Subscribe with Long Recommendation Term View BACKGROUND Price Band Rs. 205 Rs. 210 (PSP) is a multidisciplinary construction company Bidding Date 17 th Sep - 19 th May 2017 Book Running Lead Manager Registrar Sector Karvy Investors Services, Motilal Oswal Investment Advisors Karvy Computershare Pvt. Ltd. Construction Minimum Retail Application- Detail At Cut off Price Number of Shares 70 Minimum Application Money Rs. 14,350 Discount to retail Payment Mode No discount ASBA Standalone Financials (Rs Cr) FY16 9MFY17 Revenue 458.0 239.1 EBITDA 39.3 32.5 Net Profit 24.9 21.5 Lower Upper Valuations Band Band Market Cap (Rs. Cr) 738.0 756.0 EPS (x)* 6.9 6.9 P/E Ratio (x)* 30.3 30.3 ROE (%) (adj)* 9.0% 9.0% Enterprise Value (Rs. Cr) 690.2 708.2 *calculated on 9MFY17 annualised no. (post issue basis) Post Issue Shareholding Pattern Promoters 72.0% Institutions 21.0% Bodies Corporates & Public 7.0% Offer structure for different categories QIB (Including Mutual Fund) 75% Non-Institutional 15% Retail 10% Post Issue Equity (Rs. Cr) 36.0 Issue Size (Rs. Cr) 206.4-211.7 Anupam Bafna Research Analyst (+91 22 3926 8186) anupam.bafna@nirmalbang.com offering a diversified range of construction and allied services across industrial, institutional, government, government residential and residential projects in India. PSP provides services across the construction value chain, ranging from planning and design to construction and post-construction activities to private and public sector enterprises. Being a Gujarat based firm, historically PSP focused on projects in the Gujarat region but now it is diversifying into other region like Karnataka and Rajasthan. Over these years, PSP has successfully executed a number of prestigious projects across Gujarat. Investment Rationale: a) Strong track record of successful project execution b) Robust order book and growing pre-qualification credentials c) Healthy financial performance d) Experienced promoter and management team Details of the Issue: The public issue of PSP consists of a fresh issue of 7.2 lakh equity shares and Offer for sale of 2.88 lakh Equity Shares totaling to 10.08 lakh equity shares aggregating up to Rs. 211.7 crore (at upper price band). Objects of the Issue: The issue proceeds will be used in: (a) Rs. 63 Cr for funding working capital (b) Rs. 52 Cr for capital expenditure (c) General corporate purposes Valuation and Recommendation: PSP projects has a decent business model and reported a consistent financial performance. Between FY12-16 PSP s revenues grew at CAGR of 26.5% with stable EBITDA margins. PAT grew from Rs. 8.4 Cr in FY12 to Rs. 24.9 Cr in FY16, CAGR of 31.4%. PSP has delivered healthy ROEs during the same period. Further, PSP manages its working capital requirements well and has negative working capital and net debt since last 5 years. Going forward, with strong order book, diversification of geographies and growth in the construction industry, PSP is likely to deliver healthy financial performance. On the valuation front, at the given upper price band of issue of Rs. 210, PSP is offered at P/E of 20.8x (FY18E) it s diluted EPS which we believe is aggressively priced; hence there is limited room for upside is near term. One should look at subscribing to the issue only with long term view. Financial Snapshot FY13 FY14 FY15 FY16 9MFY17 Revenue 257.2 210.4 280.5 458.0 239.1 YoY Growth(%) -12% -18% 33% 63% EBIDTA 22.0 16.7 22.4 39.3 32.5 Margin(%) 8.5% 8.0% 8.0% 8.6% 13.6% Net Profit 12.3 10.1 14.1 24.9 21.5 Margin(%) 4.8% 4.8% 5.0% 5.4% 9.0% P/E (FY16) @ Rs. 210 * 30.3 26.4 P/BV @ Rs. 210 1.0 6.9 ROE (%) * 44.1% 37.3% Source: RHP * annualised 1 P a g e
