PSP Projects - Construction Company

Stock Opportunities Untested - but worth a good look
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PSP Projects is a construction company offering construction services across industrial, institutional, government, government residential and residential projects in India primarily in Gujarat. Activities of the company include planning and design to construction and post-construction activities to private and public sector enterprises.

Incorporated in 2008, Company started major construction activities in June 2012 with construction of GCS Medical College, Hospital and Research Centre in Ah medabad. Since then company has completed about 71 projects until Nov 2016.

Following table provides construction activities of the company.

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Source IPO Prospectus

Order Book

The following table sets forth a breakdown of the Company’s total order book as of November 30, 2016, by type
of project:

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Source IPO Prospectus

Company’s activities are mainly concentrated in Ahmadabad and rest of Gujarat. It is bidding for projects in Surat and GIFT City. The following table sets forth a breakdown of the Company’s total order book as of November 30, 2016, by
geography:

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Source IPO Prospectus

The Company’s order book is not audited and does not necessarily indicate our future earnings. Book-to-bill ratio is about 1.3 which is low compared to infrastructure construction companies but PSP Projects executes mainly small ticket construction projects which are not awarded in advance like infrastructure projects.

In a recent chat with ET, company MD PS Patel said that order book for FY2018 is about 729 Cr and about Rs 600 crore turnover is going to come from this present order book for FY2018.

In yet another interview with a TV news channel, company MD PS Patel said that revenue for FY2018 will be 650 Cr and bottomline will be 70-90 Cr.

In the long term, company expects revenues to reach 1500 Cr by 2020.

IPO
Company issued approximately 10,080,000 Equity Shares of Rs 10 for Rs 210 per share raising around Rs 200 Cr. Out of these 10 million shares, 7.2 million shares are issued by the company as a fresh issue and 2.8 million shares are sold by company promoter family. Post issue, promoter family owns about 72% of post issue capital of the company. Of the 10 million shares offered, 4.5 million shares are offered to anchor investors including Reliance Mutual Fund, SBI MF, Axis MF, Sundaram MF and Birla Sun Life Insurance – at Rs 210 apiece, aggregating to Rs 95.25 crore. Remaining 5.5 million shares are offered to public though book-building issue.

Company will receive Approximately 144 Cr from IPO proceeds. IPO listed at a discounted to issue price.

Financials

Rs Cr.

Source IPO Prospectus, 2017 Earnings Release

company’s sales growth is lumpy which is typical of construction companies. Some private clients provide construction materials free of cost to the contractor so revenue will be low for such contracts but margins will be higher.

Margins have improved in FY17 and company expects to maintain these margins going forward. company is mainly a labor contractor at the moment but with IPO proceeds it will purchase construction machinery and will be participating in value added projects.

Company has managed to maintain good working capital mainly by keeping receivables and investory low. This has enabled company to remain debt free (on a net debt basis). It has short term borrowings of 62 Cr against bank deposits of 125 Cr. Usually companies with both debt and cash is a read flag. However, construction is a cash-heavy industry and PSP project is keeping cash as bank deposits and taking out short term loans from the bank which is secured by the deposits and interest rate on the loan is 1% above the deposit rate. Essentially short term debt costs company about 1% as interest expense on loans is offset of interest income from deposits.

Unlike infrastructure construction companies, PSP projects executes small ticket projects that are completed in few months so it recovers cash quickly. Company’s cash and deposits have steadily gone up over the years indicating that company is able to recover receivables quickly.

company is cashflow positive and does not really need funds from IPO for its ongoing operations. IPO is for benefit of listing and buying construction machinery which will enable company to take on bigger projects.

Peer Analysis

Companies margins debt levels and ROE is much better than peers.

