3 Phase One Stocks To Consider Buying

September 25, 2019
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TABLE OF CONTENTS
Page
Introduction 3
Stock # 1
6
Shaily Engineering Plastics Ltd
Stock # 2
27
NGL Fine-chem
Stock # 3
43
PSP Projects Ltd
Disclosures under SEBI (Research Analysts) Regulations 55
Disclaimer 58
3 Phase One Stocks To Consider Buying | 2

Introduction
Dear Viewers,
Thank you for taking your precious time out and giving me this opportunity to
present a wonderful opportunity of earning potentially great returns in the world’s
most lucrative stock market segment. But before I go further, I have a confession.
Some of our best recommendations could have been the ones we never made!
As the editor of Hidden Treasure, over the years my team and I have had to avoid
recommending many fundamentally strong businesses. Despite strong conviction,
we could not go ahead. This is because these businesses were too small and volatile
to suit the risk temperament of Hidden Treasure subscribers. Not that Hidden
Treasure subscribers have reasons to complain. The service has a track record of
beating Sensex nearly 2.5 times. However, as an analyst, I believe keeping these
opportunities undisclosed could be a huge opportunity cost for subscribers with
enough capital, risk temperament and fortitude to withstand volatility.
The opportunity cost that I am referring to is the missed opportunity to reap, let’s
say, 6,081% gains in 3 years from a stock by investing it at an early stage (when it
was unknown and thinly traded), and instead being content with content just 74% in
one year. These are not some hypothetical numbers I’m quoting. These are indeed
the real opportunities that we missed, rather we had to miss! And this is just one
example.
You see, stock markets have gotten overcrowded overtime. The number of quality
businesses, unfortunately, has not grown in the same proportion. Too much
information and public access to research on these businesses has resulted in more
and more money chasing the same number of well known, reputed and stable
businesses. Even small caps have not been spared. The positive sentiments have
3 | 3 Phase One Stocks To Consider Buying

raised valuations of almost all stocks – good, bad and ugly. Most of the well-known
stocks, and even a lot of stocks in small cap space, look expensive now, and their
potential upside has taken a beating.
Hence, one needs to dig deeper for better returns.
To visualize what I’m talking about, think of the kind of profits one would have made
had he been early investor in stocks like Hawkins, Relaxo footwear, Cera Sanitary
ware and so on. Even the businesses that are labelled blue chips now started as small
companies once. And I can’t resist mentioning here that the stocks like HUL, HDFC
Ltd, and Asian Paints once had market caps and trading volumes that would have
disqualified them for broader investment community today.
These stocks, now that they are part of the Sensex, could still offer Sensex beating
returns. But for the ones who spotted them first, the percentage returns could be in
four digits.
Buying strong businesses at an early stage when they are undervalued and thinly
traded could offer margin of safety and maximize upside as early investors will
not just ride growth, but will be able to leverage better from a likely re-rating
or upward revision in the valuation multiples in the long term.
In short, the recipe to extra ordinary returns is:
- Catch Them (Great businesses) Young, Patiently See them Grow and Let the
Markets Follow.
For those who are willing to travel the road less taken, Phase One Alert is a great
opportunity. It offers one a chance to ride uncommon profits through stocks that are
unknown today, but have the potential to be future multibaggers.
So, what is Phase One process all about?
Well, I have divided this into four steps.

STEP #1: Identifying Phase 1 companies that the team believes have strong numbers
or are strong turn around candidates and could perform well irrespective of what's
going on around them
STEP #2: Meeting the management face to face to understand all aspects of the
company in great detail. This step is really important because our analysts often pick
up things during one-on-one meetings that cannot be found by looking at the
balance sheets alone.
STEP #3: Cross checking management claims, checking for any potential red flags
in the business, making financial projections and arriving at valuations. Some pretty
technical stuff, but the team takes care of it all.
STEP #4: Out of all the stocks that successfully pass the first 3 steps, the team
zeroes in on the ones trading at a huge discount to the real value at that point and
recommends them to subscribers.
Let’s now move to on to ‘3 Stocks for Extreme Profits ‘that I have selected for you
using this four-step process.