Business (PSP) is a multidisciplinary construction company offering a diversified range of construction and allied services across industrial, institutional, government, government residential and residential projects in India. PSP provides services across the construction value chain, ranging from planning and design to construction and post-construction activities to private and public sector enterprises. Being a Gujarat based firm, historically PSP focused on projects in the Gujarat region but now it is diversifying into other region like Karnataka and Rajasthan. More recently, PSP have geographically diversified its portfolio of services and are undertaking or have bid for projects pan India. Incorporation in August 2008, the company has executed 80 projects as of March 31, 2017. Over these years, PSP has successfully executed a number of prestigious projects across Gujarat. Corporate Structure Industry Prospects The Indian construction industry s outlook is bright and is set grow with average annual growth of 5.65%. Growth will be driven by investments in infrastructure and energy construction projects, and the continued expansion of residential and commercial buildings. India s construction industry is expected to reach a nominal value of Rs. 40.1 trillion (USD 593.8 billion) in 2020; up from Rs. 25.6 trillion (USD 406.2 billion) in 2015. Various government flagship programs - including 100 Smart Cities Mission, Housing for All, Atal Mission for Urban Rejuvenation and Transformation ( AMRUT ), Make in India and Power for All will be the growth drivers. Under the 100 Smart Cities Mission, the government aims to provide a more sustainable and clean environment by 2020. In total, Rs. 480.0 bn has been allocated. Each selected city will receive Rs. 2.0 bn in funding during the first year and Rs. 1.0 bn for the following three years. Government has launched the Housing for All by 2022 program in 2015, under which it set a target to construct 20.0 million social housing units across the country by 2022. The program is expected to be executed in three phases. During the first phase, 100 cities will be covered by 2017, while 200 cities will be covered by 2019 under the second phase, and the remaining cities will be covered by 2022 under the third phase. The government aims to attract more private investments to finance its flagship program. 2 P a g e
AMRUT will provide basic infrastructure services such as water supply, sewerage connection, green spaces, parks and transportation facilities. The program will be implemented in 500 towns and cities. The government will invest Rs. 500.0 bn between 2015 2016 and 2019 2020 under AMRUT. Investment Rationale Strong track record of successful project execution Over the years, PSP have developed capabilities across various stages of a typical project life cycle, commencing from business development, tendering, engineering and design, procurement and construction. This has also helped PSP to build their expertise in executing projects across a wide range of segment such as the construction of manufacturing and processing facilities, hospitals, government buildings, educational institutes, corporate offices and residential buildings, which in turn, enables them to diversify their order book and reduces their dependence on any one sector or type of project. The Company has established a track of successfully executing a diverse mix of construction projects. Since incorporation in August 2008, PSP has executed over 71 projects for a host of corporate, government and other customers across diverse segments. The experienced management and execution teams give a competitive advantage and have contributed significantly in increasing their project execution capabilities. Robust order book and growing