39
(^) Outlook BUSINESS / (^) 22 December 2017
PSP has the lowest receivable days among its peers
given that it does a better job in collecting payments:
its three-year average (debtor days) is just 29 com-
pared with 128 for its peers. Along with advance re-
ceived for mobilisation (which supports 20 - 25 days
of execution), PSP, in eff ect, is able to run its opera-
tions on a negative carry mode ( 35 - 40 days of neg-
ative cash conversion cycle). This also helps PSP in
keeping its suppliers happy as refl ected in its creditor
days (three-year average of 75 days) compared with
124 for its peers. This is also because, instead of or-
dering large quantities of materials, the company or-
ders just enough material to continue the work. As a
result, it has been able to maintain inventory at less
than fi ve days against an industry average of 50 - 90
days. To support this seamless coordination, PSP has
implemented ERP solutions to monitor operations not
only at the corporate but also at the project level.
In their 2017 annual review of Indian operations, Peri
Group, one of the world’s largest manufacturers of
formwork and scaff olding, mentioned 25 marquee proj-
ects where their formworks were used by contractors,
and it singled out PSP for having ‘excellent capabilities’.
GOOD HISTORY, GREAT FUTURE
PSP is well-poised to deliver high growth in revenues
and cash fl ows. In fact, it won’t surprise us if in the
years to come, PSP becomes a name that will be in the
same league as industry giants Larsen & Toubro and
Shapoorji Pallonji.
While there is no relevant data on the upcoming de-
velopment opportunity in Gujarat, the management
has indicated that in the Gift City itself over 150 proj-
ects are being considered. PSP is venturing into other
states as well, which is refl ected in its order backlog
mix wherein over 26 % orders are from non-Gujarat
states compared with nil couple of years back. The
strategy outside Gujarat for PSP is to be very selective
and bid for referral or repeat clients as the manage-
ment understands that executing projects outside its
core region comes with its own challenges on mobili-
sation and resource management.
The company is likely to branch out of Ahmedabad
(as it has done with the Surat project). This will test
the management’s bandwidth and scaling-up capa-
bilities. Also, any hiccups in Surat project can mate-
rially aff ect its abilities to meet our forecast. While
such risks are real, we believe that PSP represents an
excellent opportunity for a long-term investor.
The company has seen its revenue, operating profi t
and PAT grow at 18 %, 34 % and 38 %, respectively, over
FY 12 - FY 17. We expect a CAGR of 50 %, 37 % and 44 %,
respectively, during FY 17 - FY 20. The company has
thus far grown while maintaining return on equity
(ROE) in excess of 30 %. We expect PSP to achieve an
average ROE of 53 % over FY 17 - FY 20. With an order-
book of over # 2 , 700 crore (including Surat Diamond
Bourse project) to be executed over 24 - 30 months, the
company has a fi rm visibility up to FY 20. It also gives
PSP the fl exibility to bid for projects that meets its
profi tability and other selection criteria. More impor-
tantly, we do not expect the company to stretch itself
too thin. Furthermore, as administrative overheads
get allocated to a larger revenue base, there is a scope
for margin expansion as well.
PSP currently trades at 16 x, one-year forward. With
earnings expected to clock a CAGR of 44 % over FY 17 -
FY 19 , investors can expect a meaningful appreciation
in the stock in the coming years. b
The writer and clients of his fi rm have a position in the stock
Second to none
PSP has the most effi cient working capital management
PSP
Projects Ahluwalia NBCC Capacite
Inventory (Days) 4 56 94 80
Debtor (Days) 29 141 133 109
Creditor (Days) 75 102 137 135
Cash conversion
cycle -42^95 89 55
Working capital
(% of sales) -13.1 19.9 (0.1) 6.0
Note: The above numbers are all three-year averages Source: Sameeksha Capital
CY17 RETURN 122%
net profit# 41 cr
ttm p/e (x) 32
roce 49.58%