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

Thank you, Ritija. Nirmal Bang Equities welcome you all to the 1Q FY '22 Results Conference Call of Power Mech Projects Limited. Management is represented by Mr. S.K. Ramaiah, Director of 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 the participants. Over to you, sir.

Yes. Thanks, Mayank. Good evening, all friends, and thank you all for joining the earnings conference call for the quarter end at 30 June Financial Year '21-'22. And along with me, I have Mr. S.K. Ramaiah, Director of Business Development; and also Jigar from SGA, our Investor Relations Advisors. We hope you and your family members are safe, healthy and continue to take all the precautionary measures necessary to keep COVID-19 at bay. The quarter began with a lot of promise and offered that hope of continuing the momentum gathered in the last quarter of FY '21. You would have all noticed the execution level during quarter 4 of last year was all-time high in the journey of Power Mech. The execution level in a year is cyclical for our industry, quarter 3 and quarter 4 normally add more turnover as compared to quarter 1 and quarter 2 in a year. For the year, quarter 1, again, we demonstrated all-time high execution level for the first quarter in the journey of Power Mech history. This gives us a lot of confidence in our operations for the rest of the year. During second wave of COVID, there were no shutdown in sites or major disruptions like the first wave last year. It still made the company adopt a cautious approach to operations. We continued to follow all necessary guidelines to safeguard our employees at all our sites as well as ensuring that construction and maintenance of operations are running smoothly. With the thrust on infrastructure development throughout the country, the number of opportunities, especially for established and recognized player like Power Mech are significant. Given the multi-domain efforts adopted by the company over the past few years, each of these segments offer tremendous growth opportunities in alignment with our long-term objectives and targets. More importantly, the company is no longer restricted by geographical limitations and with a proven track record, has made a pan-India presence, and the coming few years will see deepen its existing and widen its potential international presence, too. To update with you this quarter's development before we open up the floor for your question-and-answer session. The reported total income for quarter 1 FY '22 is INR 628 crores and EBITDA is INR 71 crores, and the reported PAT is INR 31 crores. Whereas quarter 1 of last financial year, the total income was INR 226 crores. The reported EBITDA was negative by INR 12 crores and PAT was negative by INR 33 crores. And the revenue mix for quarter 1 FY '21-'22 is as follows: Mechanical business has contributed INR 137 crores, Civil around INR 285 crores, Operation & Maintenance close to INR 173 crores, and the Electrical business added INR 28 crores and Other income close to INR 6 crores. In the same quarter during the previous year, the Mechanical business contributed INR 60 crores; Civil, it was around INR 74 crores; O&M INR 120 crores; and Electrical business, it was INR 20 crores. The execution cycle is on a continuous uptrend over the last 2 quarters of the previous year. This quarter, the momentum briefly maintained at a healthy level. While it cannot be compared to the same quarter last year, sequentially, over the quarter, the execution was 100% during quarter 1 of FY '21-'22. Now you would have all seen Power Mech has developed a bandwidth in terms of infrastructure and capability to execute large projects in the range of INR 600 crores to INR 800 crores per quarter and the credentials to take on projects without partnering with larger players in most of their views. This would not just cement the company's position as a credible player, but also add to the margins going forward. Coming to the finance cost, there has been on the downward trend because a lot of measures taken by the management in terms of maintaining debt level and would have not seen the present net debt level stands at INR 330 crores as of now. Similarly, receivable cycle has continued to be around 65 days to 75 days, excluding BHEL and AMTZ project. And the change in receivable cycle is due to change in the business mix and the customer base. Further, the monthly collection cycle has continued to be healthy in the range of INR 200 crores to INR 230 crores per month. This we have noticed last 4, 5 months, and this trend is improving month-on-month. We ended the previous year on a high order inflow and the order book position and the momentum will continue during the year, too. We have been able to close some very good quality orders and are working on other long-term orders across all our business verticals. Overall, the company added close to INR 9,637 crores of orders during this quarter. Considering these orders, the order backlog today stands at INR 16,348 crores including MDO project and the present order backlog stands at INR 7,054 crores if we exclude the MDO project. This gives a healthy order book for the execution cycle that was one of the reasons quarter 4 of last year and quarter 1 of this year has been healthy. And the momentum cycle will continue to be healthy, the way we used to guide in quarter 4. And we're confident that the target we have set for the management will continue to stand. Now I request Mr. Kodandaramaiah sir to add a few more developments in the business building. Thank you.