Promoter

Company is promoted by PS Patel. He is 53 years old and so far this appears to be a one man show. He has over 30 years of experience in the business of construction. He holds a Bachelor’s degree in civil engineering. He has also been featured in the book titled “Business Game Changer: Shoonya se Shikhar” authored by Prakash Biyani and Kamlesh Maheshwari for completing government’s infrastructure project before the scheduled time for which he received appreciation of Prime Minister, Mr. Narendra Modi.

Corporate Governance

  1. Executive Compensation

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Company paying a total salary of Rs 3 Cr to promoter family. This works out to be 8% of FY17 profits, close to upper limit of 10% set in Company Act. As a percentage of net profits of the company salary appears to be on the higher side but in absolute terms this amount is reasonable given the high profitability generated by the company.

  1. Dividend Policy

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Company has paid dividends in the past. However, until IPO, promoter family wholly owned company.

  1. Taxes

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Company is paying taxes. Its tax rate is about 30%.

  1. Debt Repayment

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company is a net borrower and only occasionally repaid loans. However looking at the growth rate of the company and its cash & deposits, this is not a warning sign.

Valuation

Based on TTM earnings, company is selling for about 26 times TTm earnings. Based on management’s projections, net profits for FY2018 is expected to be about 70-90 cr against a current market cap of 1051 Cr. forward PE works out to be 13. However, this assumes near doubling of profits in FY2018 which appears optimistic.

Risk Factors

  1. Activities of the company are largely concentrated in Gujarat.
  2. company is heavily dependent on promoter Mr. PS Patel.
  3. company may face increased competition when it bid for big ticket projects
  4. Executive compensation is high.
  5. Activities are cash dependent.

Disclosure: Invested in IPO and thereafter.

21 Likes
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Disclosure- I recently bought into PSP Projects on pre open@190, listing & more subsequently. My Rationale for doing the same was

  1. Its superb ratios more like a FMCG co with zero debt &good CAGR, 38% ROE & that too consistent for last several years.

  2. First gen entrepreneur technocrat Mr PS Patel in right age bracket of early 50s with growth mindset & execution track record.72% promoter holding,

  3. My 90% bet is on promoters & I found his reputation in terms of ethics and timely completion of projects quite good through limited scuttelebutt.

  4. Great track record of timely completion of all projects like Dilip Buildcon including some marquee projects like Sabarmati River front project which is a matter of pride for all of Gujarat & was personally appreciated by PM Modi.

  5. Great set of marquee anchor investors like Reliance Mutual Fund, SBI Mutual Fund, Axis Mutual Fund, Sundaram Mutual Fund, Birla SunLife Insurance and TATA AIA, among others.

  6. Diversifying into other states having bagged decent orders from karnataka & Rajasthan thus reducing their dependency on Gujarat.

  7. Sticky clients due to long standing relationship with its customers,

  8. Good order book with fully integrated operations, strong cashflows.PSP doesnt bear the rawmaterial risk whose cost is borne by the clients.

  9. one of the few infrastructure companies operating through world class software ‘SAP,

  10. Valuation OK with expected net profit of 70-90 Cr in fy 18 as per MDs latest interviews

  11. Opp size remains good and growing for PSP in a growing economy like India comforted by a healthy order book .IPO will result in more orders as now balancesheet is further strengthened. The government’s focus on infrastructure spends would augur well too

  12. Relatively less visibility of co due to comparatively small size of IPO & it being in T2T group.I like to bet some portion of my portfolio in such unknown cos which will become known in future & will attract instt.

  13. V good clientele like Intas,Zydus Cadila,GCS hospital,GIFT city,AMUL Dairy

Risk remain geographical concentration,key man risk,sector risk

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https://www.sptulsian.com/free-zone/ipo-analysis/PSP-Projects

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  1. I am wary of the sudden rise in margins (doubling) just prior to ipo. If you see past track record, net margins have consistently been much lower. Cannot understand the reasoning. Maybe due to project mix? But as Mr. Patel said, he expects this to be the new normal, so should we assume their order book mix would be such which would enable them to maintain such margins going forward?

