PSP Projects : EPC Company in buildings segment

Sharing some of my notes on PSP Projects.

PSP Projects is an emerging EPC construction company based out of Gujarat. The company was incorporated in 2008 and listed in 2017. The funds from the IPO was utilised for purchase of construction machinery and to transition from a labor contractor to more value added projects. The promoter PS Patel is a first gen entrepreneur technocrat and has an experience of 22 years in the industry. The company is only focussed on the buildings segment for private institutional (24% of orderbook), govt residential (18% of orderbook), govt marquee (44% of orderbook), private residential (14% of orderbook) and industrial projects.

The company used to focus on low ticket size projects with short execution timelines with average order size being 8 crores in 2013 and 35 crores at time of IPO in 2017. The company has moved further into value added projects by integrating MEP, interior, design and becoming a one stop construction company. Current average order size hovers around 80-100 crores.

Financials March 2011 March 2012 March 2013 March 2014 March 2015 March 2016 March 2017 March 2018 March 2019 March 2020 March 2021
Sales 127 179 257 210 280 455 401 730 1044 1499 1241
Growth % 41% 44% -18% 33% 63% -12% 82% 43% 44% -17%
Op Profit 6 15 22 17 22 39 66 102 149 191 135
OPM % 5% 8% 9% 8% 8% 9% 16% 14% 14% 13% 11%
Net Profit 4 8 12 10 14 25 42 64 90 129 81
NPM % 3% 4% 5% 5% 5% 5% 10% 9% 9% 9% 7%
Receivables 8 19 12 14 24 10 53 116 143 224 222
Receivables as % of sales 6% 11% 5% 7% 9% 2% 13% 16% 14% 15% 18%
CFO 0 16 26 20 30 41 13 70 28 19 71
Employees 489 761 1229 1447
Contract Labor 3500 5000 10000 13000
Plant & Machinery 53 95 142 170
ROCE 47% 53% 34% 33% 44% 50% 44% 41% 41% 22%

Until FY19, the company had high orderbook concentration with almost 88% of orderbook in Gujarat. Since then, the company has diversified its presence with its current orderbook of 42% in UP, 39% in Gujarat, 18% in Maharashtra.

The profile of the company changed with the SDB project, as it was a massive project of 1500 crores, relative to a company of its size 4 years back. And the company had largely been on schedule with completion until the Covid related disruption and additional scope of work added by client which has now delayed the project by a few months. Completion of SDB project significantly increases the pre-qualification credentials of the company from the current 600-800 crores and opens it up to bidding for projects up to 1500-2000 crores which allows it to compete for projects in Central Vista, Airports, etc.

The company now has an orderbook of 4120 crores against annual revenues of 1250 crores with decent revenue visibility for 2-2.5 years. The orderbook is spread across private clients and different government entities. Interesting qualitative aspect to note is the repeat orders the company has been getting with its clients and added notable clients like Reliance, MRF, Torrest, Zydus, Intas, Nestle, Prestige, Phoenix Malls, etc.

The company has been guiding for margins to remain in the range of 11-13% depending on the phase of projects being executed. The earlier margins of 14% were due to projects excluding cost of material and unlikely to reach those levels again. The margins in FY21 took a hit on account of higher labor expenses and a washout Q1.

The company has so far been among the better companies in terms of managing their WC in the EPC segment. The company has been utilising mobilization advances from clients to the range of 5-10% towards procurement of materials and mobilization of labour. Company roughly spends 3-4% of revenue on capex. Further, the company’s projects have been centered around Gujarat earlier, which allowed it to sweat its assets better and deploy assets towards new projects as and when the old projects got completed. This aspect shows up further in peer comparisons on WC, asset turns and return ratios.The same is being carried forward now in UP with two major govt projects and EWS projects in Maharashtra.

Precast Plant:
The company has started work on a precast plant with annual production capacity of 1 Mn sq ft in the first phase. The stated goal of the project is to improve quality, reduce dependence on labor and increase speed of project delivery. This doesn’t translate into increase in margins and the company is currently pitching for its use to clients where projects are ongoing. The plant is located in Sanand and in proximity to major centres of Gujarat.