Stock # 1
Shaily Engineering Plastics Ltd
I Waited for 3 Years to Recommend this Phase One Stock...Here's Why
This company that I recently recommended to my subscribers has been under my

radar for almost three years now...ever since we conceived and launched Phase One
Alert.
In some sense, it is an aberration in Phase One space. You see, big investors are
already betting big on it.
While we had been waiting on the sidelines, the institutional investors entered the
stock in 2016. Since then, their stake has more than doubled - from 5.04% in March
2016 to 13.04% in June 2019.
So, are we late to the party? And why does it qualify to be a Phase One Stock where
'undiscovered opportunities' are the area of focus?
I'll answer all of that. But first, a brief overview of the company.
Shaily Engineering Plastics Ltd (SEPL) is one of the country's leading injection molding
companies. It supplies high performance engineering polymers based components
to leading home furnisher, automotive (Honeywell, ABB, FAGM, GE, Amvian),
personal & consumer care (Unilever, Gillette, P&G), pharma packaging and medical
devices (Wockhardt, Sanofi, Sun Pharma, Lupin, Dr Reddy's Laboratories, Zydus) and
engineering (Siemens, Corvi LED, L&T, Scheneider Electric, Electrolux) sectors.
The company is a B2B (business to business) player. Its products are either client
specific or application specific. The company takes an idea from concept through
engineering drawing, designs, prototype testing, tool design, manufacturing of final
components, and assemblies for its clients across above mentioned industries. High
quality and logistical efficiencies are critical to its service.

Now plastic processing companies are a dime a dozen. What makes SEPL stand
apart are its unique designing capabilities, process efficiencies and execution
skills that have helped it win long term partnerships with some of the most
prestigious names globally.
For instance....
• Shaily is the first and only supplier globally to convert metal rods (used in auto
industry) to plastic rods for its client Honeywell. This reduced costs by 40%.
The productivity was improved 300 times. These conversion rods are used in
brands such as BMW, Audi, MERC, Hyundai, Ford, Volkswagen and Tata.
• In association with IDC (Industrial Design Company, UK), Shaily designed

world's first insulin pen which was 100% made of plastic components for
Wockhardt, and met UL (underwriters' Laboratory) and FDA approval. It is still
one the very few makers of insulin pens globally (and only in India), and serves
other Pharma clients as well.
• SEPL has an expertise in making complex precision components and

assemblies. It modified Vicks 5/10-gram container design to ensure no leakage
in extreme climatic conditions.
• For Pepsi Aquafina, SEPL designed first of its kind tamper evident cap. This has
now been taken globally by Pepsi.
With its customer centric approach, the company has been able to provide solutions
and forge strong partnerships with its clients. This has helped it grow its topline and
bottomline at 18% and 20% CAGR respectively since 2006.
While the company has grown at a handsome rate, we believe that the company has
barely scratched the surface. The potential market opportunity is even bigger.
Picture this.
The top client of the company, a Swedish home furnishing major (SHFM), that was
less than 10% of Shaily's sales in 2006, now accounts for 55%.
Yet, Shaily's products comprise less than 3% of this client's imports (the biggest
supplier accounts for 13%).

This SHFM has in the recent years entered Indian markets and has ambitious
investment plans here. This is expected to give company further boost in the growth.
Further, in FY19 itself, the company has received a new product confirmation with
annual revenue potential of Rs 1,000 million (30% of the revenue base of Rs 3.3 billion
in FY19) from this client. The delivery will start from this year itself.
What this implies is that opportunity to scale up with its biggest client is huge. The
company so far has made the most of this opportunity, and the runway is still very
long.
And that's just one facet of the multiple growth opportunities.
The other is medical devices, where SEPL has developed strong name for itself.
It has a portfolio of 13 drug delivery devices in different stages of development. These

will be commercialized over the next two years (between 4QFY20 to 1QFY22). Now
Pharma is a sector with high entry barriers, and even higher margins. Shaily is the
only Indian company in this segment, and one of the very few players globally.
Besides, the company has successfully entered some new segments recently. Going
forward, these could be a big revenue contributors for the company. For instance,
the company has received orders from a global toy manufacturer post the US-China
trade tensions. Another new order is for turbochargers in electric vehicles.
Now, this company is still very small.
But with proven technical and execution skills, and strong client partnerships, the
opportunity size is huge.
It has the potential to scale up, across different industries (existing and new) and
with different clients. This makes it a perfect Phase One candidate from a growth
perspective.
But what about valuations?
Well, this brings me to the opening lines.
What had kept me from taking the plunge so far was valuations beyond comfort
zone. But with the crash in the smallcap space, things are better on this front. Our
patience has served us well.

