CMP: ₹489.4

Target: ₹707

PSP Projects Ltd, a renowned Gujarat focussed contractor is one of the few EPC (engineering, procurement and construction) contractors generating positive free cash flows and ROE of about 27 per cent. It has entered the big league by bagging the Surat Diamond bourse (SDB) project which is under execution. Post execution of SDB, PSP’s pre-qualification would increase to about ₹2,500 crore. Its one-stop-shop solution — comprising of planning and design, construction, and post-construction services — aids company with plentiful opportunities.

At the end of December 2019, the company’s order book stood robust at ₹3,080 crore (about 2.7x TTM revenues) excluding L1 of ₹310 crore and projects worth about ₹400 crore secured post Q3 FY20. This order book is majorly driven by institutional (62 per cent) and government-residential projects (24 per cent).

We believe, strong order book, robust order pipeline and execution capabilities would translate into about 26 per cent revenue CAGR over FY19-22E. The operating margin is likely to remain at an elevated level of about 14 per cent.

We initiate coverage on the stock with a ‘buy’ for target price of ₹707.