Some snippets from the AR and concalls to better understand the company:

AR 2018

What was the other business-strengthening development during the year under review?
The company reported its single largest construction contract during the year under review: the 1575 cr Surat Diamond Bourse project that was awarded in October, 2017. It would be necessary to provide a perspective of what the project means to the company: the previous largest project undertaken by the company was 242 cr and in the normal course of prequalification (especially if this had been a public project) getting to qualify for a project of this nature would have taken the company a number of years. With this single contract, the company will not just increase revenues and profits; more importantly, it will enhance its prequalification credentials to be able to bid for a variety of larger projects. In that respect, the Surat Diamond Bourse project will graduate the company from one orbit to a number of orbits higher – a decisive game-changer.

AR 2019

As a strategic decision, we are geared towards our core markets and are selective in the projects that we undertake, with the aim to better manage working capital, generate strong returns and maintain a robust balance sheet. While our strategy is focused, we have developed a comprehensive breadth and depth of capabilities. From design to mechanical, engineering and plumbing (MEP); construction to interiors and operation & maintenance, the services PSP Projects provides can address all aspects of the infrastructure life cycle. We have also made strategic investments in state of-the-art IT systems to ensure efficient project management and add value to every stage of the project through better controls and compliance. Our extensive offerings enable us to serve our customers in more ways, move up the value chain, and expand our relationships with them by integrating multiple services.

Q: Why more industrial and institutional projects?
Industrial and institutional projects have contributed significantly to our order book and revenue in recent years. While the average share of these projects in topline was ~48% between 2011-12 and 2016-17, it has increased to ~85% in 2018-19, as mentioned earlier. We are intensely focused on industrial and institutional projects as these are time-bound and quality-oriented. We have witnessed faster decision-making from clients awarding these projects, which facilitates faster turnaround. Additionally, projects from corporate or private groups normally have a healthy payment cycle including 5-10% mobilization advance upfront; this sufficiently covers our working capital requirements

Q: In a sector that is known for highly leveraged balance sheets, PSP Projects continues to maintain a strong financial profile. How are we achieving this?
Your Company has a strong net cash position of 248 Crores, mostly used as collateral towards bank facilities / performance guarantees for project execution. Our net cash position also ensures that our interest expense remains largely flat year-on-year as short-term funding is taken against fixed deposits of 62 Crores. As a strategic decision, we are more geared towards projects with upfront interest-free mobilization advances. Payments for raw materials and equipment are made against the advance received, thereby reducing our capital requirements. Strong oversight and operational efficiencies in project management and execution have further kept our working capital cycle at efficient levels. Trade receivables days for 2018-19 have reduced to 50 days from 58 days for 2017-18, which is probably among the lowest in the industry. Investments in technology have also played a pivotal role in optimising inventory levels. Additionally, due to efficient management of funds, payment to suppliers is also done on time, leading to strong creditor relations

Concalls - 2018

Q: Okay. Last thing about EBITDA margins, are the EBITDA margins in the range of 15% - 16% sustainable going forward?
No, it will be in the range of 12% and 13%, it would not be between 15% - 16%, because for the time if you see last previous quarters when we declared our results, the projects were mostly without cement and steel. When we work for a corporate company they give us projects without cement and steel. So, when a major material like cement and steel, sometimes granite and other materials does not get included in the top-line, so you would see EBITDA margins last quarter also till March you were seeing that 14% - 15%, but generally if you compare and the project is with material, including all material, now after GST most of the companies are going to give us order with material because that input credit can only be availed if they put cement and steel in our scope. So, after getting the cement and steel on our project cost or our top-line I would say it will be somewhere in the range of 12% and 13%.

Q: And in the same light, on the same project, so our average ticket size of the project that we have is around Rs. 45 crores, you just mentioned in the opening remarks. So, obviously, this SDB project is of a different scale, so how did we get qualified for a project like this?
Sir, actually what has happened, when they were asking for so many vendors to apply for this project, it started somewhere in January 2017, so they just knew about our company, we did one large project of government that is Rs. 242 crores, area was about 18 lakh square feet which was to be completed in 30 months and we did in 24 months and that was a record breaking timeline and that was the talk of the town. So they also gave us that opportunity and asked that if the turnover of any company is till Rs. 500 crores we can qualify them for this type of project and the presentation, we were asked first for the presentation and then we were qualified. And in the presentation also they could understand and they could see the confidence that we can handle such a type of project. So, they qualified us and actually we stood lowest also.

