This small stock eyes the big leagues with a robust orderbook in hand

• The stock has given 26% returns in the last one year, but analysts believe it has a good run up due to its strong order book, and bidding pipeline.
• In Q1, it bagged orders worth ₹758 crore taking its order book to ₹5,321 crore.
• The company’s lean balance with zero net debt status and asset light operating model are other positives, analysts say.
• A significant rise in commodity prices and delay in execution of key projects are the downside risks.

Construction company PSP Projects was incorporated in 2008, but has started making waves in recent times as it’s started bidding for high value projects by entering into new areas like railway projects.

The company is a contractor with diverse construction and allied services with focus on industrial, institutional, government and residential projects. The stock, which listed in 2017, has given 26% in the last one year, and has run up 14% in the last three months.

Sectoral watchers believe that the company has good potential ahead. “Prudent management, strong execution track record, healthy order book, net debt free status and robust return ratios are the key strengths of PSP,” says a report by ICICI Direct Research.

In the first quarter of the current financial year (FY24), PSP Projects bagged orders worth ₹758 crore taking its total order book size to ₹5,321 crore. Its orderbook is executable over the next two to three years and is 2.1 times the estimated FY24 revenue, according to Nuvama.

“We derive comfort from its healthy order book”, adds Nuvama but believes that its entry into high-value projects will not be easy.

“We expect high-ticket size orders to be a challenge in near term as the company is L2 (with the second lowest bid) in an ₹2,500 crore project in Navi Mumbai and given the uncertainty pertaining to the acceptance of bids for new Central Vista projects,” it adds.

The construction company has bid for projects to the tune of ₹6,000 crore, including railway station redevelopment projects in Ahmedabad and Delhi — with project sizes of ₹2,000-₹5,000 crore. However, it has to form joint ventures for the same, as it does not have the requisite pre-qualification for infrastructure projects.

“We note that all its projects are in the execution/ fully mobilised state, while bid pipeline conversion will boost further growth visibility,” says ICICI.

A double-digit growth story

For the last five years, the company’s financial profits, EBIDTA and revenues have been growing in double digits. Its revenue from operations have been growing at a compounded annual growth rate (CAGR) of 21.4%, EBIDTA at 17% and net profit at 15.6% between FY18-FY23. EBIDTA is earnings before interest tax depreciation and amortization.

ICICI expects it to report revenue CAGR of 21.3% during FY23-25E with margin likely to hover at around 12.5%.

Thanks to the pick up in activity, the construction sector is seeing a favourable status. With improved execution and a lean balance sheet, PSP could be in a position to gain from it.

“Despite the business being working capital intensive, PSP Projects has the industry’s best working capital cycle of 41 days,” the company said in its investor presentation.

Moreover, it has less to spend on account of capex. “The company expects only maintenance capex of 3-4% of revenue,” says a report by IDBI Capital.

Analysts believe that the stock has potential to provide double digits returns ahead. “This is our high conviction smallcap idea,” says ICICI which values it at 15 times the price to earnings ratio (P/E) on FY25 earnings, arriving at a target price of ₹975 per share.

The stock has been trading at a value that’s 11 times the P/E of its FY25 earnings. “We revise our P/E multiple to 13x from 12x due to a ramp up in execution. We revise our target price to ₹844,” says Nuvama.

A significant rise in commodity prices and delay in execution of key projects are downside risks to the stock reaching its earnings potential.