PSP Projects - Construction Company

Stock Opportunities Untested - but worth a good look
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Promoter has increased shareholding by nearly Rs. 1 crore.

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Based on the recent concall, the company seems to have mitigated the labour issue to an extent. Of the 18,000 labourers on contract during early March, the company has retained 13,000 in their labour colony and are available to be deployed as and when the lockdown is lifted.

Although the current order book provides revenue visibility, any delay in payments from the client’s side remains a key monitorable.

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Had mailed the company regarding resumption of operations and any delay in payments since the Corona situation post the company concall in March. The mail from the company is as below:

Dear Shareholder,

Thank you for your email. The pointwise reply to your queries is as follows:

1. Could you please clarify if any discussions has happened with the companies (Surat Diamond Bourse, Bhiwandi Municipal Corporation, IIM Ahmedabad, Pandharpur Municipal Corporation, SGH Realty, Dalal Street Commercial Cooperative, Zydus Hospitals and others) on their financial wherewithal to continue their funds for these ongoing projects (if communication has happened already - could you please provide details on which projects have no funding issues and which projects may get delayed)?

As of now, there are no payment delays from any of our clients. However, there may be some extension of work depending on the stage of work.

2. Please share if any other information is available with regards to reopening of construction sites post May 3rd and at what labour capacity?

In accordance with the directions issued by relevant state government and consequent upon receipt of approval from concerned authorities , company has already resumed work at some of its project sites at Gujarat and one site outside Gujarat with necessary labour force. Further, the company is in process of receiving permission from the concerned authority for some of other project sites and expects to receive the same within a week.

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Yesterday i talk with jr engineer of psp project who job at sdb project site he told me that migrant workers problem is more biggger for these site also… in near term not to any chance of starting work… aprox more than 5000 migrant workers work on these sight before lockdown… i think no chace that workers return in near term…

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Hi Jayraj, do you have any current update of the situation on the ground at PSP Projects post easing of the lockdown? Construction companies are reporting labour shortages. The company had a significant portion of their labour requirements in their labour colony, as per the March concall. Any idea what the current situation is?

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Nope… nothing start at sdb project site work…
Bt in some small project near ahmedabad still continue work with below half capacity force…

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Official announcement -
https://www.bseindia.com/xml-data/corpfiling/AttachLive/ff7fb506-8f54-4ab6-8b30-b0934b10f060.pdf

Another blow to construction companies is non availability of construction workers due to migration of migrant workers ! this will delay completion of many real estate project…this will lead to delay in hand-over to buyer and delay in cash collection…this will lead to more NPA on HFC / NBFC !!!

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Saw a video of SDB construction workers damaging some office (could be PSP or SDB office, not sure) a few weeks back. Hopefully the issue was resolved quickly after that.

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Construction activity is still going on for Zydus Cadila R&D centre in Vadodara. PSP is likely to finish it in 4 months. Some of the sub-contractors also work on our projects.

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UPDATE :- Construction activity has been haulted & all migrant labouers have gone to their hometown.

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Anything to do with this?

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Update on the current scenario from the company:

Q: Would it be possible to please clarify what the situation is on the ground with respect to labour currently? Are we still facing labour shortages? At what capacity is the labour at for our major sites?

We are not facing any labour shortages as of now. In the last one and half month, we were able to retain 70% of our labour strength. Moreover, we expect the remaining on board in the next 15-20 days.

Q: Additionally, would it be possible to clarify on the payment from clients, if there have been any delays due to the corona situation or if any projects have been put on hold due to the ongoing situation?

There are no delays in payments from the client side nor any of the projects have been put on hold.

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The company is putting up a pre-fabrication plant in Sanand to serve sites in Gujarat. In the concall, the management stated that this would help them reduce the timeline for executing projects. Although, there is a 10% increase in costs using pre-fabricated building materials, there is a drastic reduction in timelines required for execution of projects which for institutional and industrial projects would bring substantial savings for the client.

Although, this venture by itself is not margin accretive - the management has indicated that once this new process and the benefits of it is accepted by clients they might be able to command better pricing going forward. This benefits them as they can reduce the labour component required in construction sites to a large amount while also increasing their capabilities to keep multiple sites operational concurrently.

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PSP Projects out of the race in the new parliament bid

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PSP project stands out as a construction company with very high asset turnover and capital turnover ratios (2.8+). Does anyone that follow/invest in this company know/understand how PSP projects has such a high asset turnover ratio (this in turn means that they have a very asset light model, specially looking at the industry they are in)?

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Hi Sahil, have been tracking this company for a while. Few reasons for the high asset turnover from my understanding of the business.

  1. Company has a concentrated order book (~60%) in Gujarat. This allows the company to sweat its assets better. Particularly, if you notice - the company has done almost all the projects that have come up in GIFT city. This concentration of projects helps them to churn good set of revenues with lesser assets whereas larger companies with more geographically diversified project sites don’t have that advantage.

  2. The company’s big chunk of annual sales is still derived from a small number of sites. For example, SDB project size alone is roughly about a year of the company’s revenues. And if you consider that the affordable housing projects, IIM project, etc. the company has a large proportion of assets deployed in small number of sites which churn out a big chunk of their revenues which again is bound to increase their asset turnover.

  3. From being a pure construction player, the company now is working on being a one stop solution. So they’ve now added Mechanical, Electrical, Plumbing work as well as Interior Design. My understanding is that these contribute to the revenues without requiring much by way of fixed assets.

We do need to track how these ratios evolve over time as the company gains scale and operates out of multiple states.

Disc: Invested.

