Why Stocks Of PSP Projects And JMC Projects Outperformed Peers This Year

Shares of PSP Projects Ltd. and JMC Projects (India) Ltd. have outperformed their peers so far this year even as the infrastructure sector is beset by multiple problems.

The two small-sized EPC (engineering procurement construction) companies gained 24-39 percent when most asset-light peers—or those that don’t own road assets—in the sector declined. Construction companies have been facing multiple headwinds led by high debt, delays in land acquisition, project awards and sticky receivables, among other factors. Shock defaults by Infrastructure Leasing & Financial Services Ltd., which led to a credit crunch among non-bank lenders last year, exacerbated the problem.

But strong order inflow, steady execution and healthy working capital differentiates PSP and JMC projects from others, Amber Singhania, senior equity research analyst at AMSEC, told BloombergQuint. Their peers are struggling with balance sheet issues, high exposure to real estate sector and slow execution, he said.

Here’s why JMC Projects, a subsidiary of the Mofatraj Munot-owned Kalpataru Group, and PSP Projects—both with a market value of close to Rs 2,000 crore each—have performed well this year.

Limited Exposure To Government Orders

Both the companies have limited infrastructure orders from government agencies and no exposure to contracts from the National Highways Authority of India, which according to the Prime Minister’s Office, faces ballooning debt and is “log jammed with unplanned and excessive expansion of roads”.

Steady Execution

The order books of JMC Projects and PSP Projects grew at annualised rates of nearly 15 percent and 57 percent, respectively, in the four years through March 2019. Their book-to-bill ratio—a measure of project execution and order flow—remained nearly constant. That suggests a steady pace of order intake and execution.

PSP Projects’ order book grew at a faster rate on the back of it winning a Rs 1,575-crore contract to build the Surat Diamond Bourse—its largest order till date.

Debt-To-Equity Ratio Improves

PSP Projects’ debt fell by nearly two-thirds to Rs 25.9 crore over the last four financial years. Its debt-to-equity ratio, as a result, declined from 0.61 times to almost nil in the same period.

JMC Projects’ balance sheet remains healthy, with its debt-to-equity ratio halving to 0.7 times during the same period. The company plans to sell its BOT (build-operate-transfer) project portfolio, which could further pare debt.

Stable Working Capital Cycles

JMC Projects’ working capital days have remained nearly stable over the past five fiscals and, in fact, dropped last fiscal.

PSP Projects’ working capital requirements rose to 68 days from a negative of 49 days as it now executes more projects that require higher inventory days for construction materials like steel and cement. Yet, according to the company’s annual report, it has among the lowest trade receivables in the industry and the best working capital cycle.

Edelweiss Securities said in a report that a “healthy payment cycles, including 5-10 percent mobilisation advance up front from corporates or private firms, sufficiently helps PSP Projects’ working capital requirements”.

BloombergQuint’s emailed queries to the companies on their outlook remain unanswered. This story will be updated once they reply.

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