common fallacy in investing is that if a sector is expected to decline in the future, then it’s prudent to stay away from it. This argument is valid if you chose to invest in some sort of a sectoral index. However, within a larger declining industry, there will always be at least a couple of companies that buck the trend. Peter Lynch, the renowned investor and fund manager, made one of his biggest gains in Philip Morris, a cigarette manufacturer in an otherwise declining smoking industry. At the same time, just because a sector is expected to boom, it doesn’t necessarily mean that every constituent company is going to give you great returns. In fact, the reality of consolidation means there are always going to be just a few winners in the long run.
The Real Estate Sector, currently in the red zone of Indian industry as another FIC article puts it, is marred in a serious crisis. A bird’s eye view of the sector tells a tragic story: super-slow recovery, serious cash deficits, delayed project deliveries, complicated land acquisition, idle projects and yet seemingly ‘unaffordable’ housing. Even more, the fundamentals of the realty sector show that there is hardly any listed company that has an Interest Coverage Ratio or Return on Capital employed greater than 5, implying the serious possibility of a collapse due to defaults and/or asset saturation.
However, even in the most unforgiving deserts, one will find oases if one cares to look for them. A very interesting company in this sector is a contract construction company based in Gujarat called PSP Projects Ltd. This company provides all-under-one-roof services offering planning, designing, construction and interior services to clients with a focus on industrial, institutional and high-profile government projects. Incorporated in 2008, it now has a market capitalization of Rs 1500 crore, and clocked over Rs 1499 crore in sales in FY 19-20. That’s basically sustaining a CAGR of 75% over a period of 13 years. It’s been able to complete a mammoth total of 153 projects so far, at an average rate of 1 per month since inception.
What makes this company interesting? Since the company just undertakes contract work, it doesn’t really have to worry about unsold inventory or constantly low liquidity. As a matter of fact, the company has a very healthy quick ratio of 1.29 and Cash & Cash Equivalents form 21% of the Balance Sheet total. It also doesn’t have to deal with Land Acquisition issues – those are left to the client. One of the company’s main reasons for success is its track record of timely delivery. Most projects become a cash drain once they start getting delayed. That is why it is imperative for all parties that projects are completed on time. Since 2017, PSP Projects’ Debt-Equity Ratio has been less than 1 and the Interest Coverage Ratio is currently around 8.2. The company’s outstanding performance can be attributed to its philosophy of only taking up those projects that it can maintain its margins on,and not being very aggressive as a bidder. PSP’s order book stands strong at 2500 crores with tailwinds expected for the company in Q4FY21.
The litmus test that all companies had to pass this year was the COVID challenge. While the company’s financial position wasn’t very badly affected, it had indeed suffered project slowdowns and delays due to the lockdown and the migrant crisis. This is reflected in the Q1-FY20 results. However with some incidental expenses it was able to sufficiently gather its workforce back by the end of Q2 and since then, work has been going on at a decent pace. The business model and the focus areas of the company are such that they are unlikely to be affected by the pandemic in the long run. As long as the government decides to continue infrastructure spending, especially towards its vision of housing for all, PSP Projects is going to earn its bread and butter. Even institutional infrastructure spending including the building of schools, colleges and hospitals, whether private or government spending, forms a crucial portion of the revenue. Another fascinating vertical that PSP Projects serves is private industrial construction, under which it builds customised industrial complexes and manufacturing facilities for companies in pharmaceuticals and other sectors.
Gradually, PSP is taking up larger projects and increasing the ticket size at both the top-line and at the bottom-line. Their most iconic project so far is the Surat Diamond Bourse, the world’s single largest office building, which is a contract worth Rs 1575 crores for the company. PSP has taken up the revamping of the Gujarat Legislative Assembly building as well as the construction of new buildings for the IIM-Ahmedabad campus. While eventually rejected, PSP was also among the top 7 bidders for the Central Vista project concerning the new parliament building. The clear takeaway is that while relatively young, the company is ambitious and driven. It is on its way to the big leagues.
There are going to be a few impediments on the way. The company is currently operating in the limited geography of Gujarat and Maharashtra, though it has begun expansion to other states. So far, the company’s growth has been a one man show run by Mr. Prahaladbhai S. Patel, who has many years of experience in the industry and has been the guiding light for namesake PSP Projects. Lastly, performing well in the small projects arena is an achievement, but to survive among the sharks L&T, Tata Projects, Shapoorji, Lodha is a wholly different ordeal.
Only time will tell whether PSP Projects turns out to be an oasis or a mirage for investors in the long run. But for now, it is one of the better bets in the real estate sector in India.
By Hardik Vakil