Yes. Thanks, everybody. Welcome to the quarter 1 call of 2021-'22. Yes, continuing with the update of, Satish, yes, certain developments, I would like to state that. I think last year had been exceptionally good year in terms of adding to the backlogs at the end of the year, INR 7,333 crores. And we had seen a major addition of maybe INR 4,638 crores. Now how to continue the journey in the present form and also that will help us to augment our conversion capabilities also, that is being demonstrated in the first quarter in spite of the COVID second wave conditions. One positive thing is that, as Satish said, there were no shutdowns in our sites, and we are continuing to ramp up the capacity for the manpower. However, the pre-COVID of 8,000 working strength has now almost doubled up now. That should give us the confidence that the conversion will be on track in the current year with a backlog of orders what we have won. The key development in the current quarter has been the Singareni Collieries bagging of the O&M contract 5 years. This is a very important contract for Power Mech in terms of technology, in terms of application and customer requirements. It is a comprehensive O&M, where we did both the control room operation and the offsite operation, outside the control room operation. That has given us a quantum jump into the world of capability in future also to scale up the operations to take control of the control room operations also. That is a major add-on. Of course, taking that into account and also the conversions that happened in the first quarter, the present backlog stands around INR 7,054 crores. And the mechanical jobs is INR 2,232 crores; civil, it is INR 3,300 crores; O&M INR 1,339 crores; and the Electrical INR 184 crores. That is what the breakup of the backlog. Now in terms of the Domestic and International business, the major portion is in domestic. So from the orders what we accumulated in the last year, almost 87%, 88% is in the domestic side backlog, INR 6,189 crores, and the international is INR [indiscernible] crores, 12.3%. Now in the case of Power to Non-Power, the Power sector business is around INR 4,822 crores backlog. And the Non-Power sector is INR 1,232 crores. Therefore, that is how it is as on today. Then, of course, at the current time, we are looking at a lot of new opportunities based on the new investment that's coming in various segments, in the Energy sector and in the Infrastructure sector and then the Metals and Minerals sectors. All these things around INR 10,000 crores of opportunities we are presently tracking and submitted the offers in different segments, in Metals, Minerals, Roads, O&M and various other projects, including the Railways. Therefore, at least the progress and the achievement should be on par with the last year with some of the key opportunities what we are tracking now is the NMDC, 2 major opportunities are there. One is for the mineral processing. This the first time we are attempting EPC technology tender. It is joint venture, partner with FLSmidth, Chennai. And then another tender for the crushing and mineral handling process for NMDC at Kirandul and that is also we are partnering with another world leader, Thyssenkrupp also. These are the 2 major tenders. Apart from that, we are also working on one more mineral processing plant for Hindustan Zinc Limited. This is in partnering with FLSmidth. And presently, in Khurja, we have taken a lead by giving support to Thyssenkrupp for the NTPC 2x660 megawatt. They are technically placed on L1 and they're expecting an order shortly, Thyssenkrupp, since we have given a support for the coal handling plant, that is around INR 350 crores to INR 360 crores. We hope to get that order in the second quarter. Now these are the major opportunities. Then, in terms of current year, we continue to keep -- we are bullish on keeping our target of INR 4,500 crores and in the various segments, in Installation, Civil O&M and Electrical, we hope we will meet those targets with the opportunities available. That is what I would like to say. Thank you.

[Operator Instructions] The first question is from the line of Pratiksha Daftari from Aequitas Investment.

My first question was that this time, the order inflow was particularly low. I think apart from the mining order, we just had inflow O&M section. So if you could highlight if there are any issues with tender finalization or any other...

