Analyst corner: High valuation for PSP Projects with EPS of Rs 23 – Anand Rathi

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Updated: March 29, 2019 3:24:47 AM

The management pegs the outstanding OB at Rs 3,000 crore (~3.1x TTM BtB).

Analyst corner, PSP Projects, Ebitda, Vedanta Steel, Essar Oil, Nayara EnergyThe project has been slightly delayed (by 40 days) but the management is positive of delivery by the scheduled June 2020 deadline. It expects Rs 700-750 crore in FY20, the rest in FY21.

Anandrathi

PSP Projects’ record of improving operations and the inherent potential for a further scale-up led us to meet its management represented by prom-oter Prahaladbhai Patel. We sought to look into the coming shape of things for PSP particularly, and the industry in general. The management pegs the outstanding OB at Rs 3,000 crore (~3.1x TTM BtB). Despite its predominant Gujarat focus, the management is open to diversifying into south, Maharashtra and, to some extent, Rajasthan. However, the diversification would be measured. Originally, a Rs 1,570-crore project, Rs 1,280 crore is pending execution with a large part of this to come in FY20 as it commences facade and MEP works in coming months. The project has been slightly delayed (by 40 days) but the management is positive of delivery by the scheduled June 2020 deadline. It expects Rs 700-750 crore in FY20, the rest in FY21.

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Its clients are largely from the private sector; where, competition for such orders is low (in contrast to orders in the public sector). Its geographical concentration further allows the management a greater handle to be involved in execution. This is reassuring to clients and gives it an edge over the larger competition. The management has maintained its FY19 Rs 1,000-crore revenue guidance (implying Rs 290 crore in Q4). For FY20, it sees a potential to deliver Rs 1,300-1,500 crore (largely driven by a peak-execution cycle at the SDB). Ebitda guidance too has been reaffirmed at 13-14%.

At the CMP, the stock quotes at 20x TTM EPS of Rs 23. We believe the company’s sturdy order backlog, focused approach, execution capabilities, healthy balance sheet and better return ratios call for such a high valuation. The management does not rule out gradual diversification but is least interested in looking at the north zone for growth. Its preference is for the south (the major focus will be here), Maharashtra and Rajasthan. It sees a pipeline of Rs 2,000 crore, largely between two projects of a cumulative Rs 1,500 crore, one by Vedanta Steel (in Barmer, Rajasthan), the other by Nayara Energy in Jamnagar (formerly Essar Oil; negotiations already held, currently in-process approval of Russian partner). Besides these, it is in talks with Maruti Suzuki for a hospital project of `100 crore (with an execution timeline of a year), among others.

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