Jitendra Kumar GuptaMoneycontrol Research
Strike while the iron is hot, goes the popular saying. And for Gujarat-based PSP Projects, which will be launching its initial public offer tomorrow, the timing couldn’t be better.
But PSP, which is raising Rs 212 crore through the IPO, could pose a few questions.
To put it in perspective, ever since its first project was completed in 2012, PSP has accumulated a total equity of Rs 88 crore, all of which belongs to its promoters.
Through its offer for sale (OFS), the promoters will look to raise Rs 60.5 crore. Post this sale, the promoters will effectively hold Rs 28 crore (Rs 88 crore minus Rs 60.05 crore) equity in the company and enjoy a 72 percent stake. The rest of the holding of about 28 percent stake will be vested with the public after the Rs 212-crore issue. The disparity between the promoters’ lion’s share and public holding is hard not to be missed.
The promoters will be walking home with 72 percent of their money invested in the business. Although their promoter equity will be worth Rs 28 crore, the worth of their combined stake will be a whopping Rs 544 crore based on the post-issue market capitalization of the company.
The IPO will include a fresh issue of shares and an offer for sale by promoters. PSP is hoping to raise Rs 212 crore through the sale. It comprises a fund-raising of Rs 151 crore. At the upper end of the price band of Rs 205-210, the company is looking at market capitalisation of Rs 756 crore.
Company background
PSP Projects, which is a small infrastructure company, was incorporated in 2008 and started out with a few government projects. In FY16, the company saw a sales turnover of Rs 458 crore. The consolidated order book stands at Rs 927 crore, over 2 times its sales. Obviously, the company needed more working capital to notch up a faster pace of growth and compensate for poor internal accruals. For the period ending December 2016, the company reported a deficit of Rs 3.7 crore in cash from operating activities.
Usage of IPO proceeds raises questions
The company’s plan to invest Rs 63 crore from IPO proceeds on working capital raises concerns. In an ideal situation, if a company has good cash flows, funding additional working capital would not have been a problem.
PSP will also be investing Rs 52 crore on purchasing construction equipment. What is worth noting is that after deducting all the above, close to Rs 37 crore, which is about half of its current net worth, will be used for the general corporate purposes and issue expenses. By any standards, this is huge.
Related party transactions?
PSP is a family-run business managed by Prahaladbhai Shivrambhai Patel, who is Managing Director. Apart from him, his wife Shilpaben Patel is a whole-time Director and daughter Pooja Patel holds the position of Executive Director. Related party transactions show that the company has given unsecured loans to subsidiaries. The disclosure also suggests that apart from salary, dividend, the company also pays rent for its registered corporate office to its managing director. PSP has also entered into a few other lease agreements where the land is owned by the promoter Prahaladbhai Shivrambhai Patel.
Past performance sound
On the business front, Prahaladbhai Patel, who is the civil engineer with 30 years of experience, has done quite well for the company in terms of growing revenues from Rs 257.25 crore in FY13 to Rs 458 crore in FY16. PSP has executed close to 80 projects since its incorporation in 2008 and is a well-diversified player working for industrial, government, housing and corporate clients. The company largely operates in Gujarat and reported close to 8.6 percent operating margins and close to Rs 38 percent return on equity in the financial year 2016, which is quite impressive for a construction company.
Valuation
The expected market capitalisation of Rs 756 crore is about 21 times its annualised profit. Post the IPO, equity will go up to about Rs 200 crore (current equity of Rs 87 crore and Rs 115 crore from the IPO proceeds), which works out to a price-to-book value of close to 4 times. On most parameters, IPO seems to be quite expensive particularly in the light of the myriad concerns that we have highlighted.
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