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Q1 FY21 Concall highlights (Aug 5, 2020):

Ongoing Work

  • Company achieved 80% of labour strength back, might get to 100% at end of August or Mid-September

  • Currently doing only two affordable housing projects, one is in Pandharpur and the second project is in Bhiwandi. Pandharpur project has already started with less labor and there is no permission or anything hurdle in that project as of now. The Bhiwandi project, still waiting for RERA , should be done this month or sept 15

Order Book

  • Value of order book = Rs. 2963 Cr as on 30th June 2020, which comprises of Rs.573 Crores for Surat Diamond Bourse project and Rs.2390 Crores for other projects.

  • Out of the total order book, about 75% projects are from Gujarat, Rajasthan, Karnataka and UP where they have resumed operations smoothly (except couple of projects).
    Remaining 25% projects are from Bhiwandi and Pandharpur in Maharashtra where the company has not been able to resume operations due to clearance issues by authorities amid highly affected Covid areas.

Capex

  • Setting up a state-of-the-art manufacturing plant of Precast Concrete Building and allied Infrastructure elements near Sanand, Gujarat which will have annual production capacity of 3 Million square feet.
    However initially, setting up plant with production capacity of 1 Million Square Feet as Phase-I, which is targeted to be operational by May 2021.

  • Main objective to setup the plant is to achieve speed in delivering larger volumes in control environment and minimum dependency on labors

  • 75cr will be spent in the next 2-3 quarters

  • "In present scenario of scarcity of labor, looking to the demand of the clients in terms of time and quality, I think these types of projects or these types of practice will give you a better quality, better timeline and we will not be forced to stop the work or we will not be more dependent on labor because labor when we talk about regular conventional RCC it is purely labor intensive work and when we talk about precast foundry it is very more mechanized and automation which has been done at the factory level and only the erection plant and some of the things which you require at the factory side, labor requirement is almost 10% of what we require in regular scarcity to concrete building. " - CMD

  • Question by an analyst
    Q. Capex and equity requirement for FY2021 and FY2022 based on current order book and any expected order in place?
    A. Presently company is having sufficient capex to handle large size project so we may not be in regular basis because around 3% to 4% of our sale but once the capex from Surat is getting free then most of the projects are getting completed by structure point of view, so I think there will not be too much requirement of capex as on regular operation is concerned.

Bid Book

  • Presently the bid book is about Rs.3000 Crores which majorly includes new Parliament building of Rs.889 Crores which is early on presently for pre-qualification only. Welspun Warehouses at Bhiwandi it is about Rs.400 Crores, Brigade Hyderabad it is about Rs.300 Crores, for GIDC the company has already been declared L1 but still yet to receive order is Rs.275 Crores, Torrent House in Ahmedabad is about Rs.100 Crores and there is one project of Reliance in Jamnagar which is about Rs. 100 Crores.

SDB Project

  • The revenue generated from Surat project was Rs.45.61 Crores during this quarter and total revenue booked for the same till June 30, 2020 is Rs.1002 Crores.

  • SDB will likely be completed by april/may ‘21

  • Financial update: Company was able to maintain positive EBITDA at Rs 1.29 Crores for the quarter. For the consolidated numbers, the group had booked a net loss of Rs 3.54 Crores.

Others

  • As on June 30, 2020 the company has total fixed deposit of Rs 212 Crores out of which free deposits of Rs 49 Crores, FD of Rs 148 Crores are under lien for credit facilities and FDs given to clients as security deposits amounts to Rs 15 Crores.

  • Regarding payment from clients- delay may be there for maximum 60 days, but there will be very few clients outside this 60-day outstanding

  • Increase in cement and steel prices do not matter because they’re pass through

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Hi ashwin,

thank you for sharing your views. I wanted to better understand the first and second point which seem related. I hope you’ll be ok with the follow-on question.

I hadn’t heard the phrase “sweat assets better” so i read about it a bit. The particular line which really stuck with me is the following: When companies “sweat their assets,” they are typically reinvesting less than their depreciation, and measures such as asset intensity, asset turnover, return on capital and economic profit all look better. But nothing really happened.
And sure enough, this does seem to be happening. Looking at the balance sheet in screener.in, following can be seen:

Mar 2012 Mar 2013 Mar 2014 Mar 2015 Mar 2016 Mar 2017 Mar 2018 Mar 2019 Mar 2020
Sales 179 257 210 280 455 401 730 1,044 1,499
Fixed Assets - 18 18 19 33 52 51 77 103 108
Gross Block 23 27 31 51 77 82 120 169 ?
Accumulated Depreciation 5 9 12 18 25 32 43 65 ?
2019-2020 2017-2020 2012-2020
Increase in Sales (%) 43.58237548 55.19786889 30.4273214
Increase in Fixed assets (%) 4.854368932 28.41562203 25.10334049

We can see that the fixed assets have not increased as fast as the sales, specially in last 1 year and last 3 years.

As per the article and my understanding based on analysis above, it looks like the asset turns seem abnormally high because company has not yet made the investments needed to refresh the fixed assets (like say machines and plants). Is my understanding correct?

Also, if my understanding is correct, would we reasonably assume the asset turns and ROIC to come down if and when the company diversifies more geographically?

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Yes, that’s my understanding too. I do believe the asset turns would come down as the company expands into more geographies. However, the effectiveness of the pre-fabrication plant is a key monitorable for me. If the company is right about how much this could cut down the project timelines, the company stands to gain by cutting down the time duration the captive assets are blocked in each project site.

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Hi Ansh,

I have limited knowledge in the construction area so couldnot get the below part.
What state-of-the-art manufacturing plant of Precast Concrete Building means?
How will it help them to reduce achieve speed in delivering larger volumes and also reduce dependency on labors?And does any other construction company use similar technique?

If possible kindly explain.

Thanks,
Deb