Yes, not exactly, madam. See that 1 tender, which we are lowest along with Thyssenkrupp, they are the lowest. But once we get their order -- their order is expected perhaps in June, there was some delay in that. Now maybe in the first week of September, it'll come. That's what we hope to use that order. And we are also following a couple of O&M orders also with JSW, and that should also happen in the second quarter. And the Railways, about 4 or 5 tenders we have given it, valued about INR 1,000 crores. At least 50% of the orders would mature out based on the competition. But as I said earlier, there are plenty of opportunities. In fact, we are trying to choose the opportunities. And another 2, 3 tenders, we are working with Thyssenkrupp, Pakri Barwadih about INR 175 crores, then Talabira about INR 80 crores. We are working with them. I told you about Hindustan Zinc Limited also. We are working with FLSmidth. Then railway electrification jobs around INR 2,000 crores, we are looking at it. And all these things, and then there are 2 -- 1 road project is there. Therefore, with all these things, the -- it is normally first quarter, sometimes the backlog will not happen because of variety of decision-making process and also tenders have to be called our, something like that. Therefore, we hope we'll be on track for the current year also.

Okay. And last time, sir, we had mentioned that the actual availability of labor was a little bit lower than the required labor. So how does this quarter look like? And how do you think going ahead? Do we see any labor availability issue?

No, I told you in my opening remarks, our -- during the peak COVID time, we had a 50% shortfall in the labor, that is last -- first and second quarter of the 2021. But now it has almost come to the normal. That's why, the conversion itself speaks for that, INR 622 crores what we achieved in the first quarter compared to last year's almost less than 50% of that. That shows that the labor strength is more or less back to normal. Therefore -- with that we should be able to continue to get better results, except for the second quarter because being a rainy season. But I'm sure third and fourth quarter will ramp up to more than INR 700 crores each.

Okay. Got it. And then last time, you had mentioned that there were certain COVID-related extra expenses that we had incurred and then certain impacts of second wave that we were anticipating, which had impacted the margins. So do we expect that kind of expenses to be more sustaining in nature and hence, the margins shall stay impacted?

No, see, the margin trend we are seeing it's improving, okay? The COVID-related expenses just in quarter 1 and quarter 2, because we cannot ignore the protocols of the customers on the local. So there would be some costs which we need to incur things -- till these things get settled down fully, okay? Maybe the quantum is coming down. What used to be 2, 3 quarters back. And now, okay, that in terms of expenditure, it is coming down, but still, yes, it will continue to add some cost maybe next 1, 2 quarters, we'll continue to be there.

Okay. And may I just -- if you could just share the receivables as on 30th June, along with retention money.

The receivable is around close to INR 495 crores. And returns on money against -- it's in the range of INR 280 crores, INR 285 crores.

INR 280 crores?

Yes, yes.

And net debt as on June, you said is INR 330 crores?

Yes, madam.

The next question is from the line of Anupam Gupta from IIFL Capital.

[indiscernible] on the revenue [indiscernible].

I am sorry to interrupt you, Mr. Gupta, but your voice is breaking. We cannot hear you. If you can at least check...

Is this better? Hello?

Yes. This is much better.

So my first question is on the revenue run rate, as Mr. Ramaiah said, was that number INR 700 crores per quarter in the second half or higher than that? Because your order book obviously supports higher than that...

See, quarter 3, quarter 4, yes, we are confident the run rate could be, okay, more or less the same, okay, what you've indicated or maybe slightly more. Quarter 2, it's a mix of monsoon and -- okay. So quarter 1, quarter 2, you will see normally low as compared to quarter 3 and quarter 4.

Right. Okay. And secondly, of the INR 7,054 crore order book, what portion is under execution at this point of time? What incrementally will come up in execution over the next couple of quarters? If you can just give some picture there.

No. See, now all the projects on ground started. Backlog what we are carrying, all the projects have started.

So INR 7,054 crores entirely is under execution at this point of time?

Under execution. So for this year, FY '21-'22, the execution what we were planning is, for the substance, it'll come from the existing order only.

Okay. Okay. Understand.

Actually, this year, we have started new projects [indiscernible]. At Buxar, we have started INR 176 crores. Then we have started in Kurmitar, INR 198 crores. Then the Road projects are picking up now. Water projects also is going to start in July -- started in July. Therefore, a lot of projects, which were bagged last year in the third and fourth quarter, that conversion is going to start now.

Okay. I understand. Secondly, you are bidding for quite a few projects with FLSmidth or Thyssen, what is the nature of the partnership to be clear, what do they do and what do you do?

