Long road to recovery
We downgrade PSP Projects to REDUCE with a TP of Rs 370/sh (10x Mar-22E EPS). PSP recovered 40% post low of Rs 273/sh in March, in-line with our valuation, order pipeline looks muted, labour availability challenging and NWC is likely to deteriorate. We expect 1HFY21 to be total wash out as company is operating at 20-25% of labour force at aggregate level. We cut our FY21E EPS by 33% to account for revenue miss due to labour shortage and tweak our FY22 estimates by 2.7%. Our revised TP is Rs 370/sh (vs 380/sh).
* Strong momentum runs into Covid-19 wall:
PSP Projects posted Rev/EBIDTA/APAT of Rs 4,564/505/343mn beating our estimates by 23/5/5% YoY. Although, Revenue grew by 35/8% YoY/QoQ, EBITDA margin contracted by 368bps as company has booked unbilled revenue of Rs 1.1bn and related expenses, margin booking has not happened. PSP booked Rs 1.69 bn of revenue form Surat Diamond Bourse (SDB) project. Company does not expect monsoon to impact work on SDB as large part of exterior work is done and is hopeful of finishing it on time with revised timeline of March-21 (earlier Dec-20). PSP won order of Rs 15.7bn in FY20 with order book of Rs 30.7bn and L1 of Rs 2.75bn.
* Acute labor shortage to result in 1HFY21 wash out:
Although initial material related issues have been resolved to some extent, majority of sites are experiencing acute labor shortage as most of the project sites are within city limits. Company is working with 20-25% of regular labor force, largely reallocated to 6 (large sites) of 47 project sites. Management said they have spoken to govt officials to arrange facilities to bring migrant laborers back from Eastern states of Bihar, Jharkhand and West Bengal and is hopeful of getting 70-80% of labor force back by June-20 end, which we believe is aggressive estimate. Hence, we expect 1QFY20 to be impacted severely. Monsoon could derail PSP’s execution recovery and sluggishness could last through-out 2QFY21, we think. We cut FY21 revenue by 21% to account for revenue loss. We estimate labor recovery to pan out post monsoon.
* Working capital to rise: Receivable days rose to 55 days (vs 50 days YoY), as share of govt orders with milestone based payment increased in mix. Besides, other current and non-current assets rose materially as company booked unbilled revenue of ~Rs 1.1bn. To finance working capital, PSP has increased its gross debt to Rs 722mn (Rs 286mn in FY19). Net debt to equity ratio stood at 0.1x, excluding the FDR of Rs 1.7bn. We expect Working capital and subsequently Net D/E to rise further as PSP NWC shifts to milestone based payment in Government contracts. PSP generated negative cashflow of 140mn in FY20. PSP has given capex guidance of Rs200-250mn
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