Q. And in terms of your own execution capabilities, how do you see that over the next two to three years. Say for example over two years, you may become say Rs.1000 Crores, Rs.1500 Crores kinds of a revenue, but can you do Rs.2000 Crores, Rs.3000 Crores of revenue per year and to do that what kind of what I would say resource mobilization required, working capital plus non working capital both?
If you really see through our total journey from 2006 to 2018, we started with Rs.28 Crores and this year we will be landing somewhere more than Rs.600 Crores. So probably the strength of the company lies in the culture that we have created and every now and then we are increasing people, so gradually very efficiently we have been expanding to 30% to 40% and we would like to maintain that base by increasing our manpower. The basic idea for having construction company to expand is its capability to execute and the way we have executed since last 10 years with a gradual growth of 30% to 40% presently also we have got this Rs.1575 Crore project of Diamond Bourse, totally considering the project as PSP 2.0 and we have already mobilized with the bank that most of the peoples say 30% to 40% concern we have shifted from Ahmedabad and 40 to 60 people we have hired new and the project is going fine, so it is all about the people who are with the company since so many years and we add on those people and having four to five years because experienced people can handle the single project you can add rest of the people from the market, so it is more important about the top management resources rather than capital end machinery.

Q. Competitive intensity of the company.
The type of projects, the type of name that the company has gathered in and around Ahmedabad and Gujarat, we are known for speed and quality. So when we talk about projects from Rs.25 Crores to Rs.150 Crores really speaking there is a very big vacuum. The companies like L&T Shapoorji are bidding for projects for more than Rs.500 Crores. When they are forced by a client to quote for a project Rs.150 Crores, they are always going to quote more and as these two companies are more concentrating on larger size projects, they do not have their concentration on smaller size projects. So truly speaking we really concentrate on whatever the delivery time and the quality, I do not see there is a big competition as far as our company is concerned for a smaller size project of Rs.150 Crores.

Q. Okay and just alluding to an earlier question that was asked on resources, how difficult is it in and around Ahmedabad to find high skilled or more experienced manpower that would be used to working on projects of larger sizes?
In this my journey of 35 years and the journey of our new company PSP projects limited of 10, 11 years, we always try to create a culture, wherein what are the standards we should have rather than what the industry is having, so it is all about training of your own people, getting them experience of four to five years within the company and putting them on larger size project has given us a good example all the time working well. So nobody is so smart and so much you can say smart enough for this type of project, if a person working in L&T may not work efficiently for my company. He has to get in my culture and so what we do is usually the project head level people are always repeated with one other project when two people are already working on a single project. So once we have got training of four to six months we always put him on a new project, so it is about the company’s culture, company system, how company operates, what are the speed criteria, what are the quality criteria so this is how we go and I always believe in better to train people to your set up rather than getting the people from the top most company’s market.

Concalls - 2021 (Precast)

Q: Just I want some color. I mean sorry for making you repeat but I want some color on this facility picture developing for 75 Crores which you mentioned in your initial comments, could you just throw some more color on it?
See this is a precast building construction plant wherein we will be making a new column RPC abrading at the factory and we will be installing at site. Previously I was thinking on this project since last four years to five years but previously the portal provisions will not go strong but now the portal provisions are so strong and there are so many consultants who have been doing these types of work in America and Europe, they have also started designing the projects in India and also the technology has been expected for so many types of building and so you must have seen so many projects going in Hyderabad which is up to 30 storey. Now looking to the present scenario or looking to the 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.

The land is available which is at 35 km from Ahmedabad, which is 15 km from Sanand, it is 34 or 40 km from Vadodara so these are the industrial areas which we can gather at the same time we can gather real estate projects whenever required and whenever it is expected in the market from Ahmedabad. We can do these precast work basically up to 200 km but largely if we say lesser distance better is the viability so that is why we have selected this land.