pre-qualification credentials The Company s total order book as of March 31, 2017, was Rs.729 Cr, which include of 17 institutional projects, 4 industrial projects, 4 government projects and 2 government residential projects. Further, the order book of Subsidiary s and Joint Venture s stood at Rs.92 Cr and Rs.107 Cr, respectively as on FY17. An order book is considered one of the key indicators of future performance as it represents a portion of anticipated future revenue. PSP s strategy is focused on adding quality projects with potentially higher margins and/or prestigious projects that help enhance with their growing reputation. By diversifying their skill set and order book across different sectors, PSP is able to pursue a broader range of project tenders and consequently, optimize business volume and profit margins. Healthy financial performance PSP has a strong track record of completing diverse construction projects across Gujarat. The Company s standalone revenue has grown from Rs 178.9 Cr in FY12 to Rs 458 Cr in FY16, at a CAGR of 26.5%, and the net profit after tax Rs. 8.4 Cr in FY12 to Rs 24.9 Cr in FY16, at a CAGR of 31.4%. Further for the 9MFY17 PSP s revenues were Rs. 239.1 Cr and PAT was Rs. 21.5 Cr. The Company s total order book as of November 30, 2016, was Rs. 593.9 Cr, which comprises of a number of projects with a relatively short gestation period, and provides the Company with significant near term cash flow visibility. Also, as illustrated in the table below, the company has managed its working capital requirements very efficiently and has negative working capital. Another unique feature of PSP that its net debt is negative since past 5 years. Also the company has robust return on equity, wel above 30% during FYFY14-16. 3 P a g e
Particulars FY12 FY13 FY14 FY15 FY16 9MFY17 Working capital Total Current assets 33.6 30.1 42.9 53.9 52.0 63.4 Total Current liabilities 52.1 60.5 75.9 105.9 117.7 108.6 Net Working capital (18.53) (30.49) (32.98) (52.07) (65.65) (45.17) Net Debt Long term borrowings 15.1 11.5 0.6 0.4 1.0 3.3 Short-term borrowings 8.9 1.8 24.5 32.5 43.3 73.8 Current maturities 1.9 1.7 0.9 0.5 0.9 1.7 Total Debt 25.9 15.0 26.0 33.4 45.2 78.8 Cash and Bank balances 35.9 44.6 68.4 84.8 106.4 124.9 Net Debt (10.07) (29.63) (42.43) (51.41) (61.13) (46.09) Return on Equity (%) 55% 59% 33% 34% 44% 37% Source: RHP, Company Data, Nirmal Bang Research Experienced promoter and management team PSP has qualified and dedicated management team, which is led by Chairman and Managing Director and CEO Mr. Prahaladbhai Shivrambhai Patel. He has experience of 30 years in the business of civil construction. Further, their management team also has qualified, experienced and skilled professionals, who have several years of experience across various sectors. The management team s collective experience and execution capabilities enables PSP to understand and anticipate market trends, manage the growth and expansion of their business operations, and respond to trends in design, engineering and construction of projects based on the preferences of their customers. PSP will leverage on the experience of their management team and their understanding of the construction market to take advantage of current and future market opportunities. Expanding geographical foot prints Having strong position as a fast-growing construction company in Gujarat, PSP intend to expand their geographical footprint and grow the business by increasing orders from outside of Gujarat. To control diversification risks, through an increasingly diversified portfolio, PSP hopes to broaden company s revenue base and also hedge against risks in specific areas or projects and protect themselves from fluctuations resulting from business concentration in limited geographical areas. In FY17, the Company was awarded projects in state of Karnataka and Rajasthan which constituted 19.8% of the Company s total order book as on FY17. The Company has also bid for projects in Kochi, Kerala, Hyderabad, Telangana and Udaipur, Rajasthan. We believe, geographical diversification of the projects will reduce their reliance on home state of Gujarat and allow them to capitalise on different growth trends in different states across the country. 4 P a g e
