Good points.
Also, to chip in, while the company usually spends about 3-4% of sales on capex, last couple of years the capex has been elevated due to the precast project to the tune of 75-100 cr, which affects the free cash flow numbers.
Further, the cashflow numbers pre 2017 are meaningless as the business model itself was different and focussed more on civil contractor work, the nature of the work itself was such that it was not fixed asset intensive, more labor intensive and focussed more on quick turnover of projects at negative working capital cycles. Post 2017, the nature of the work has changed for the company due to full EPC, MEP, interiors and end to end ownership of the project. Which changes the structure of debtor days, payable days and inventory days, all of which affects the cashflow from operations. Makes sense to keep these points in mind while looking at cash generation potential in the company.
On the point about competition, it’s important to look at different buckets of orders. The competition is more pronounced in the 100-300 cr government projects, where multiple companies qualify and are empanelled. In private projects, there are other variables in play and not just the cost factor like trust in company, quality of construction, speed to finish the project, etc. And in the case of government tenders of higher size than 500 cr, the competition significantly diminishes between just the top 4-5 players. As can be seen in the Kashi, central vista projects, etc. If the govt begins approving precast use in construction, this opens up another variable to differentiate for PSP.
Key man risk is there, but both the son and daughter of the promoter have been involved in the company since past few years and are involved in day to day ops of the company. Also, at age 59, PS Patel is not yet at the higher end of the age where succession is too much of a concern. And can probably make the case as well that promoter involvement helps their case in key projects vs dealing with business managers or project directors in a L&T or Shapoorji.
Having said all that, don’t want to gloss over the fact that any construction company’s business quality and metrics is inherently inferior. The value appreciation here is more around where the capex cycle is in India, how the company fares with respect to competition, order book mix, quality of promoter.
Disc: invested. Pls do your own due diligence before investing.
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