It is not only about the COVID impact even if you see the hierarchy, mason’s son will never become mason, labor son will never become labor, so more and efficient coming up in this all the states of India there are going to be some scarcity of labor in maybe in that four to five years and more or less the business has become seasonal so whenever there is shortage of labor, when there is monsoon, there is a shortage of labor, when there is Holi, there is a shortage of labor, when there is Diwali again there is a shortage of labor, so looking all these things and company will keep the phase consistent I think these types of facilities will always help the company to go on a consistent way so that overall project timelines are not affected.

Q: Does this add anything to the margins? This will improve our margin Sir?
You cannot say it will improve our margin. It depends on the type of the project and the necessity of the client. When we talk about any good product or any technological product once it is accepted in the market there will be client who need their building so fast and it helps the requirement of the client of course it is going to pay us more but that depends on future and we cannot say as in that six months any of the clients will be a support but at least we can say after one year of operations we will be in a position to demand more.

Presently we are not thinking of increasing our margin. It is a facility which is going to give us a different image in terms of dealing with the product with the good quality and in time. As of now as a technocrat I am targeting more to convince the people in terms of how better we are in quality and how better we are enduring and once that is convinced in the market I think we will be in the demanding face to go for a better margin.

More and more it is going to be labor dependency and the timelines are not being managed just because of the labor deficiency and uncertainty of labors. So, as and when these things is usually accepted whether we are making a large size bungalow scheme or whether you are making a 30-storey commercial building or whether you are making a 24-storey or 30- storey residential building, all these projects can be converted into precast once this technology is being accepted in the market, it is not that it is not accepted at all. It is the mindset of the people from where it is coming and we can go on to a total solution whether he wants to finish up the building, he wants to give us the structure part, he wants to give the foundation whatever way. This will come as it cannot be sold as a commodity or a product it has to be sold as a solution.

Q: Okay, Sir just one more thing is it true that this is slightly more expensive than the normal construction process which we follow and the benefit should only come if we do heavy volumes only then we are able to save some cost is that understanding correct?
You are to an extent right but I would say if you value for quality and if you value for timeline I think it is not costly. If you clearly compare with the conventional building it is costly at a consigned percent of course if you purely compare with our regular RCC construction with a precast construction it can be costly to 10% extent but if you really have a value for timeline if your project is being getting completed before six months and your revenue will be PAT in before six month if it is a rental based project I would say then it is cheaper than conventional RCC.

The differential cost is not that much high it is about 10 to 12% through conventional RPC, but probably it is about when we talk about the conventional RPC it ranges from 700 to 800 and if there is a rise of 10% to 12% which is Rs.70 to Rs.80 per square feet, Rs.70 to Rs.80 per square feet is not a cost when the developer is getting a better product, quality and the most important savings 30% to 40% of his timeline. So, it is a consistent work which is going on in time and with a consistent quality that is more important, and now day-by-day things are moving in a direction that people want quality at the same time they want to reduce the timeline also.

Concall 2021:

Q: Okay. So, are we open to airports and railway station development?
Airport is a large building complex which is over first in the (Inaudible) only. So, that is the reason that presently we are able to qualify up to 600 to 700 crore so probably when we complete Surat Diamond Bourse we will be in the range to compete up to 2000 crore criteria. In that we will be able to bid for 1000 crore plus projects which usually contain airports.

Q: For next year I am looking like similar kind of topline even for Rs.1600 Crores when you would have expected some growth because of lack of new orders, so between now and may be next three to four months it becomes very crucial for you to bring orders to continue to show that growth momentum even in the next year otherwise we are looking at a degrowth from the current order book.
That is what we are also initiating, targeting, planning and doing that, but the thing only if we cannot go into any such type of orders where we proceed aggressively, so that we compromise on our overall perspective that is my worry. So probably first worry about the orders and orders will 110% complete in March end and we will have sufficient orderbook to handle for the next two quarters. Even if we are not getting orders till March, we are not going to get impacted in April or May, so that is my take, which I personally feel, we will let us go slowly for the next three months and even if within this three months, I am expecting more than Rs.1000 Crores of order book is not a problem in that, but only thing is entering into any prospects of project wherein we are just aggressively bidding just to maintain our top revenue, I personally feel we should not hurry about the bid pipeline.

