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  • CMP : 878.0 Chg : -3.70 (-0.42%)
  • Target : 720.0 (26.09%)
  • Target Period : 12-18 Month

19 Oct 2022

Extended Monsoon impacted execution pace...

About The Stock

Incorporated in 2008 by Prahladbhai Patel, PSP Projects (PSP) is one of the prominent contractors offering a diversified range of construction and allied services. Its focus remains on industrial, institutional, government, government residential and residential projects.

  • PSP reported 34.3%, 31.2%, 31.3% CAGR in topline, EBITDA, PAT CAGR, respectively, during FY17-22
  • Prudent management, net debt free, robust return ratios (RoCE: 25+%)
Q2FY23 Results

PSP reported subdued number during Q2FY23.

  • Revenue declined 8.7% YoY to ₹ 356.6 crore as execution pace in key projects got impacted by heavy and extended monsoon period.
  • EBITDA margin moderated to 10.8% (down 319 bps YoY) due to benign revenue recognition, and higher employee expenses. Also, commencement of execution in newer projects (attracts lower margins during initial phase of construction) impacted margin performance. Effectively, EBITDA at ₹ 38.6 crore, was down 29.5% YoY.
  • PAT declined 37.4% YoY to ₹ 22.9 crore
What should Investors do?

PSP’s share price has grown at ~6% CAGR over the past five years (from ₹ 419 in October 2017 to ₹ 571 levels in October 2022).

  • We maintain our BUY rating on the company
Target Price and Valuation

We value PSP at ₹ 720/share (14x FY24 P/E).

Key Triggers for future price performance
  • PSP’s pre-qualification for public projects would rise to ₹ 2,500+ crore with the completion of the Surat Diamond Bourse (SDB) project. Addition of big ticket sized project is expected to boost its overall order book position
  • Significant traction and orders for pre-cast facility is likely to bring incremental benefits and associated revenue
  • Expect revenue, earning CAGR of 15.3%, 6.9%, respectively, in FY22-24E
Alternate Stock Idea

Besides PSP, we like PNC Infra in the EPC space.

  • Strong execution, lean balance sheet and healthy order book
  • BUY with a target price of ₹ 350/share

Particulars

Particulars (₹ crore) Amount
Market Capitalization 3,480.4
Debt (| crore) FY22 116.2
Cash (| crore) FY22 195.2
EV (| crore) 1,978.2
52 week H/L (₹) 1,029.9/609.0
Equity Capital 39.6
Face Value (₹) 10.0

Price Chart

Key Risks

(i) Delay in execution of key projects; (ii) Significant increase in commodity prices

Research Analyst

Bhupendra Tiwary
bhupendra.tiwary@icicisecurities.com

Lokesh Kashikar
lokesh.kashikar@icicisecurities.com

ICICI Securities – Retail Equity Research

Key Financial Summary

| crore FY19 FY20 FY21 FY22 5 Year CAGR(FY17-FY22) FY23E FY24E 2 Year CAGR (FY22-FY24E)
Net Sales 1,044.0 1,499.3 1,240.9 1,748.8 34.3 1,944.9 2,325.0 15.3
EBITDA 148.9 191.0 134.8 256.5 31.2 242.4 297.1 7.6
EBITDA Margin (%) 14.3 12.7 10.9 14.7 - 12.5 12.8 -
Net Profit 90.2 129.3 80.8 162.4 31.3 149.1 185.7 6.9
EPS (|) 25.1 35.9 22.4 45.1 - 41.4 51.6 -
P/E (x) 22.8 15.9 25.5 12.7 - 13.8 11.1 -
Price / Book (x) 5.5 4.5 3.8 3.0 - 2.5 2.2 -
EV/EBITDA (x) 12.5 10.1 14.2 7.7 - 8.2 6.7 -
RoCE (%) 37.6 35.9 20.7 31.0 - 24.4 25.2 -
RoE (%) 24.3 28.3 15.5 23.7 - 18.5 19.4 -
Source: Company, ICICI Direct Research

Key business highlight and outlook

Order book robust, execution to pick up considerably

As on September 30, 2022, PSP’s order book was healthy at | 5,081 crore (2.9x book to TTM revenues) aided by | 1,512 crore of order inflow secured during H1FY23. Most of its older projects are in the execution/ fully mobilized state (excluding two EWS Housing projects in Bhiwandi and Pandharpur worth ~| 730 crore). Additionally, it has secured orders worth ~| 345 crore post Q2FY23 -  strengthening its order book position even further. Going forward, PSP has guided for overall inflows worth | 2,500+ crore during FY23E (vs | 1,802 crore of projects secured in FY22) to be backed by better opportunities coming from both - government and private clients, its expansion into different states, and improved eligibility of higher-ticket size projects. On the execution front, the company has retained their topline guidance of | 2,200 crore despite muted performance reported in H1FY23 (revenue: | 701.8 crore; -1% YoY growth). This is likely to be driven by its healthy order book position, and expected pick-up in execution going ahead. However, on a conservative basis, we expect PSP to report revenue CAGR of 15.3% during FY22-24E with margin likely to hover at ~12.5%.