The stock is down 57% from the highs in May 2018. Along with the weak market
sentiments, a less than expected performance in FY19, due to temporary setbacks
discussed in detail later in the report, have impacted the stock price performance.
Though it is no more as hidden an opportunity as typical Phase One bets are, those
who consider investing now with a long-term horizon will still be ahead of the big
investors. That's because they will get to enter the stock at much attractive (lower)
levels.
Institutional Stake and Stock Price
In our view, subscribers could consider buying the stock at current price or lower
(maximum buy price: Rs 620 per share) (please refer to the Valuation Rationale
section at the end of the report for details).

Financial Snapshot
About the Management

Mr.Mahendra Sanghvi, 71, is a Chemical Engineer from Wayne State University USA,
plastics technologist and has done Diploma MBA from Toronto University, Canada.
He looks after all day-to-day operations of the company and business development.
Mr Sanghvi was working in North America, in the plastics industry before he decided
to come to India and set up Shaily Engineering Plastics limited. He has over four
decades of experience in the plastics industry in India as well as in North America.
He was Co-Chairman Overseas of Plastindia Foundation. He has been the Managing
Director of Shaily Engineering Plastics limited in the past and currently serves as
Promoter and Executive Chairman, and has led the company to its stupendous
growth and recognition globally. His remuneration for FY19 stood at Rs 11.8 million.
Mr Amit Sanghvi, 36, holds the position of Managing Director (since 2011) & Executive
Director at Shaily Engineering Plastics Ltd. Mr. Sanghvi received a graduate degree
from The Pennsylvania State University and a graduate degree from the University of
Ottawa. His remuneration for FY19 stood at Rs 11.8 million.

Mr Sanjay Shah, Chief Strategy Officer, has done his B.Com from Mumbai University
and has done a diploma in systems management. He has been working with the
company for the past 15 years and looks after the financial and strategic affairs of
the company. He has been associated with the company since 1991 and has worked
as Commercial Manager and Vice President - Finance.
Note: Ideally, we would have preferred lower management remuneration... Currently it

seems high in relation to net profit for the company (17% as compared to 12%). That said,
overtime, the net profits have grown at much faster rate than the growth in compensation.
And FY19 was a disappointing year for the company because of some temporary setbacks,
which makes the ratio of salary to income seem higher. We will be tracking this metric and
keep subscribers updated.
On a separate note, the company has started stock option plan for the mid and senior
level management to retain and incentivize critical human resources. As such, 131,570
(1.6% of existing outstanding shares) were issued at a discount to market price with a
vesting period of 4 years.
Key Investing Rationale

• Strong Visibility for Sustainable Stream of Revenues
In the first quarter of FY20 and FY19 (most of these projects are yet to be
commercialized), the company announced new orders wins.
Order Wins in 1QFY20
These include order for new drug delivery device from a large domestic
company. With this, there are a total of 13 drug delivery devices in different
phases of development which will be commercialized from 4QFY20 to 1QFY22
(over next two years).
Further, the company has received confirmation from a big global toy company
for manufacturing and supply of two products. The supply for this will start
this year itself and does not require major capex.
As per my interaction with the management at the Corporate office in Baroda

a few days ago, the US China trade war has come as a good opportunity for
the company. You see, amid the growing trade tensions, this toy company is