Q4 Concall:

Q: so my first question is that nearly 13 years you have built a Company from scratch to nearly 1300 crores turnover, I just wanted to understand going from here to 3000-4000 crore turnover, how do you view the challenges we could see and our plans for it, in terms of management of working capital and management bandwidth be able to execute multiple projects concurrently across multiple states, I just wanted to understand how you view the path ahead for the next three to five years and how you are strategizing for it?
It is not about the 3000 or 4000 crores what we are expecting, it is all about what we would like to grow, the pace with which we have grown it depends on the management bandwidth. There is regular bandwidth which we can all expect is 25% to 30%, but we have always grown more than 30% so when the bandwidth of the person of Management goes on increasing in the face of 22% to 25% and if your credentials are good and if you are able to perform well on the execution side, I think whatever value we think about, it is whether 3000 or 4000, I do not visualize for the next three to four years, but at least I can say about next two years, we would be able to manage that in a proper way as far as our Management bandwidth is good and it is getting strengthened at the same time our credit facilities are also getting increased, so from 610 to we have increased our credit banking facility to 1047 crore already, now it is only about Management bandwidth which we have been doing since last three-four years and we have been doing better and better as far as the growth is concerned, so we can expect 20%-25% growth and regularly we should add on people so that the culture remains the same so that we can achieve the target what we are expecting or what you are saying to reach up to 3000 crore or 4000 crore.

Q: But do you see that the quality of receivables could be a concern going forward as the base of Government revenues increases?
No, I do not think so because as far as PSP order book is concerned and wherever or whatever projects which we are going ahead, supposing if you talk about the UP Medical College and Hospital these are all the projects which are having finance and usually where we bid for a Government projects, usually it is some of the marquee projects of that Government, probably we have not faced till now and we would expect it will not face too much problem in terms of finance cost, receivables from Government.

Q: In an earlier call you had mentioned that about how like some of the larger players like L&T and Shapoorji are now bidding aggressively in the large projects and how we are being cautious on maintaining our usual margins and we are bidding for projects, so any inputs on how the competition bidding is turning out this time and since we had a slew of order wins recently, any comments on the margin profile in these orders, will this be in our usual sort of range?
No what we usually bid we have some criteria within the office and what type of permissions that they are in the tender, what level of organization it is whether it is Government or private, if it is a Government project what are the liabilities which is lying on the tender and depending on that we could put in our margin as cost of percentage and that should in return be somewhere in the range of it will be converted in the level of 11% to 12% and we bid, rest of the companies how they bid, I would take there can be a difference of overhead from different, different companies, we are able to manage our finance properly, we are still able to manage our overheads properly, I think we would still stand competitive with these companies, even if they will be little bit aggressive.


  1. The company’s share of govt revenues is significantly increasing - could cause concerns on stuck orders.
  2. High competitive intensity in the industry. Will be up against the likes of SP, L&T when competing for larger size orders.
  3. Key man risk - operations pretty dependent on the promoter with the promoter himself involved in most of the projects.
  4. Possible losses of 14 crores towards resource mobilization and encashment of BG in Bhiwandi project. Under litigation now, management believes it can work towards resolution with escalated costs or get a ruling in its favor in not letting clients encash BG.
  5. Precast plant has pretty average economics as a standalone basis. 1.5 asset turns and 11-13% margins. The economics of it makes sense only for sites within a 200km radius, so it mostly serves just the markets of Ahmedabad, Sanand, Vadodara. If the clients don’t share the management vision on precast based buildings, this could be a 75-80 crore misallocation.
  6. Currently, almost all EPC companies are sitting on high orderbook, slowdown in order flows could deteriorate revenue visibility.

Screenshot 2021-07-07 at 9.39.53 PM

Management has guided for 20-25% growth going forward. Valuations are favourable on a normalized basis and it could be an interesting company to track in the EPC space.

Disc: Invested.