PSP Projects IPO is open for subscription; we weigh pros and cons

Highlights: 

• PSP Projects raised around Rs 95 crore from anchor investors a day before its IPO issue. 
• The company has maintained a successful track of executing projects across Gujarat. 
• PSP Projects' total order book alone stood at  Rs 729.16 crore as on March 2017.

Construction company PSP Projects' Initial Public Offer (IPO) to raise Rs 211.7 crore opened on Wednesday May 17, 2017. The IPO will close on May 19, 2017 and a total of 1.01 equity shares at an lower price band of Rs 205 per piece and upper price band of Rs 210 per piece are on offer. 

Here's what analysts expect: 

Pros

PSP Projects has maintained a successful track of executing projects across Gujarat. 

Since its incorporation in August 2008, the company has executed over 80 projects for a host of corporate, government and other customers across diverse segments. 

As of March 31, 2017, PSP Projects' total order book alone stood at  Rs 729.16 crore which comprised of 17 institutional projects, four industrial projects, four government projects and two government residential projects. 

Meanwhile, its subsidiaries and joint ventures had an order book of Rs 90.85 crore and Rs 107.39 crore, respectively. 

A break down of aggregate contract income for the preceding 5 Fiscals. 

Teena Virmani, analyst at Kotak Securities said, “Company intends to continue to leverage its established relationships and growing reputation to help build its order book in the future."

The company's financial performance has also been strong.  

PSP Projects contract income which stood at Rs 178.19 crore in FY12 has now reached to  Rs 454.16 crore in FY16 -  at a compound annual growth rate (CAGR) of 26.35%. While profit after tax has grown from Rs 8.35 crore in FY12 to Rs 24.93 crore in FY16 -  at a CAGR of 31.44%. 

Axis explained four reasons for backing the IPO. They are - Visible growth through a robust order book and growing pre-qualification credentials, Experienced management and promoter, Robust financial performance and financial strength and Long-standing relationships with the customers. 

Cons

As per analysts at GEPL Capital and ICICI Securities there are disadvantages that the company holds. 

Firstly, PSP Projects' business is mostly concentrated in Gujarat and any changes affecting the demand for construction services in that particular region may impact the business, financial condition and results of operations.   Gujarat accounts for approximately 70.2% of company’s total order book.

Currently, PSP has its hand tied up in an outstanding lawsuits involving compensation for loss due to various reasons including tax matters, civil disputes, labor and service matters, statutory notices, regulatory petitions and other matters.  Any decision in future ahead would impact its business. 

Large portion of new orders is sourced from PSPs relationship with corporate and other customers. Any failure to maintain their long-standing relationships with existing would have a material adverse effect on their business operations and profitability. 

Valuation

ICICI Securities said, "At the IPO price band of Rs 205-210, the stock is available at a multiple of 25.8-26.5x annualised FY17 EPS."

GEPL said, "PSP Projects Ltd.(PPL) stands to gain from operating leverage. At a P/E of 24.1xs of FY16 EPS. We believe that PPL. demands a discount to its domestic peers. We assign a Subscribe rating to the IPO."

IPO Central said, "We don’t find the offer appealing and while we understand it may still find takers in the bull market, this should not be a reason for one to rush. There are likely to be better opportunities for investors going ahead."