looking to spread out and shift its manufacturing facility beyond China. And
Shaily has managed to capitalize this event well. This also reflects well on the
execution abilities and trust global players have in company's capabilities.
The management has not disclosed the size of the order yet. While it might
be small to begin with, if Shaily executes this well, there is a good scope of
deepening the client engagement and get further growth momentum in this
segment.
Order Wins in FY19
In FY19, the company received confirmation for 2 new pens and 2 new devices
from domestic pharma company. Besides, it got a confirmation from new
client in South Korea for supplying medical device.
In the auto segment, the company received confirmation for 4 new products
from Honeywell,
From its biggest client, the company got confirmation for manufacture and
supply of products under carbon steel project. It will start with 6 new products
(cabinet, coffee tables, racks , shelves etc) that will go up in future. The expected
investment in plant is Rs 400 million and revenue potential is Rs 1000 million
(almost 30% of the total sales in FY19). For this, the company has set up a new
plant in Halol. The plant was expected to commercialize by September 2019
but has been delayed due to floods in Baroda. Besides, it has got confirmation
for three new products from this client. It expects the Swedish giant (which
has recently forayed in India and has big investment plans to expand its retail
operations here) to continue to be its biggest client.
The company also added a new customer (a Europen supermarket chain) with
huge business potential in the future. The revenue potential for now has been
stated at Rs 90 to Rs 100 million and is expected to start to flow this year.
Basically, the company is witnessing strong order momentum both from its
biggest client and in other segments, most of which have a strong business
potential in future.

If the company executes well, it's likely to get more opportunities to mine
these clients. Higher sales are likely to keep utilization levels high and result in
better margins as well.
The company has a target of US$ 100 million sales (with 85% visibility) for
FY21E. We have been conservative in our estimates on the revenue front.
• High Utilization and New Segments to Improve Margin Profile
For Shaily, 90%-95% of business is on contracts where the raw material cost
is a pass through. The margins are driven by cost efficiencies and machine
utilization/asset turnover. The company has been in a capex and growth mode,
and despite that the margin profile has been quite stable. In the last five years,
the lowest operating profit margin has been at 14.7% and the highest was
17.3%. In FY19, where company faced temporary setbacks on revenue and
margin front, the operating profit margins were at 15.6%, which gives comfort
in this regard.

Going forward, with strong revenue visibility, we expect machine utilization
rates to improve (the management targets a rate of 90%-92%). Further,
sales and margins from pharma packaging (CRC- Child Resistant Closures),
and medical devices, insulin pens, anal applicators, derma applicators, eye
droppers etc are likely to go up as more with commercialization and better
utilization at CRC facility. Pharma segment has high entry barriers due to
required technical proficiencies, product complexities, strict compliances and
regulations, high gestation period and hence offers high margins.
The management has stated that as a strategy, it does not aim to add new
products that will offer lower margins than what it currently achieves. We
expect margins to improve to 17.2% by the end of FY23.
Key Investment Concerns

• High Client Concentration
Shaily derives 55% of its sales from SHF (Swedish home furnishing major) and
supplies over 40 different products to this client. In terms of contribution, SHF
is followed by auto, pharma and FMCG that are within 2%-3% range of each
other.
Shaily has set up a dedicated export oriented unit (EOU) at Gujarat for
manufacturing products for this client. The products supplied include brushes,
storage devices, boxes, furniture items, food jar lids etc
This makes the company vulnerable to slowdown in growth at the end client's
level and limits its pricing power.
In fact, in FY19 itself, sales value worth Rs 260 million were hit due to change
in inventory policy by SHF (five to six months of the pipeline inventory was
revised down to 45 days). In short, all the inherent risks that come due to high
reliance on a single client exist.
That said, one of the reasons the company has a strong standing in the
industry and has managed growth rates (CAGRs) of 17% and 28% over last
11 years is because of the strong association with this client and its ability to
increase share in sales from the client (the company is growing at much faster
rate than the client).

