PSP Projects Ltd

The Company maintained its growth and stability in FY 2023-24 and followed it with an equity infusion in April 2024, strengthening prospects of business sustainability

Overview

When I communicated my overview a couple of years ago,

I was upbeat on account of the national economic buoyancy, need for accelerated pan-India construction, dearth of large credible construction companies, the promise of superior cash flows and enhanced pre-qualification credentials.

There could not have been better prospects for a focused construction company like ours in a rapidly growing India.

The Company closed the financial year with a highest ever outstanding order book of h6,049 Crore, a YoY growth of 20%. During the year, the Company received highest ever order inflow to the tune of H3,498 Crore (excluding GST) consisting of 27 major projects. The Company recorded its highest revenues of Rs.2,486.76 Crore, a 27% year-on-year growth. However, the profit after tax declined from a peak of H161.12 Crore in FY 2021-22 to HL23.80 Crore during the year under review. The one number that went against expectations was an increase in interest outflow - from HT7.98 Crore in FY 2021-22 to H39.73 Crore in FY 2023-24 - which went counter to our desire to remain relatively under-borrowed for short-term loans.

Despite every department in our organisation operating with discipline and earning customer appreciation, we experienced a decline in our financial performance. This was primarily due to a rise in the interest outflow and a difference in expectations between the perceived value of the project we delivered and what the customer anticipated paying.

Herein lies the irony, where one of our largest and marquee customers, Surat Diamond Bourse was not dissatisfied with our performance. On the contrary, the customer expressed its complete satisfaction with regards to the quality of work and more importantly, the timeliness of project completion (given the fact that we needed to encounter pandemic-related operational challenges). The difference in opinion was only on account of the financial value of what we felt we had delivered and what our customers intended to remunerate us for.

At a technical level, this should have meant a simple notional loss of surplus, but for one factor. This created a cascading impact across the Company. The Company's budgets are balanced and streamlined; the projected inflows in any year are reinvested in ongoing projects for other customers with the objective to optimise capital deployment and efficiency.

When the projected receivables did not materialise in FY 2022-23 and FY 2023-24, the Company encountered a funding gap related to ongoing and new projects. To plug this gap and ensure that ongoing projects are not hampered, the Company mobilised shortterm loans. This increased our interest outflow from HL7.98 Crore in FY 2021-22 to H39.73 Crore in FY 2023-24; correspondingly, there was a decline in interest cover from 12.48 in FY 2021-22 to 4.95 in FY 2023-24 and a moderation in our net profit by 4.98% during the year under review. The decline was also influenced by an increase in the cost of construction resources (steel and cement mainly) for certain EPC contracts that dented our desired profitability.

Reasons for decline

Shareholders are likely to explore the symptoms for the decline coupled with an assurance of how these may not recur. Ironically, the reason for the decline comes down to what could also be interpreted as our biggest strengths - pride, trust and emotional project ownership. Because we were faced with a challenge to address challenging deadlines across both prestigious projects - Surat Diamond Bourse and Kashi Vishwanath Temple - we often completed project sub-parts ahead of schedule or milestones; in some cases, we also exceeded our precise brief based on verbal approvals provided by customers.

When the time came to regularise the additional project deliveries and associate a corresponding revenue value to them, there emerged a mismatch between what we felt we had delivered and the customer's interpretation.

The deviation of construction projects from what had been initially contracted and how they eventually evolved is not new in the construction sector. What prevents such deviations from escalating into serious and even possibly litigation disputes is an ongoing reconciliation and matching of outcomes with expectations so that the customer and vendor are perpetually on the same project cum financial page.

This brings me to my big learning from the last financial year: the need for corporate systems and processes to remain completely in sync and step with construction pace. There were hundreds of things that we did right in addressing these two large and prestigious projects - the Surat Diamond Bourse in Surat and the Kashi Vishwanath Temple in Varanasi - in record time, each of which attracted customer appreciation. We could have done better in our back-end process compatibility and real-time documentation cum approvals.

As it turned out, your Company sought a legal redressal for the under-payment. During this period, the Company's working capital management was stretched and may have continued to remain so, had the Company not pursued a redressal to its logical conclusion. In the interests of protecting corporate sustainability cum management bandwidth and address core business (comprising an existing order book) and customers more effectively, the Company settled the issue with customers, took a voluntary surplus loss on the books and moved ahead. The decline in our receivables may appear as a setback for stakeholders (and at one level it surely is) but when seen holistically it is a price that we selected to pay in the short-term to protect our long-term relevance.

Precautions

Shareholders will want to know how the management of your Company will prevent a recurrence of this reality, especially when engaged in more than 50 concurrent projects. This is increasingly relevant when even a nominal variation in expectations - at a time when project sizes are getting larger - can potentially affect your Company's estimated and budgeted profitability.

At PSP, these are some of the precautions we are deepening into our operating system.

One, we will deepen investments in bidding discipline.