  2. With surplus cash, I don’t understand the reasoning behind taking debt. They can directly use this cash as working capital. He says they have a credit line of 175 cr from which they are using 150 cr. I don’t understand how this credit line us different than short term loan?

  3. Geography concentration - i don’t consider this much of a risk as they are present in one of the most industrially rich state and are already diversifying.

  4. High ROE - need to take a closer look. May be due to small ticket short turnaround projects, there are able to sweat there assets more generating high asset turns, and thus higher roa, and this then aiding higher roe compounded with already very good margins. Any reasoning on what are the factors behind such industry beating numbers? Is there no competion?

  5. Going forward, they have appointed crisil or care to rate their 180 cr credit line. I am not sure…have they taken more loans? This is regarding what? Next one year is supposed to be good as per mgmt commentary so valuation isn’t very high. What need to be understood is the reason behind this amazing efficiency. Is this because they are very small?

  6. Balance sheet is good as they have managed the receivables well.

  7. Some general question…what is there vision going forward? He said gift city where they are already doing 4 project. Any particular segment they want to focus on? They are strong in pharma and dairy.

  8. They have said 1500 cr revenue by 2020…have they laid any plans for that as to how they would attain this goal? This target looks highly optimistic at 20-25% cagr.

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As per the MD interview, some private clients provide construction materials free of cost to the contractor so revenue on such contract is low but margins are high. That’s the reason revenue growth in FY17 is low but margins are high. It’s a sales mix issue. Gross margins in FY17 are at 65% compared to 56% in FY16 reflecting this sales mix.

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Yeah…i went through that interview and guessed it’s due to project mix. But him saying this would be the new normal means they would now be doing only such private party high margin projects?

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Few more things to check -

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  1. Receivables have gone up from 20 cr in 2016 to 60 cr in 2017. Topline hasn’t increase much because of low revenue high margin projects executed this year. We were discussing about the efficiently with which they have been able to manage their receivables in order to keep their balance sheet in good shape. But this rise in receivables might be a cause of concern?

  2. Where is this “goodwill on consolidation” amount coming from? Almost 5.5 cr added this year.

1 Like
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On May 29, mgmt said - “For March 2018, we are having an order book of Rs 729 crores.”

Today, in disclosure to exchanges, they have received orders worth 172 cr during q1FY18.

Not sure how much of these 1723 cr came after May 29, as most of these would already have been counted in 729 cr figure revealed by the MD on May 29?

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Margins again back to 12-13%?

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PSP received orders worth 515 cr during q2. Though one needs to find out the current order book status.

Rough estimates -
Assuming they executed 160 cr order book in q2, and assuming 172 cr orders that they received in q1 were taken into account in their previous disclosure of 723 cr order book end of May…

723 (order book as on May 30) - 160 (q1 executed) - 160 (q2 executed) + 515 (q2 addition)
~900 cr?

Anyone got any insights in this regard?

2 Likes
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@yogesh_s after reading annual report and my job experience in real estate construction company.
There are two type of contracts
1.With material where revenue/order value will be high due to inclusion of cost of material
2.Without material where revenue is low due to exclusion of cost of material
Overall profits are almost same but due to inclusion and exclusion profit margins differ same was the reason for decline in revenue from fy16 to fy 17
So it doesnot matter which contract and contract type mix will determine margins Y2Y

2 Likes
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@Mridul cash and equivalent include

  1. FD pledge as margin money against bank guarantee 16.55CR
    2.FD against overdraft facility 76.57CR
    3.FD against overdraft of subsidiary company 4.48cr
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PSP Projects has been awarded main contract works at Surat Diamond Bourse, Khajod valued at Rs. 1575 Cr.
Source BSE Filing

This is in addition to 500 cr order inflow in Q2. This is a 30 months contract so this should give a good visibility over next 3 years. Sales for all of FY17 was 465 Cr. Book to bill ratio is now a healthy 4.