I think this is a typical partnership bringing the strengths from both the organization. It is based on a consortium philosophy. With both, Thyssenkrupp or FLSmidth, we entered a consortium, that is joint and several responsibilities, that is the basis on which PSUs accept the tender because we take the single point responsibility for entire site execution, including engineering of the civil and structural portion. And Thyssenkrupp is a technology partner. They will take the technology part of the entire engineering and equipment supply and the overall plant engineering input. And then they also supervise and take care of the commissioning and guarantees for the entire plant once it is completed. That is how it is. Similarly, the relationship with FLSmidth also, which we have entered for the 1 tender we have quoted for the Bacheli. On the same lines, we have arranged every single point responsibility, Power Mech in the case of site execution, including engineering of civil and structural. And then engineering responsibility of the -- plant engineering responsibility with FLSmidth and the technology part, all the equipment supplies in their scope. But here, some equipment in -- unique thing in the case of Bacheli is that we are also doing some equipment portion on the balance of plant, not on the process side, non-process side for the utility parts, electrical control instrumentation and tool systems, all those things we are trying to source directly, and we are tied up with the reputed vendors for that.

Okay. So in this case, the entire revenue will flow through your P&L and you'll share some margins with Thyssenkrupp and FLSmidth.

No, I think, for FLSmidth, it is 70-30, something like that. 70% of the -- whatever it comes, if it happens, it will be for PMPL, balance would go to the FLSmidth. Whereas in the case of Thyssenkrupp, the ratio is slightly different. It may be around 60-40.

Okay. So you'll have 60% of revenue, effectively?

Right. The consortium, so we will take our contract value only. So to the extent of our contract value only, the turnover will flow.

So your order book will also reflect accordingly, right? Order book will be 60% of the order book effectively?

You're right. It's to the extent of our value only it will reflect.

In fact, this percentages, value of the contracts with the respective partners is mentioned is the bid itself.

Right. Okay. And the margins in these projects would be similar to what you generally do, 11%, 12%, or slightly lower because you are...

That we cannot say. I'll tell you what has happened. Now we have given the first bid and technical discussions have started, then negotiations will take place. Negotiations means PSUs, there's no initial negations. It is mostly on the terms and conditions they negotiate. But the Bacheli, we have completed the set of negotiations. And then in the case of Nagarnar, the other tender we are participating with Thyssenkrupp, we have to start it. We would like to keep slightly better margins looking at our present order backlog. But ultimately, there are big ticket tenders, we would like to see what is the best we can get it and based on the limited competition also, and in both the cases, only 2-2 parties are there.

Okay. Understand. Just 1 last question. On the MDO order which you have won, what is the sort of CapEx -- or sorry, equity investment, which you'll do in the STG? And what is the CapEx that STG will do in the first 2 years? And what sort of ramp up in production and revenue do you see there?

Yes. This project will be executed -- as I said, it will be executed at STG level. So the CapEx and the additions will happen on the STG level. So it -- the first development will be over a period of 2 to 2.5 years. So over a period of time, we need to infuse around INR 80 crores to INR 85 crores of equity out portion. Of that 74% is ours and 26% is the JV.

So INR 80 crores to INR 85 crores is the total equity, of which 74% will be your share?

Yes, yes. That has to come from Power Mech and the rest will come from JV.

And what is the total CapEx which they need to do, the STG needs to do?

It's the -- development period, it's around INR 280 crores of infrastructure and infrastructure cost we need to spend that includes CHP and all other like township-related expense, like drainage, electrical system, storage and everything. So if we put together, it will be close to INR 280 crores.

And the...

Yes, sorry.

And you have the site in terms of clearances, land acquisition, all that has already been done or it's still -- it's in the process, I need to understand.

Yes. The land -- it's actually -- we are working as a contractor. It's the responsibility of the owner. So out of 1,100 hectare, already -- 840 hectares is already acquired, being -- because it's being a notified forest land. So that task is completed. So land acquisition is well in control. Now the approval part, it would take some time, where now, along with the developer and the owner together, we are working to see that next 6 to 8 months, the approvals are in place so that we can start the ground activity.

