deployed the complete resources, but it ended up dip in the performance. So one is like the execution at 100% level, the deployment of the resources at 100% level, but execution is slightly lower than 85% 90%. Now if you break into recurring and nonrecurring, we could say that the projects like -- which I was mentioning like, [indiscernible] and some of the international projects, the cost like remobilization plus the Visa expenses, food, traveling, safety and quarantine [indiscernible] put -- when the customer puts a set of team members into quarantine that cost also has to be added to Power Mech, okay? So the onetime cost itself, I'm sure it will not be less than INR 20 crores, INR 25 crores.

And this we don't expect going ahead?