While the company is not among the top 10 for this client, in terms of
compliances (which are strict considering it's a global player with best
practices), it is way ahead of other suppliers with bigger contributions.
As I quizzed management about this risk, here is what they had to say.
The company sees enormous growth opportunity from these levels with this
single client and expects it to remain its single biggest client in the future as
well.
And indeed, in FY19 itself, the client has given Shaily a confirmation for
Carbon Steel project , with a revenue potential of Rs 1,000 million (~30% of
the company's total topline in FY19) and an expected capex of ~RS 400 million.
The number of customers the company has are around 35. The high share
of the top client is not on account of lack of other growth opportunities. The
client is associated with Shaily since 2004 (initial orders worth Rs 40- Rs 60
lacs). In 2006, it accounted for around 9% of SEPL's sales. Overtime, given the
economics and better growth opportunities from the client, the contribution
to company's sales has grown to 55%. It is important to note that the company
still accounts for less than 3% of SHF's imports (largest supplier accounts for
nearly 12). And this client has recently entered Indian retailing space and has
ambitious investment plans in India, which could strengthen the relationship
further. In short, the scope and potential to grow further with this client is
huge.
Further, the company is actively diversifying and expanding its client base
in industries like Pharma packaging (CRC/child resistant closure, bottles and
caps), medical/drug delivery devices, automotive components (engine, braking
and safety components), home and personal care, lightning, engineering
goods and now toys. All this is expected to open multiple growth frontiers for
the company.
• Rise in Competitive Intensity
While Shaily cannot be compared to other plastic processing companies like

Nilkamal, Wimplast etc, it does face global and domestic competition from
players in different industries it caters to. The key competition comes from
China and Europe.

For instance, in home furnishing segment, China is a big competition. The
other domestic competitors include Fancy Fittings and Alltime Plastic.
The carbon steel segment remains a highly competitive area already.
In FMCG, the competitors include SSF and Creative Plastics. In medical devices,
competitors include Phillips Medisize (global). In insulin pens, it's the only
manufacturer and supplier from India but it does face competition from global
players such as Nemera, Ypsomate, Owen, Gerresheimer etc . In Packaging
segment, competitors include Shriji, Triveni, Gopaldas.
That said, the company in the past has shown its ability to strike partnership
with new clients and deepen its relationships with the existing ones. For its
top client, Shaily is not among its top 10 suppliers but ranks much better than
the bigger suppliers in terms of following compliances and best practices.
Since a lot of its end products are customized and uniquely designed for
the client, unless the company fails on quality and delivery timelines or in
maintaining reasonable costs, the risk of loss of customer /business is low.
As per the management, the company has maintained high quality standards.
The external rejections are in the range of 0%-0.23% at the most and that too
are not due to product defects but for issues like misplaced label etc.
• Delay /Slowdown at Client's or Company's End
There are a lot of new products coming up for launches for Shaily that will
involve steps like designing, compliance/regulatory tests and other validations.
There has been an instance where a product launch has been delayed due
to last minute design changes by the client. At times, the timelines may get
stretched due to delay in regulatory approvals/validations (especially in
pharma segment). Such delays will adversely impact revenue projections.
Since the company has taken debt to set up capacities, any such delays that
lead to lower machine utilizations could impact margins and return profile of
the company.
The orders could also get impacted due to poor business sentiments at the
client level. For instance, the company's sales to Maruti Suzuki and Swift have
been impacted amid domestic auto slowdown.

The year FY19 witnessed such negative developments due to which revenue
of around Rs 800 million revenue was impacted. The reasons included order
cancellation by GE Motors, slow ramp up for LED, design changes, price
negotiations and change in inventory policy by its largest client. The company
expects to recover over 60% of this loss in FY20. But a single bad year led
to shifting the revenue goal by a year (the company had set the target and
guided for US$ 100 million for FY20... the target has now been shifted to FY21
with 85% visibility).
• Business Risks
The company derives 75% of its revenues from exports (rupees and dollars).
That said, it bills its largest client in rupees and hence to that extent the business
is currency neutral. For the rest of the exports, the company does not hedge
as around 50% of its raw materials are imported and serve as natural hedge.
However, the high share of exports still exposes it to inherent risks such as
slowdown in the (end- client) economies and trade wars (although trade wars
could be a potential opportunity since the orders may shift from China to
economies like India...Shaily has already got a confirmation from global toy
major that is derisking away from China).
Besides, the key raw material for the company are crude derivatives. The
pricing power is limited as in most cases, the raw material costs are passed to
the clients with a lag effect of around one quarter. Any inability to do so, and
in a timely manner, could impact the profits for the company.
• Execution Challenges
In the first half of FY19, the company's performance was impacted on account
of power and labour shortage issues. This impacted the company both on the
revenue and margin fronts due to lower utilization levels (because fixed costs
do not come down with lesser sales). Both the issues have been addressed
and have normalized now. For power, the company has a dedicated line from
substation and on labour front, the company has introduced more labour
contractors. However, such events in the future cannot be ruled out. They
could lead to increase in the costs and could impact margins for the company.

