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PSP Projects’ (PSP) 2QFY24 PAT at INR 394mn (+72% YoY) was in-line with estimate of INR 383mn (consensus: INR 349mn). While revenue was ahead of expectations, EBITDA beat was relatively modest due to variance in revenue mix. Revenue grew by 70% YoY to INR 6.1bn (JMFe: INR 5.5bn) on low base. EBITDA grew by 91% YoY to INR 737mn (JMFe: INR 687mn). EBITDA margin expanded by 130bps YoY on a low base to 12.1% but was below our estimate of 12.5%. Gross debt rose sharply from INR 2.8bn in June-23 to INR 4bn in Sept-23 due to rise in working capital. Debt levels are expected to reduce by c.INR 500mn by the year end with normalization of working capital. PSP received order inflows of INR 9.6bn in YTD and is also L1 in two orders worth c.INR 4.6bn. Given the strong bid pipeline of c.INR 61bn, PSP is confident of achieving its order inflow guidance of INR 30bn for FY24. We like PSP given its strong execution track record and superior return ratios. We value PSP at 15x average FY25-26E EPS to arrive at a revised price target of INR 900. Maintain BUY

* Execution beat estimates; earnings in line: Revenue grew by 70% YoY to INR 6.1bn and was above estimate of INR 5.5bn due to strong execution in the UP hospital project. EBITDA grew by 91% YoY to INR 737mn (JMFe: INR 687mn). EBITDA margin at 12.1% (up 130bps YoY on low base) was below estimate of 12.5% due to adverse revenue mix. Interest costs grew sharply by 77% YoY to INR 125mn (JMFe: INR 110mn) due to higher debt levels. PAT grew sharply by 72% YoY to INR 394mn (JMFe: INR 383mn).

* Weak inflows in 1H moderates order backlog; bid pipeline strong at c.INR 61bn: PSP’s YTD inflows have been weak at INR 9.6bn. It is L1 in two projects worth c.INR 4.6bn. Order backlog has moderated to INR 49bn (2.1x TTM revenues) as PSP lost few prominent big ticket orders (Ahmedabad railway station redevelopment (INR 24bn) and Gems and Jewellery park project (INR 25bn) in Mumbai) to competition. However, bid pipeline stays strong at INR c.61bn comprising of AIIMS Rewari (INR 10bn), museum in MP (INR 10bn) and Ahmedabad (INR 4bn), university in Baroda (INR 7.8bn) and Lucknow (INR 5.8bn) among others. PSP is also evaluating Delhi station redevelopment project of INR 47bn.

* Maintains FY24 guidance; debt to moderate by year end: PSP maintained its revenue guidance of INR 26bn (+35% YoY) with EBITDA margins in the range of 11-13% for FY24 (12.4% in 1HFY24). PSP expects order inflows of INR 30bn (YTD inflows: INR 9.6bn). PSP’s gross debt rose sharply from INR 2.8bn in June-23 to INR 4bn in Sept-23 due to rise in working capital intensity. PSP expects debt levels to moderate by year end with normalization of working capital.

* Expect 21% EPS CAGR over FY23-26; Maintain BUY: We like PSP for its track record of delivering robust growth while preserving its balance sheet health. Over 10 years the company has grown at an impressive Revenue/EPS CAGR of 22%/27% with operating cashflows funding commitments in capex and investments. We expect EPS CAGR of 21% over FY23-26E. Valuations are reasonable at 14.2x FY25E earnings. We value PSP at 15x average FY25-26E earnings and arrive at a revised price target of INR 900. Maintain BUY.

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