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Tuesday, May 16, 2017 Click here for Rating Reckoner
PSP Projects
Less constructive for investors
CM RATING35/100
Promoted by first-generation entrepreneur Prahaladbhai Patel in 2008, PSP Projects (PSP) is a multidisciplinary company developing industrial, institutional, government, government residential and residential projects in India. Services offered are across the construction value chain, ranging from planning and design to construction and post-construction activities to private and public sector enterprises. Almost 80 projects had been completed till March 2017.

Plants and offices are developed for the pharmaceuticals, food processing, engineering, hospitals and healthcare services, education, retail and hospitality sectors. Clients whose projects are being currently implemented include Cadila Healthcare; Care Institute of Medical Sciences; Claris Injectables; Emcure Pharmaceuticals; Gelco Electronics Pvt Ltd; the Gujarat government-managed GCS Medical College, Hospital and Research Centre; Inductotherm (India) Pvt Ltd; Intas Pharmaceutical Ltd; Kaira District Co-operative Milk Producers' Union (Amul Dairy); Nirma and Torrent Pharmaceuticals.

Construction of group housing and townships as well as independent residences is undertaken for select customers besides producing ready-mix concrete.

Historically, the focus is on projects in Gujarat. Recently, to diversify geographically, bids have been put for pan India projects.

Around 28% of the contract income came from execution of institutional projects, 22% from government projects, 22% from industrial projects, 19% from government residential projects, and around 9% from execution of residential projects in the nine months ended December 2016.

The Rs 729.17-crore order book comprised 17 institutional projects, four industrial projects, four government projects and two government residential projects. Further, the order books of subsidiaries totalled Rs 90.84 crore and joint ventures Rs 107.39 crore end March 2017. Orders from the Gujarat government constituted around 70% of the book, Rajasthan 18% and rest 12% Karnataka.

The Offer and the Objects

The offer comprises fresh issue of 72 lakh shares. At the lower price band of Rs 205 per share, the size of the issue is Rs 147.60 crore and at the higher price band of Rs 210 per share, Rs 151.20 crore.

The offer also comprises offer for sale of 28.80 lakh shares. At the lower price band of Rs 205 per share, the size of the issue works out to Rs 59.04 crore and at the higher price band of Rs 210, Rs 60.48 crore. The minimum bid lot is 70 equity shares and in multiples of 70 equity shares. The issue, to be made through the book-building process, will open on 17 May and will close on 19 May, with anchor investor bidding on16 May 2017.

The offer for sale of 28.80 lakh shares is by the promoters and promoter group Prahaladbhai Patel, Shilpaben Patel, Pooja Patel and Sagar Patel.

The objects of the issue include Rs 52 crore towards capital expenditure, Rs 63 crore for capital requirements and rest for general corporate purpose apart from the benefits of listing the equity shares on the BSE and the NSE of enhanced visibility and brand image and providing liquidity to the existing shareholders.

Strengths

Present across the construction value chain. Provides customers a one- stop solution for all the construction services.

Long-standing relationships with customers help in getting repeat orders despite competition: Has executed 14 projects of Cadila Healthcare since FY 20009.

Track record consists of successful project executions in Gujarat.

Financial track record is good. Contract income recorded CAGR of 26.4% and PAT 31.4% from FY 2012 to FY 2016.

Weaknesses

Operations are concentrated in Gujarat, accounting for 100% of total contract income in FY 2016 and 96% of total contract income in the nine months ended FY 2017. Any change in policies, laws and regulations or political and economic environment in Gujarat will have a major effect on the financials.

Most of the order book of the company comprises of fixed price contracts and any increase in raw material and other expenditure will have to be borne by the company.

The business is subject to investments in the construction sector. These are dependent on government and private spending. Demand for services will get affected in the event of any economic downturn or unfavourable government policies.

The business is exposed to implementation and other risks including litigation and retention money issues post execution of projects.

Expanding presence pan India involves execution and implementation risks. The margins will be affected.

Revenues are difficult to predict and are subject to seasonal variations.