Two, we will conduct periodic project reviews that ascertain where we are in relation to our target and billing cycles.

Three, we will continuously match cash flows with budgeted estimates and business needs.

Four, we will deepen multifunctional checks to bring different perspectives to the project appraisal table.

Five, we will engage in periodic projects review with customers to ensure that both are on the same page related to project status and quality.

Six, we will rigorously follow the milestone-driven remuneration approach backed by periodic cash flows.

Seven, we will invest in digitalised alerts in the event of systemic transgressions.

Eight, we will discontinue onsite activity in the event of nonpayment for sub-parts agreed upon, exercising an effective stop loss.

Strengthening the business

I am pleased to state that even as the challenges of the last two years were transpiring, the Company was engaged in strengthening its operating framework. The Company tightened its SOPs through its Project Control team; the result was a deeper alignment with established or evolved systems. The Company invested deeper in digitalisation, it selected software packages covering every major aspect of the project including resources, timeline, achievements, costs and pending issues (if any) upto the supervisor level. The software replaced personal interpretation or gut feel with institutionalised information.

The Company had started the year under review with an order book of J5052 Crore; it ended the year with J6049 Crore, indicating a revenue visibility for 30-36 months.

Principally, the decline in the numbers did not affect our credit rating, which was maintained at A+ Stable by CARE Ratings Limited. We believe that this was our biggest positive outcome during the last financial year, where the agency factored our holistic competitiveness - we delivered two of our largest projects on schedule through the pandemic - rather than focus on a temporary aberration.

The Company outperformed its order book accretion momentum. The Company had started the year under review with an order book of H5,052 Crore; it ended the year with h6,049 Crore, indicating a revenue visibility for 30-36 months. At the close of the year under review, the Company had a bid book of close to H6000 Crore of projects and is optimistic of generating an 8-10% bidding strike rate, expected to sustain the Company's project pipeline across the foreseeable future.

The Company leveraged its precast technology business during the last financial year. A larger deployment of this next generation construction technology in projects accelerated workflows and empowered the Company to complete projects faster, creating new industry benchmarks. We believe that this technology is increasingly relevant in a country marked by labour shortage; the Company intends to report a higher quantum increment in revenues during the current financial year.

The successful completion of our projects such as Surat Diamond Bourse and the Kashi Vishwanath Temple enhanced our independent pre-qualification capability to H2000-2500 Crore of project bidding. In a country where progressively larger and complex projects are being commissioned, we see this enhanced pre-qualification credential as a business platform that will empower us to grow faster.

The company strengthened its respect across brand-enhancing private and government customers. The one client I would want to talk about is Nestle. This multinational company employs demanding construction standards in line with its international standard applicable to a hygiene-sensitive foods business adhering to compliances and safety standards. It is creditable that our Company was engaged for the third time by this demanding customer for the construction of one of its modern facilities; against an initial deadline of December 2024, your Company delivered the project in July 2024.

The Company largely protected its terms of trade. While receivables continued to be at around 50 days against delivered construction milestones, payables were maintained at around 62 days of turnover equivalent with the objective to protect the vendor eco-system, aggregate materials of the desired quality on schedule and protect our respect as a good paymaster (attracting credible suppliers).

Net worth infusion

The cash crunch experienced by our Company needed to be plugged with a timely infusion of net worth.

Your Company made a qualified institutional placement of 36,41,791 equity shares in April 2024, mobilising H244 Crore. This mobilisation helped the Company pare short-term debt; this will result in an attractive annualised interest outflow saving, starting from the current financial year, restoring our post-tax bottomline.

What is creditable is that the QIP attracted marquee institutions like Life Insurance Corporation of India, Unit Trust of India, Fidelity Funds, Societe Generale, ICICI Prudential, Bandhan Mutual Fundetc. Their engagement represents

a validation of the Company's strategic clarity, business model, long-term competitiveness, technology orientation and intrinsic profitability.

The timely QIP restored the confidence of the management.

The presence of marquee investors seeking long-term outcomes has provided the Company with patient capital to grow the business and address a growing sectorial potential.

The net worth infusion following the QIP helped right size the Company's Balance Sheet. The Company strengthened its net worth following the QIP; shortterm debt declined; gearing strengthened. This rightsized foundation will empower the Company to build responsibly, profitably and sustainably. The QIP was raised to address the debt repayment of the Company and address general corporate expenses for FY 2024-25. Besides, the net worth infusion eased the cash crunch, enhanced systemic liquidity and regularised vendor payments.

The QIP moderated the promoter's equity holding in the Company by around 10% to 60.14% in Q1FY25.

Conclusion

At PSP, we believe that the QIP has provided us with a vital financial boost, alleviating our cash crunch and offering us a renewed opportunity to support our robust order book.

The one assurance I will make to all our stakeholders is that even as the Company was process oriented in the past, it will deepen this commitment, enhancing the predictability of project outcomes, revenues, profitability and stakeholder value across the foreseeable future.