Breakup of the Company s total order book as of March 31, 2017: State No. of Total Contract O/s Contract % of O/s Contract Contracts Value value Value Gujarat 24 980.1 511.9 52.2% Karnataka 1 108.7 84.3 77.6% Rajasthan 2 152.0 133.0 87.5% TOTAL 27 1,240.7 729.2 58.8% Source: RHP Key Risk and Concerns PSP s business is concentrated in the state of Gujarat and any changes affecting the demand for construction services in the region may adversely impact their business. Revenues are directly dependent on orders the company secure and thus, are difficult to predict. Valuation and Recommendation PSP projects Ltd. has a decent business model and reported a consistent financial performance. Between FY12-16 PSP s revenues grew at CAGR of 26.5% with stable EBITDA margins. PAT grew from Rs. 8.4 Cr in FY12 to Rs. 24.9 Cr in FY16, CAGR of 31.4%. PSP has delivered healthy ROEs in the same period well above 30%. Further, PSP manages its working capital requirements well and has negative working capital and net debt since last 5 years. Going forward, with strong order book, diversification of geographies and growth in the construction industry, PSP is likely to deliver healthy financial performance, but return on equity will be subdued due to expansion in the equity base which will normalize in the long run. We have compared PSP with Ahluwalia Contracts which also has similar business profile. Ahluwalia Contracts with ROE of 21.1% is trading at 21.3x its FY18E EPS. Peer Comparison Company (FY18E EBITDA EV/EBITDA Revenue EBITDA PAT EPS (Rs.) P/E (x) numbers) Margins (x) ROE Ahluwalia Contracts 1,606.2 219.6 13.7% 124.7 18.6 21.3 12.0 21.1% 675.0 60.8 9.0% 36.4 10.1 20.8 10.8 12.3% Source: RHP, Company Data, Nirmal Bang Research On the valuation front, at the given upper price band of issue of Rs. 210, PSP is offered at P/E of 20.8x (FY18E) it s diluted EPS which we believe is aggressively priced; hence there is limited room for upside in near term. One should look at subscribing to the issue only with long term view. 5 P a g e
Financials Particulars - Standalone FY12 FY13 FY14 FY15 FY16 9MFY17 Income: Net Sales 178.6 257.2 210.4 280.5 458.0 239.1 Export Incentive - - - - - Total Operating Income 178.6 257.2 210.4 280.5 458.0 239.1 YoY 44.0% -18.2% 33.3% 63.3% -47.8% Expenses: Raw materials consumed 64.0 98.8 79.3 133.3 190.0 79.7 (Increase)/decrease in inventories 1.5 (0.8) 0.5 (1.7) 0.2 (2.1) COGS 65.5 98.0 79.7 131.6 190.2 77.6 GP 113.2 159.3 130.7 148.8 267.8 161.5 GP margin 63.3% 61.9% 62.1% 53.1% 58.5% 67.6% Subcontracting Expenses 11.387 42.831 45.844 43.504 68.316 32.875 Construction Expenses 71.4 75.9 49.0 49.9 130.7 72.4 Employee benefits expense 5.4 6.5 11.2 23.8 14.0 14.2 Other expenses 9.6 12.1 7.9 9.2 15.5 9.7 Total Expenses 163.2 235.3 193.7 258.1 418.6 206.7 EBITDA 15.4 22.0 16.7 22.4 39.3 32.5 Margin 8.6% 8.5% 8.0% 8.0% 8.6% 13.6% Other income 2.1 3.7 4.4 6.5 9.7 10.3 Depreciation 2.8 3.7 3.7 5.2 7.1 5.5 EBIT 14.7 22.0 17.5 23.7 42.0 37.3 Finance costs 2.3 3.8 2.0 2.5 3.4 5.5 PBT 12.4 18.2 15.4 21.3 38.6 31.8 Total tax expense 4.1 5.9 5.3 7.2 13.7 10.3 Tax Rate 32.7% 32.7% 34.6% 33.9% 35.4% 32.3% Minority Interest PAT 8.4 12.3 10.1 14.1 24.9 