MDO And O&M Expansion Set To Drive Future Success In Power Sector

Key Takeaways

• Aggressively pursuing large tenders and power sector opportunities, likely to boost revenue and operational efficiencies, positively affecting net margins.
  
• Significant growth expected in MDO and O&M businesses, enhancing overall EBITDA margins through substantial contributions to top-line revenue.
  
• High reliance on domestic markets and power sector backlog risks revenue stability and cash flow amidst increased overhead and strained liquidity.

Catalysts

Provides services in power and infrastructure sectors in India and internationally.

• The company is actively pursuing large upcoming tenders, with a focus on securing ₹3,000 crores in new orders by March 2025. This is likely to positively impact revenue growth.
  
• Significant progress in the MDO business, with coal supply scheduled to start in April '25, is expected to substantially contribute to top-line growth, aiming for ₹2,000 crores by 2028, which could enhance EBITDA margins.
  
• The O&M business shows promising growth due to new order intakes and higher profitability compared to other segments, which could enhance overall EBITDA margins in the next 2-3 years.
  
• The company is eyeing extensive opportunities in the power sector, with anticipated projects that may contribute positively to revenue, and potentially improve operational efficiencies, impacting net margins positively.
  
• Order book growth is expected to drive future revenue increase. The company projects to reach up to ₹7,000 to ₹7,500 crores in revenue by FY '26 and around ₹9,000 crores by FY '27, also potentially improving EPS over time.

Power Mech Projects Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Power Mech Projects's revenue will grow by 28.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.3% today to 8.5% in 3 years time.
• Analysts expect earnings to reach ₹8.5 billion (and earnings per share of ₹267.68) by about March 2028, up from ₹2.9 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.2x on those 2028 earnings, down from 21.9x today. This future PE is lower than the current PE for the IN Construction industry at 19.3x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.53%, as per the Simply Wall St company report.

Power Mech Projects Future Earnings Per Share Growth

Risks

• Decrease in EBITDA margins from 12.66% to 11.87% and 12.45% to 12.22% year-on-year due to increased overhead costs suggests potential erosion in profitability, which could impact net margins.
  
• Civil business, a significant revenue stream, showed a decrease of 12% in quarterly and 8% in nine-months revenue compared to the previous year, potentially affecting overall revenue growth.
  
• Increased net current days from 147 to 155 due to delays in certification and realization of receivables can strain working capital and liquidity, impacting earnings.
  
• High reliance on domestic business (94-95%) with limited international exposure (5-6%) may limit diversification, posing a risk to revenue stability in case of local economic downturns.
  
• Significant order backlog linked to the power sector (62-65%), with slow movement in non-power sector opportunities like FGDs (around ₹4,600 crores) possibly delaying revenue recognition and affecting cash flow.

Valuation

• The analysts have a consensus price target of ₹2943.5 for Power Mech Projects based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹3330.0, and the most bearish reporting a price target of just ₹2557.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹99.5 billion, earnings will come to ₹8.5 billion, and it would be trading on a PE ratio of 16.2x, assuming you use a discount rate of 14.5%.
  
• Given the current share price of ₹2031.1, the analyst price target of ₹2943.5 is 31.0% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.