PSP Projects is entering the primary market on Wednesday 17^th May 2017, with a public issue of upto 1.01 crore equity shares of Rs. 10 each, comprising of fresh issue of upto 72 lakh shares and an offer for sale (OFS) of upto 29 lakh equity shares by promoter, both in the price band of Rs. 205 to Rs. 210 per share. Representing 28% of the post issue paid-up share capital, issue will raise Rs. 212 crore at the upper end, of which OFS portion is worth Rs. 60 crore. Issue closes on Friday, 19^th May. Issue size, being below Rs. 250 crore, listing will be in "T" group on 29^th May.

PSP Projects is a construction firm having completed 80 projects since its inception in August 2008, primarily in Gujarat, for clients such as GCS Medical College (Gujarat Cancer Society), Cadila Healthcare, Torrent Pharma, Care Institute of Medical Sciences, Claris, Emcure, Nirma, Sabarmati River Front Development Corporation, to name a few. Broad revenue split is 28% from institutional projects, 22% from industrial projects, 22% from government projects, 19% from government residential projects, and balance 9% from residential. Its order book of Rs. 729 crore (31-3-17), comprising of 27 projects, represents 1.5x of FY16 sales, providing healthy revenue visibility, besides Rs. 198 crore order book of 2 subsidiaries (74% and 50% stakes respectively) and 1 JV (with 49% interest). Current order book has projects from Bangalore and Rajasthan too, besides company having bid for projects in Kerala and Telangana, with an aim to diversify geography.

Company’s financials have posted good 28% CAGR over FY12 to FY16, with revenue rising to Rs. 476 crore, up 70%YoY in FY16, and EBITDA increasing 55% YoY to Rs. 45 crore, translating into EBITDA margin of 9.4%. PAT of Rs. 23 crore lead to EPS of Rs. 7.86 for FY16. During 9MFY17, revenue of only Rs. 279 crore has been garnered (attributed to seasonality as H1 generally softer than H2 for construction firms) on EBITDA of Rs. 43 crore, resulting in 15.3% EBITDA margin, which is quite sudden spike in margin. Thus, net margin has also strengthened from 4.7% in FY16 to 7.2% in 9MFY17, which is quite a sudden jump just before the IPO, as historically net margin has been in the 4.6% to 5.3% range. EPS for 9 months ended 31-12-16 stands at Rs. 7.21, on PAT of Rs. 21 crore.

Company’s return ratios have been healthy, with return on equity (RoE) of 30% in FY15, 35.5% in FY16 and 24.6% for9MFY17. As of 31-12-16, company’s equity has expanded to Rs.28.80 crore, pursuant to 2 bonus issues of July 2015 (3:1) and October 2016 (8:1), with networth of Rs. 85 crore. While the company is wholly owned by the promoter family, this IPO is the first fund raise from the public. Post IPO, promoter holding will shrink to 72%.

Fresh issue will fund working capital of Rs. 63 crore (in addition to internal accruals) while Rs. 52 crore will enable company purchase material handling machinery and shutter material. This is quite a significant capex for the company, since its consolidated fixed assets (as of 31-12-16) stand at Rs.53 crore, doubling of which in a year’s times, should boost topline significantly, going forward. Consolidated total debt is Rs. 88 crore while cash and equivalents are Rs. 159 crore, leading to net surplus cash of Rs. 71 crore of Rs. 20 per share (on expanded equity). When company has surplus cash of Rs. 71 crore, generates about Rs. 40 crore in cash annually, then raising Rs. 150 crore further, looks too ambitious a growth plan! Hence watching performance over the next couple of quarters is important.

At the upper end of the price band, company’s market cap will be Rs. 756 crore, while EV will be Rs. 685 crore. This leads to EV/EBITDA and PE multiple of 11x and 20x respectively (on FY17E) and 9x and 19x, based on FY18E, which is in line. Many peers are either grappling under huge debt (Pratibha, Ramky, Simplex) or are too large in size (Ahluwalia, KNR Construction, Man Infra) making comparison futile. South focussed RPP Infra Projects with similar topline and margin profile as PSP, is ruling at FY17E EV/EBITDA and PE multiple of 12.6x and 27x respectively.

Very strong historic growth, visible order book, leverage-free balance sheet give the issue sound fundamentals. However, sudden rise in margins in 9MFY17 before the IPO, small size with geographic concentration, listing in T segment and less fancy for construction stocks currently on the bourses go against the company. Pricing is also not too cheap. Hence one can give the issue a miss. However, the company can be a promising stock and one must keep it on radar, gauging financial performance over the next couple of quarters.

Disclosure: No Interest.