21.5 YoY 46.7% -17.8% 39.6% 77.4% -13.8% Margin 4.7% 4.8% 4.8% 5.0% 5.4% 9.0% Equity Capital 0.80 0.80 0.80 0.80 3.20 28.80 FV 10 10 10 10 10 10 EPS 104.40 153.13 125.88 175.68 77.91 9.95 Diluted EPS 2.32 3.40 2.80 3.90 6.93 7.96 PE @ Rs. 210/- 90.52 61.71 75.07 53.79 30.32 26.39 BV 191.01 332.44 434.91 586.53 206.54 30.41 P/BV @ Rs. 210/- 1.10 0.63 0.48 0.36 1.02 6.91 EV 757 723 711 700 690 699 EV/EBITDA 49.13 32.89 42.47 31.23 17.53 21.53 EV/Sales 4.24 2.81 3.38 2.50 1.51 2.92 ROE% 54.7% 58.5% 32.8% 34.4% 44.1% 37.3% ROCE% 37.4% 55.5% 35.0% 34.0% 44.2% 36.1% Source: RHP 6 P a g e
Particulars - Standalone FY12 FY13 FY14 FY15 FY16 9MFY17 Equity & Liabilities Shareholder's funds (a) Share capital 0.8 0.8 0.8 0.8 3.2 28.8 (b) Reserves and surplus 14.5 25.8 34.0 46.1 62.9 58.8 Total Shareholder's funds 15.3 26.6 34.8 46.9 66.1 87.6 Non-current liabilities (a) Long term borrowings 15.1 11.5 0.6 0.4 1.0 3.3 (b) Deferred tax liabilities - - - - - - (c) Trade payables - - - - - - (d) Long term provisions 0.5 0.5 0.5 0.6 0.6 0.9 (e)long term liabilities - - - - - Total Non-current liabilities 15.6 12.1 1.1 1.0 1.6 4.2 Current liabilities (a) Short-term borrowings 8.9 1.8 24.5 32.5 43.3 73.8 (b) Trade payables 20.6 35.6 40.0 63.1 69.4 56.2 (c) Other current liabilities 31.5 24.0 33.9 40.4 45.0 48.2 (d) Short-term provisions 0.0 1.0 2.0 2.4 3.3 4.2 Total Current liabilities 61.0 62.3 100.4 138.5 161.0 182.4 Total 91.9 101.0 136.3 186.4 228.7 274.2 Assets Non-current assets (a) Fixed assets Tangible assets 18.0 18.5 18.5 33.2 51.9 51.4 Intangible assets - - - 0.0 0.3 0.5 Capital work in progress - - - 0.2 - - (a) Fixed assets 18.0 18.5 18.5 33.5 52.2 51.9 (b) Non-current investments 0.2 3.5 0.8 0.8 5.0 7.4 (c) Long-term loans and advances 2.9 1.8 1.9 4.0 4.7 21.8 (d) Other non-current assets 1.1 2.3 3.4 8.9 7.5 3.4 (e) Deferred tax asset 0.1 0.2 0.3 0.5 0.9 1.3 Total Non-current assets 22.4 26.3 24.9 47.7 70.3 85.8 Current assets (a) Inventories 1.4 1.8 1.6 4.2 4.0 9.5 (b) Trade receivables 19.0 12.2 13.8 23.9 10.4 8.1 (c) Cash and Bank balances 35.9 44.6 68.4 84.8 106.4 124.9 (d) Short-term loans and advances 11.9 14.0 16.8 9.9 19.4 26.2 (e)current Investments 0.1-8.1 11.8 13.0 13.9 (f) Other current assets 1.2 2.1 2.7 4.1 5.2 5.8 Total Current assets 69.5 74.7 111.4 138.7 158.4 188.3 Total 91.9 101.0 136.3 186.4 228.7 274.2 Source: RHP 7 P a g e
Disclaimer: Nirmal Bang Securities Private Ltd. (hereinafter referred to as NBSPL ) is a registered Member of National Stock Exchange of India Ltd., Bombay Stock Exchange Ltd. and MCX stock Exchange Ltd.. We have been granted certificate of Registration as a Research Analyst with SEBI. Registration no. is INH000001766 for the period 23.09.2015 to 22.09.2020.NBSPL or its associates including its relatives/analyst do not hold any financial interest/beneficial ownership of more than 1% in the company covered by Analyst (in case any financial interest is held kindly disclose)nbspl or its associates/analyst has not received any compensation from the company covered by Analyst during the past twelve months. NBSPL /analyst has not served as an officer, director or employee of company covered by Analyst and has not been engaged in market making activity of the company covered by Analyst. The views expressed are based solely on information available publicly and believed to be true. Investors are advised to independently evaluate the market conditions/risks involved before making any investment decision Nirmal Bang Research (Division of Nirmal Bang Securities Pvt. Ltd.) B-2, 301/302, Marathon Innova, Opp. Peninsula Corporate Park Off. Ganpatrao Kadam Marg Lower Parel (W), Mumbai-400013 Board No. : 91 22 3926 8000/8001 Fax. : 022 3926 8010 8 P a g e