Lean balance sheet, prudent working capital management …

PSP has a lean balance sheet structure backed by its asset light model (no investments in metro and roads projects) and has a net cash positive position. While capex incurred towards pre-cast facility (| 109 crore) has increased the debt-level, to some extent, we do not expect a major swing in its net debt position further as incremental free cash flows would be sufficient for its working capital and capex requirement, going forward. Also, the company has exhibited prudent working cycle management, which was at 30 days at Q2FY23-end. We expect working capital cycle to hover in the same range, going ahead.

Key conference call takeaways

  • Order inflows and pipeline: PSP has received highest ever order inflow of | 1,512 crore during H1FY23 (vs | 637 crore during H1FY22) majorly secured in the state of Gujarat. At YTD FY23 level, the company has secured projects worth | 1,857 crore. Going forward, the company has indicated towards strong order pipeline of ~| 5,000 crore (45% from Private clients; 52% from Gujarat state). With these, the company is targeting overall orders worth | 2,500+ crore during FY23, and 20-25% YoY growth in inflows during FY24.
  • Impact of monsoon on execution and guidance: As per the management, the execution in the key projects such as Medical college and Hospital job in Uttar Pradesh (outstanding order book value: | 1,239 crore), and new orders (worth | 1,512 crore) were at basement/ground and structural levels during Q2 FY23. The progress of abovementioned projects got hit by heavy and extended monsoon period which resulted into lower productivity. Additionally, the company has increased their employee strength in the recent past to aid construction work in new orders. However, under-utilization of employees coupled with benign revenue recognition, and execution for newer projects (attracts lower margins during initial period of construction) has impacted overall margin performance. Going forward, the management has indicated towards picked up execution pace from October’22 with considerable decline in rains which is likely improve its overall performance significantly during H2FY23.
  • Margin: Conservatively, the company expects overall margins to hover in the range of 11-13% over the medium term depending on type, size and stage of projects. Margin for pre-cast facility are expected to be in line with EPC orders.
  • Update on Maharashtra projects: PSP has secured two projects in the state of Maharashtra till now. However, it faced several challenges in both the projects. In the residential project at Pandharpur, PSP has significantly slowed down execution pace and has sent legal notice to the respective authority with regards to clearance of outstanding bills (~| 17 crore) and requirement of further clarity on pending work. For the residential project at Bhiwandi, PSP has secured project couple of years back but no significant progress was seen mainly from the government side due to land acquisition problem. Later on, PSP demanded rise in the project cost in order to commence execution to offset significant increase in raw material costs and protect its margin. With government denying the escalations, PSP went to court and hearings are going on. The next hearing is during Nov’22 for the finalization of arbitration amount.
  • Opportunities from Central Vista and other big-ticket size projects: As per the management, the authority has tendered jobs worth | 6,500 crore till now in the Central Vista Project. Hence, significant opportunities (to the tune of | 12,000- 13,000 crore) are still pending, and likely to come at bidding stage over next year. Also, the company has bidded for Surat Municipal Building project having potential order size of | 1,080 crore. However, it is likely to get cancelled as PSP was a lone bidder. With Gujarat Election around the corner, the retendering and awarding process is likely to take time
  • Pre-cast facility: PSP has commissioned precast facility in Gujarat during December 2022 with the objective to provide sustainable building solutions and technological upgradation. Currently, the company is getting higher number of enquiries with completion of orders for various godown, buildings and warehouses. Order Book from Precast is to the tune of ₹236.4 crore at Q2 FY23-end (secured repeat order for National High-Speed Project from L&T worth |195 crore during Q2FY23).
  • Debt: Long term borrowing has declined from | 50 crore at Q1FY23-end to | 46 crore at Q2FY23-end. However, working capital loan has increased from | 67 crore at Q1FY23-end to | 111 crore at Q2FY23-end mainly due to increase in requirement towards newer projects for mobilization purpose. The management expects working capital debt to normalize to | 60-80 crore by FY23-end.
  • Working capital days: Working capital days at the end of Q2FY23 declined to 30 days (vs. 35 days at Q1FY23-end) mainly due to increase in Creditor days (71 vs. 54 days at Q1FY23-end). Debtor remained steady at ~72 days, while there was increase in inventory (29 vs 19 days at Q1FY23-end)
  • Capex: PSP incurred negligible capex of | 6 crore during Q2FY23 (vs | 3 crore during Q2FY23). Going forward, the company has guided for overall capex of | 35-50 crore (3-4% of sales) during FY23E.

Disclaimer

ANALYST CERTIFICATION

I/We, Bhupendra Tiwary, CFA, MBA, Lokesh Kashikar, MMS, Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. It is also confirmed that above mentioned Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months and do not serve as an officer, director or employee of the companies mentioned in the report.                       

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