About the Company
Shaily Engineering Plastics Limited (SEPL) was established more than three decades
ago by Mr Mahendra (Mike) Sanghvi. From a start-up of just two injection moulding
machines at Halol (Gujarat), it is now one of India's leading exporter of plastics
components.
It manufactures precision injection moulded plastic components, subassemblies,

moulds and dies for various Original Equipment customers. Apart from commodity
polymers, the company specializes in high and ultra-high-performance polymers. It
is the only licensed manufacturer of Torlon in India. This allows it to produce robust
plastics that can be used as a direct replacement of metal, being resistant to extremely
high temperatures and mechanical wear. The company also has the ability to mold
plastics with up to 60% glass content by volume.
The company operates in the industrial and precision segment of the engineering
plastic industry. The production is based on orders and the company does not
stock and supply. The company is basically a custom OEM, custom molder, contract
manufacturer. It is important to note that none of its arrangements with the customers
are exclusive and it can work with any firm in any sector.
It produces goods for Swedish Home Furnishing giant (since 2004) that accounts for
55% of its sales (although the company still accounts for less than 3% of this client's
imports). The other key industries it caters to include automotive (components)
- Honeywell, FAG, GE; healthcare (packaging devices and healthcare)- Sanofi,
Wockhardt, Zydus Cadila, MWV, home and personal care - Lakme, Unilever, P&G,
MWV - Calmar, consumer and electrical goods and appliances.

Product Profile
Client Profile

It has 5 manufacturing facilities in Gujarat and over 120 injection moulding machines
and employs a work force of over 1100 employees. The company is a direct institutional
seller - there is no channel distribution model.
Exports accounted for 75% of company's revenues in FY19. While share of exports
is significant, the impact is mitigated to an extent since it bills its biggest client in
rupees. And since the company imports around 50% of its raw materials, there is a
natural hedge in place.
Valuation Rationale
We recommend subscribers to buying the stock of Shaily Engineering Plastics
Ltd at or below the maximum buy price of Rs 620.
With strong revenue visibility, we expect the topline for Shaily to grow at a CAGR
of 22% for FY19-FY23E. Our estimates are quite conservative with regards to the
management guidance.
As revenue improve from the existing clients, the margins are likely to improve on
account of higher asset turnover, machine utilization and better profitability in the
Pharma segment where competition is limited.
For FY19-FY23E, we expect the net profits of the company to grow at a CAGR of 30%.
The debt to equity ratio for the company is expected to come down from 0.9 times to
0.6 times at the end of FY23. We expect the return on net worth to improve from 15
% to 21.3%, while return on capital is likely to improve from 18% to 24% as per our
estimates.
Given strong and proven designing skills, long term association with marquee clients
and strong growth prospects, we believe a price to earnings multiple of 16 times
is reasonable for the company. Our target multiple compares to a long term
median P/E multiple of 29 times and current P/E of 28.7 times.
On the basis of our conservative estimates, we have arrived at a target price of Rs

1050 (for FY23E) for the company which implies a point to point upside of 68%,
and a CAGR of 15.9%.
In our opinion, not more than 2% of the portfolio should be allocated to a single
Phase One Stock (10% for all Phase One Stocks). Please note that this allocation

will vary from person to person. To find what works best for you, we recommend
you talk to your investment advisor.
Action to Take
We recommend subscribers to consider buying the stock of Shaily

Engineering Plastics Ltd at current valuations or lower (Maximum buy
price : Rs 620 per share).
An important note:
Subscribers must note that the target price shared here is just the initial
milestone set for tracking Phase one stocks through their entire journey. For
the Phase One businesses that keep executing, we believe the runway and the
upside will be stronger. As we track the stocks through their journey, we will
keep revising the estimates and the upside for the businesses that deliver.
Further, Shaily Engineering Plastics Ltd is a stock with low liquidity, as such there is
an inherent volatility risk. We recommend subscribers should not consider buying
any Phase One above the maximum buy price. Further, we believe there will be
multiple buying opportunities in case of Phase One stocks where business turns as
out as expected. As such, it makes sense to have a staggered buying approach.
And under no circumstances should one compromise on margin of safety.
According to us, in a scenario of ideal allocation of funds, Phase One stocks could
be considered to comprise of not more than 10% of one's total equity portfolio.
Further, we believe that a single Phase One stock should ideally not form more
than 2% of the total portfolio. However, please note that this allocation will vary
from person to person. For something that works best for you, we recommend you
talk to your investment advisor.

