Should You Subscribe To The PSP Projects IPO?

IPOs are seeing a record number of subscriptions with the latest IPO from the government stables of Hudco Ltd garnering subscriptions to the tune of over Rs 94,000 crore. Given that the appetite for IPOs are strong and retail investors are pouring in record numbers, PSP Projects is one such IPO that has opened for subscription at an opportune time.

It’s a company that is under construction and has been predominantly present in the Gujarat region executing both public and private projects. Ever since its inception, the company has executed around 80 projects till March 2017.

PSP Projects plans to raise around Rs 212 crore through a sale of fresh equity of 72 lakh shares, and an offer for sale of 29 lakh shares between a price-band of Rs 205-210.

Essentially PSP projects do four kinds of construction projects which include industrial i.e. building manufacturing plants for companies, institutional projects such as hospitals, educational centres, government projects and other residential projects.

Over the years, the company has been scaling up its business. In the last four years, the company clocked a revenue growth of 26.5 percent with revenues for FY16 coming in at Rs 458 crore. Net profits have expanded at a faster pace of 31.4 percent in the same period, with reported FY16 profits at Rs 24.9 crore.

PSP Projects operates at a steady EBDITA margin of around 8-8.6 percent, while it clocked 8.6 percent margins in FY 16.

Currently, the company has an order book of around Rs 729 crore spread across government and private companies. Institutional order book comprises of nearly 59.7 percent of its overall order book, while government orders comprise of 23.9 percent.

The growth trend in order book also shows that the company is branching out from Gujarat to Karnataka and Rajasthan which comprise of 11.6 and 18.2 percent of the order book.

For the nine months ending December 2017, the company clocked total revenues of Rs 293.1 crore and a net profit of Rs 21.5 crore. This translates into an annualised EPS of Rs 7.9 for FY17. At the upper end of the price band, the PE works out to 26.5 times.

The pricing of the IPO appears to be marginally lower to existing companies in the construction space such as Ahluwalia Contracts, which is quoting at an FY16 of 31 times.

But given that the government has launched Smart Cities and Housing For All programs that envisage 20 million social housing units by 2022, the construction business appears poised to clock reasonable growth. But the recommendations of the IPO is mixed.

Some analysts contend that the issue is priced quite stiffly given other peers in the construction business, but a few brokerages have recommended subscribing to the issue given the buoyancy in the IPO market.