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PSP Projects’ (PSP) 3QFY24 PAT at INR 325mn (down 8% YoY) missed JMFe of INR 420mn (consensus: INR 419mn) due to lower margins. While revenue was ahead of expectations, EBITDA missed JMFe due to lower margin which was impacted by ECL provisions and UP project closure costs. As of Dec-23, PSP has o/s assets of INR 1.4bn pertaining to SDB project against which PSP has filed for claims of INR 5.4bn. PSP would prefer to settle it outside court with client (probably at a lower amount) or else will go for arbitration which may take more than a year to realize the claims. Board has approved equity fund raise of up to INR 3bn which could be exercised in case resolution in SDB takes time. Funds would be used to normalize NWC and fund growth. Meanwhile, gross debt has further increased from INR 4bn in Sept-23 to INR 4.8bn in Dec-23 due to rise in NWC. PSP has lowered its margin guidance from 11-13% to 11-12%. Accordingly, we have tweaked margin and debt assumptions which led to 10-11% earnings cut in FY25/26E. The coverage stands transferred to Vaibhav shah. We value PSP at 15x FY26E EPS to arrive at price target of INR 870. Maintain BUY.

* Execution beat estimates; earnings missed due to lower margins: Revenue grew by 40% YoY to INR 7bn (JMFe: INR 6.3bn) led by strong execution in the UP hospital project. EBITDA growth was lower at 16% YoY to INR 714mn and missed JMFe of INR 757mn due to lower margins. EBITDA margins declined by 210bps YoY to 10.3% (JMFe: 12%) due to ECL provisions of INR 30mn (adjusted margins: 10.7%) and UP project closure costs. Interest costs grew sharply by 51% YoY to INR 153mn (JMFe: INR 130mn) due to higher debt levels. PAT declined by 8% YoY and missed JMFe of INR 420mn.

* Order backlog moderates to INR 44bn; to improve with conversion of L1 orders: PSP’s order backlog has moderated to INR 44bn as on Dec-23 (1.7x TTM revenues) due to weak inflows in 9MFY24 (INR 10.6bn). YTD inflows have improved to INR 20bn and PSP is also L1 in two orders of INR 9.3bn which on conversion should boost order backlog. Bid pipeline remains strong at c.INR 60bn which includes prominent orders like residential building in Delhi of INR 10bn, commercial building in Delhi of INR 10bn, GIFT city building of INR 4bn and airport at Varanasi of INR 10bn among others.

* Lowers FY24 guidance; debt to moderate or remain at current levels by year end: PSP has moderated its revenue guidance from INR 26bn to INR 25bn for FY24E while maintaining INR 30bn revenue guidance for FY25E. EBITDA margin guidance was also trimmed by 100bps to 11-12% range. PSP’s gross debt increased further from INR 4bn in Sept-23 to INR 4.8bn in Dec-23 due to rise in NWC intensity. Accordingly, we have tweaked our margin and debt assumptions which led to 10-11% earnings cut in FY25/26E.

* Timely resolution of SDB matter key monitorable; Maintain BUY: We like PSP for its track record of delivering robust growth while preserving its balance sheet. We have cut EPS by 10-11% in FY25/26E factoring lower margins and higher debt levels. Resolution of the SDB matter would be key as it could normalize NWC leading to moderation in debt levels. We expect EPS CAGR of 16% over FY23-26E. Valuations remain reasonable at 12x FY26E EPS. We value PSP at 15x FY26E EPS and arrive at price target of INR 870. Maintain BUY.

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