Reduce PSP Projects Ltd For Target Rs. 920 by Choice Institutional Equities Ltd
Order Execution and Margin Improves, Order Inflow Subdued
PSPPL delivered a strong 64.8% YoY revenue growth owing to improved order execution, with EBITDA margin improving QoQ to 6.4%, though still below the 7–8% guidance. Quarterly order inflow remained subdued at INR 6.3 Bn, comprising an order book of INR 132 Bn and a bid pipeline of INR 62 Bn (61% group, 39% external)
Our core investment thesis on PSPPL remains unchanged: With the entry of Adani Group entity (Adani Infra) as a promoter shareholder, we believe there is a better order book visibility. However, we see a near-term risk to margin expansion following the SPA and Open Offer. Management has indicated that projects awarded by the Adani Group will be executed on a cost-plus basis. In our view, given Adani Group's strong focus on cost efficiency and disciplined capital allocation, these contracts are likely to offer limited upside to margins, which could keep PSPPL's profitability under pressure over the next few quarters. In this kind of a structure, the lucrative upside optionality in PSPPL stock is automatically traded off for downside protection.
Valuation: We maintain our ‘REDUCE’ rating on PSPPL with a revised TP of INR 920/sh, which implies a downside of 3.2% from CMP. We have taken a conservative view on the management’s guidance based on the basis of PSPPL’S recent performance. Using a DCF model with a 10-year forecast and 4.0% terminal growth and 15.6% WACC, we estimate a TP of INR 920/share
Risks: Possibly large volumes of low-margin deals from Adani and PSPPL’s inclination to forgo Adani deals for other more lucrative opportunities.
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