There was negative cash flow from operations in the nine months ended December 2016.

Valuation

Standalone net sales were up 63% to Rs 457.98 crore and the operating profit margins (OPM) were up 60 basis points to 8.6%, resulting in a 76% increase in operating profit (OP) to Rs 39.35 crore in the nine months ended December 2016.

There was 50% increase in other income to Rs 9.74 crore. With a 38% higher interest cost to Rs 3.43 crore and 37% jump in depreciation to Rs 7.06 crore, profit before tax (PBT) could improve 82% to Rs 38.60 crore in FY 2016. After providing total tax of Rs 13.66 crore, standalone profit after tax spurted 77% to Rs 24.94 crore.

Standalone net sales stood at Rs 239.10 crore, with the OPM of 13.6%, leading to OP of Rs 32.46 crore in the nine months ended December 2016. Highet margin was due to strong execution of few high margin contracts. Interest cost stood at Rs 5.54 crore and depreciation Rs 5.48 crore, resulting in PBT of Rs 31.75 crore. After providing total tax of Rs 10.27 crore, Pat was Rs 21.48 crore.

On a higher price band of Rs 210, the diluted equity share capital of stands at Rs 36 crore on face value of Rs 10 each. EPS for FY 2016 works out to Rs 6.9. EPS for the nine months ended December 2016 is not annualised due to seasonality of business: generally the second half of every year generates higher revenues compared with the first half. The scrip is offered at P/E multiple of around 30 times FY 2016 earnings.

JMC Projects and Ahluwalia contracts (India) are some of the listed peers. JMC Projects reported standalone net sales of Rs 2484 crore, with Pat of Rs 41.02 crore in FY 2018. EPS for FY 2016 stood at Rs 12.2. At the current market price of Rs 276, the scrip trades at 22.6 times FY 2016 earnings.

Ahluwalia contracts (India) reported standalone net sales of Rs 1249.57 crore, with Pat of Rs 84.41 crore in FY 2016. EPS for FY 2016 stood at Rs 12.6. At the current market price of Rs 397, the scrip trades at around 31 times its FY 2016 earnings.

Most of the past financial track record is due to high-margin government projects that may or may not get repeated. Further, bidding for orders outside Gujarat will not result in a consistent margin performance of the past and business and execution risks will increase going forward, given the size and scale of operations of the company. The scrip at current valuation offers very little for investors.

PSP Projects: Issue highlights

Offer for sale (in Rs crore)
- On lower price band59.04
- On upper price band60.48
Total Issue size for offer for sale ( in no of shares in lakh)28.80
Fresh Issue ( in Rs crore)
- On lower price band147.60
- On upper price band151.20
Issue size of fresh issue (in no of shares in lakh)72.00
Price band (Rs)205-210
Post issue share capital (Rs crore) 36.00
Post-issue Promoter & Group shareholding (%)72.0%
Issue open date17-05-2017
Issue closed date19-05-2017
ListingBSE, NSE
Rating 35

 

PSP Projects: Standalone Financials

1203(12)1303(12)1403(12)1503(12)1603(12)1612(09)
Net Sales178.65257.25210.42280.46457.98239.10
OPM (%)8.6%8.5%8.0%8.0%8.6%13.6%
OP15.4221.9816.7522.4139.3532.46
Other in. 2.113.724.376.519.7410.31
PBDIT17.5325.7021.1228.9249.0942.77
Interest2.283.782.052.493.435.54
PBDT15.2521.9219.0726.4345.6637.23
Dep.2.843.733.665.177.065.48
PBT 12.4118.1915.4121.2638.6031.75
EO 0.000.000.000.000.000.00
PBT after EO12.4118.1915.4121.2638.6031.75
Tax (including Deferred Tax)4.055.945.347.2013.6610.27
PAT8.3612.2510.0714.0624.9421.48
EPS*2.33.42.83.96.9#
*EPS is on post issue equity capital of Rs 36 crore of face value of Rs 10 each
# EPS for 9 months results are not annualised due to seasonality of business
Figures in crore
Source: Capitaline Database

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