Okay. And just 1 last question on this. In terms of -- I assume this will be take or pay in terms of volume, right? So how is the volume ramp-up and whether take or pay is confirmed? Or is there an end use part of it, which is known for your mine?

Yes, because the minimum quantity is 5 million tonnes per annum, that's been -- that's the arrangement, which the SCCL has to take. So the end use, they've already -- they have got back to pick end users because it's -- for coking coal, there's a lot of demand now, but the response of end use, it's the customer. Our approach is to ensure that we deliver 5 million tonnes per annum.

Okay. You said it is coking coal, to be certain?

Yes. Coking coal. Yes, yes. True.

[Operator Instructions] Next question is from the line of Dixit Doshi from Whitestone Financial Advisors.

A couple of questions from my side. Firstly, in this JV, you mentioned INR 280 crores CapEx to be done over a couple of years. So the -- whatever the revenue booking will come only after from the third year, right?

You're right, sir.

Okay. Now you earlier also mentioned even in last call that we are targeting around INR 4,000 crores, INR 4,500 crores of fresh orders in FY '22. So I suppose this is excluding this Coal India project.

Yes, sir, it was -- it is not part of that, as you said, is rightly correct. So quarter 1, we had a target of INR 550 crores. We could able to book [indiscernible], though we have sourced the orders, but still in L1 stage, which Mr. Ramaiah was mentioning. So probably, first week, we may add to more -- first week of next month, we may add 2 more orders. So the target is, excluding the MDO, INR 4,000 crores to INR 4,500 crores, and we are on the target.

The next question is from the line of Faisal Hawa from H.G. Hawa and Company.

INR 10,800 crores kind of an order book and another INR 5,000 crores coming. Then can you not do a much better revenue in '21-'22 ended rather than the target which you just mentioned in your opening remarks? And secondly, sir, how do you -- do you see that more orders could come in from Coal India for different geographies now that they are moving on to clear-cut privatization of operation?

Yes. You see the orders what is going to flow also in this year, it'll take a couple of months to start. We are already in the second quarter end. And the third quarter, it'll take a little less as some of these major orders are not there. In the fourth quarter, we'll take away a lot of engineering work, initially prepared to mobilization work. That is how -- we are not accounting but if it starts, it will add on to that. It'll be under INR 200 crores maximum. But we are not taking that into account, whatever our present plans what we have made around plus INR [indiscernible] crores of the current year's turnover is based on the backlog what we have built up after the last year.

So we could be -- more such orders from different other zones, too.

Yes. Regarding Coal India job, Coal India job that is -- particularly that Kotre Basantpur, that will happen only from the third year onwards. That is maybe [ 2014 end or '15 ].

Does that answers your question, Mr. Faisal?

We can get it some more -- we can get more such orders from different other zones of Coal India.

No, that is a matter of taking a call in that investment and then the type of opportunity available and then the project feasibility and then how much we would like to take it also. And then here, it was a specific coking coal related, and there is a lot of demand in that, and there is a sure commitment for offtakes for the entire period of the operation. Those things we have to see. Conventional coal and all that is a different aspect of it. We have to take a call on that case to case.

So to start with, we have to privilege this project. So we'll see how things will move going forward, but now to start it, we'll focus on this project.

It also being a very big opportunity over the next 2 to 3 years. And is the Railways now moving like how the Road Ministry has moved with bigger orders and faster movement on tendering, et cetera?

On the Road sector?

Railways, sir.

Is it also now as swift as a Road sector?

Yes, Road sector, we are participating. We are already executing 2 jobs, one is in Northeast; another is in Karnataka, nearly INR 1,000 crores. And already about 78% of the work has been completed in the projects. Therefore, we're established there. Now we would like to look at some opportunities then [indiscernible] offers a lot of opportunities. We have to select those issued projects and see -- take a call on that.

The next question is from the line of Abhishek Poddar from HDFC Mutual Fund.

Sir, congratulations on good quarter. Regarding this NMDC opportunity, what could be the size of these 2 opportunities, sir?

It can be INR 500 crores to INR 1,000 crores.

Per opportunity? So combined would be...

Yes.

Okay. And this would be, again like an MDO where it will run for a longer period? Or...

No, they are all EPC contracts.

Okay. Okay. Sorry.

Not MDO or DoT, no.