1 Like
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Sir I’m from Surat, regarding diamond bourse, land is been aloted way back in 2015 but till now no work has started and my friends form diamond market are not so excited as there main offices are in BKC so why do they shift from mumbai to surat. I don’t know that this info would be helpful or not.

1 Like
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That is nice. 2.5 year visibility at least from here. They will execute around 650 cr this year. They will still be left with almost 2400 cr order book post q4 this year.

Now with rising order book, would be interesting to see how they manage their working capital in order to increase throughput. They have lean BS, so can take more leverage.

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Good co with good technocrat first gen entrp n execution.

Discl- Invested having bought on listing @190 n more .

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PDF link of book shhonya se shikhar some pages on promoters
http://www.pspprojects.com/pdf/Business%20Game%20Changers.pdf
disclosure:Invested

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thanks a lot. v infomative

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Good first concall. Some things, which got clarified -

  1. EBITDA Margins will be ~12-13% as most of the orders that they are getting are including cement/steel (pass through). Private orders are usually including RM.

  2. Debtor days increased due to GST. Will get to normal in next 2 qtrs.

  3. Order book as it stands today ~ 2700 cr (exclusive of GST). 24-30 month execution period.

  4. They are positive on getting 400-500 cr more orders by end of q4.

  5. No need to raise additional capital for 1 yr.

  6. Most of the capex will be done by March (for Surat project as well).

  7. Not given any new guidance. Remains the same…600-700 cr this year.

  8. They want to remain focused in Gujarat and will look for similar projects in other states as and when opportunity comes.

  9. Stiff competition for orders below 100-150 cr. Cannot compete in that space now as margins have become very low. For instance affordable housing projects in Gujarat.

  10. Would focus on execution and stabilizing of the big orders they have got till Jan/Feb. Only then will participate in more tenders.

Overall mgmt sounded pretty conservative when it comes to margins/bidding. They said their is enough work to be done in Gujarat itself. Surat project will be a milestone which would open further opportunities for them (in terms of order size).

Disclaimer: Invested. Added more in last 3 months.

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Red Flags ?

Item No. 6 – Approval of Contract/Arrangement with Director for consideration other than cash
To consider and if thought fit, to pass with or without modification(s), the following Resolution as a Special Resolution :
“RESOLVED THAT pursuant to the provisions of Section 180,188,192 and other applicable provisions, if any, of the Companies Act,
2013 and the Companies (Meeting of Board and its power) Rules, 2014 including any statutory modification(s) or re-enactment(s)
thereof and any rules thereunder for the time being in force, consent of the company be and is hereby accorded to the Board of
Directors of the Company to enter into a contract/arrangement for purchase of immovable property (known as “PSP House”), as
per the details given below at market value of `17,54,00,000 (Rupees Seventeen Crore Fifty Four Lakhs Only) and as certified by
registered valuer Mr. Bakul N. Desai, from Mr. Prahalad S. Patel, Promoter, Managing Director & CEO of the Company, who is the
legal owner of the said immovable property.

“RESOLVED FURTHER THAT consent of the Company be and is hereby accorded to the Board of Directors of the Company to
transfer the ownership title of land of the Company bearing R.S. No. 364/1, 361/2, F.P.S, No. 27, 24/2, T.P.S. No. 86, Mouje Sarkhej,
Taluka: Vejalpur, District: Ahmedabad and S. No. 186/2, F.P. No. 88, T.P.S. No. 86, Mouje, Taluka: Vejalpur, District: Ahmedabad
Opp. Applewood Township, Near Lakshya School, Sarkhej Sanand Road, Ahmedabad at market value of ` 18,18,45,000 (Rupees
Eighteen Crore Eighteen Lakhs Forty Five Thousand Only) as certified by Registered Valuer to Mr. Prahalad S. Patel, Promoter,
Managing Director & CEO of the Company, in lieu of consideration towards purchase of “PSP House” as mentioned above and the
balance amount to be payable in cash on either side.

4 Likes