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Mixed bag – weak execution but margin beat!

About the stock: Incorporated in 2008 by Prahladbhai Patel, PSP Projects (PSP) is one of the prominent contractors offering a diversified range of construction and allied services. Its focus remains on industrial, institutional, government, government residential and residential projects.

* PSP reported 34.3%, 31.2%, 31.3% CAGR in topline, EBITDA, PAT CAGR, respectively, during FY17-22

* Prudent management, net debt free, robust return ratios (RoCE: ~25+%)

Q1FY23 Results: PSP reported a mixed operational performance during Q1FY23. 

* Revenue improved 8.8% YoY to | 345.2 crore. The topline got impacted partly by slowed-down execution in UP-based projects due to labour issues

* PSP delivered elevated level of operating margin and was at 13.6% during Q1FY23 (up 123 bps YoY). Effectively, operating profit at | 47.1 crore, was up 19.6% YoY

* PAT improved 13.6% YoY to | 28.5 crore

What should investors do? PSP’s share price has grown at ~14% CAGR over the past five years (from | 308 in August 2017 to | 598 levels in August 2022).

* We maintain our BUY rating on the company

Target Price and Valuation: We value PSP at | 710/share (14x FY24 P/E).

Key triggers for future price performance:

* PSP’s pre-qualification for public projects would rise to | 2,000+ crore with the completion of the Surat Diamond Bourse (SDB) project. Addition of big ticket sized project is expected to boost its overall order book position

* Diversification in select states offers a bigger opportunity pie

* Significant traction and orders for pre-cast facility is likely to bring incremental benefits and associated revenue

* Expect revenue, earning CAGR of 15.3%, 5.9%, respectively, in FY22-24E

Alternate Stock Idea: Besides PSP, we like PNC Infra in the EPC space.

* Strong execution, lean balance sheet and healthy order book

* BUY with a target price of | 350/share

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