Outlook Business — December 07, 2017

38

My Best Pick

22 December 2017 / Outlook BUSINESS

C

atch ‘em young is a phrase used by

James J Heckman, a Nobel laure-

ate economist, in devising a public

policy which shows that investing

in disadvantaged young children has a high econom-

ic return. Though the policy is aimed at promoting

fairness and social justice, it does fi nd application in

investing as well. Identifying businesses at an early

stage with a sound revenue model creates wealth in

the long run.

An industry which is perceived, generally as inef-

fi cient and murky, stands disadvantaged to attract

investments. Construction is one such business. The

market cap of all listed standalone building construc-

tion companies combined is less than # 35 , 000 crore

and their performance has been patchy.

The more familiar you are with a company and the

more you understand its business and competitive envi-

ronment, the better are your chances of fi nding a good

‘story’. This is why Peter Lynch is a strong advocate of

investing in companies with which one is familiar, or

whose products or services are relatively easy to under-

stand. Lynch’s bottom-up approach means that pro-

spective stocks must be picked one by one and then

thoroughly investigated — there is no formula or screen

that will produce a list of prospective ‘good stories’.

I came across one such company in my hometown

(Ahmedabad) that has found the right balance of

growth and fi nancial discipline that distinguishes it-

self from most companies in the construction space.

DARK HORSE

Prahaladbhai Shivrambhai Patel (PSP), a civil engi-

neer and fi rst generation entrepreneur, started PSP

Projects with his personal savings in 2009. The com-

pany got its big breakthrough in the same year when

it won and completed within the stated time line a

# 100 crore-hospital project in Ahmedabad. Since

then, it has executed over 80 projects worth # 1 , 200

crore across all segments. Timely execution and qual-

ity outcome are the two key reasons clients keep com-

ing back to PSP. Since inception, the company has

executed 13 projects for Cadila Healthcare and its af-

fi liates, six projects for Torrent Pharmaceuticals and

its affi liates and four projects for Nirma and its affi li-

ates. The company has also executed many marquee

projects for the government, including portions of the

Sabarmati River Front and renovation of the Legisla-

tive Assembly of Gujarat.

Thanks to Prahaladbhai’s accessibility and repu-

tation, PSP recently won the # 1 , 575 -crore Surat Dia-

mond Bourse project against very stiff competition.

This project will add annual revenues at a run rate

equivalent to the current run rate of the whole com-

pany, which will double its revenue base. More im-

portantly, the successful completion of this project

will cement PSP’s reputation and help it execute large

projects, even outside its home territory.

Besides strong execution, the promoter himself pays

acute personal attention to every project. Construc-

tion is a complex activity, and the many layers of de-

cision-making at large companies add to this com-

plexity. Delays are quite common. Prahaladbhai uses

his experience and strong business acumen to identi-

fy bottlenecks and fi nds solutions in a way that helps

him deliver results and win respect not only from cus-

tomers but also suppliers and service providers. Un-

like larger companies, at PSP, the project manager

is not only the decision-maker but also the owner of

the business and that means decisions are taken at a

quick pace, even if calculated risks need to be taken.

MASTER PLANNER

PSP has developed unique internal capabilities to ex-

ecute projects without having to use much of its own

capital. The only capital it requires to put upfront is

the margin money it needs to give to a bank to avail

non-fund based limit. Such limits are used to issue

performance guarantees required by customers. As

is common practice, the company receives advance

from clients to start the project and secure initial

supply of materials on credit. However, by being able

to bill for timely completion of work, PSP receives

payments from customers that are used to cover in-

ternal costs and the payments to suppliers, continu-

ing the cycle till the end of the project.

Note: Market related data as on December 1, 2017; Financials

for FY17; Consolidated fi nancials considered wherever applica-

ble; PSP return computed from issue price of # 210

Data: Ace Equity

net sales# 457 cr

stock price# 466 M-CAP #1 , 679cr

ROE 49.52%