Financials at a Glance (Consolidated)
(Rs m) FY15 FY16 FY17 FY18 FY 19 FY20E FY21E FY22E FY23E
Sales 1,797 2,255 2,459 3,183 3,383 3,730 4,924 6,155 7,386
Sales growth (%) 19.2% 25.5% 9.0% 29.5% 6.3% 10.2% 32.0% 25.0% 20.0%
Operating profit 265 390 410 532 526 589 822 1,059 1,270
Operating profit
14.7% 17.3% 16.7% 16.7% 15.6% 15.8% 16.7% 17.2% 17.2%
margin (%)
Net profit 130 155 159 239 193 196 298 422 543
Net profit margin
7.2% 6.9% 6.4% 7.5% 5.7% 5.2% 6.0% 6.9% 7.3%
(%)
Balance Sheet
Fixed assets 774 973 972 1,121 1,467 1,926 2,089 2,169 2,218
Other non cur-
96 52 72 141 286 313 333 360 380
rent assets
Inventories 201 225 275 407 431 462 610 762 915
Receivables 372 361 462 682 596 704 930 1,162 1,395
Other Current
482 300 223 497 336 371 445 530 642
assets
Total Assets 1,925 1,911 2,003 2,848 3,116 3,776 4,406 4,983 5,549
Net worth 783 898 1,054 1,243 1,361 1,557 1,855 2,277 2,820
Long term debt 327 306 160 210 472 755 720 650 350
Short term debt 369 201 371 639 511 634 886 985 1,182
Other non cur-
78 83 28 60 100 100 93 93 93
rent liabilities
Current liabilities
barring short 367 423 390 696 672 729 852 978 1,105
term debt
Total Liabilities 1,925 1,911 2,003 2,848 3,116 3,776 4,406 4,983 5,549

Cash flow from
42 357 170 53 665 349 321 477 617
Operations (CFO)
Free Cash Flow (267) 64 (4) (210) 16 (310) (90) 110 257
CFO/Net Profit
0.3 2.3 1.1 0.2 3.4 1.8 1.1 1.1 1.1
(Earnings Quality)

Valuation
Key Financial
FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E FY23E
Ratios
Operational & Financial Ratios
EPS (Rs.) 15.6 18.6 19.1 28.7 23.2 23.5 35.8 50.8 65.2
Cash EPS (Rs.) 23.4 31.0 35.1 46.1 41.1 46.5 64.3 83.2 101.4
Book Value per
94.1 107.9 126.8 149.4 163.7 187.2 223.0 273.7 339.0
share (Rs)
Dividend Pay
12.79 21.48 26.23 26.11 0 0 0 0 0
Out Ratio(%)
Margin Ratios
PBIDTM (%) 14.7% 17.3% 16.7% 16.7% 15.6% 15.8% 16.7% 17.2% 17.2%
PATM (%) 7.2% 6.9% 6.4% 7.5% 5.7% 5.2% 6.0% 6.9% 7.3%
Cash Profit
10.8% 11.4% 11.9% 12.1% 10.1% 10.4% 10.9% 11.2% 11.4%
Margin(%)
Performance Ratio
ROA (%) 7.7% 8.1% 8.1% 9.8% 6.5% 5.7% 7.3% 9.0% 10.3%
ROE (%) 21.5% 18.4% 16.2% 20.8% 14.8% 13.4% 17.4% 20.4% 21.3%
ROCE (%) 17.3% 21.9% 20.8% 22.3% 17.8% 15.9% 19.0% 22.1% 24.1%
Tax Adjusted
15.8% 17.8% 15.9% 16.7% 13.0% 11.8% 13.8% 15.7% 16.9%
ROCE (%)
Gross Fixed As-
1.4 1.4 1.8 2.4 2.0 1.7 1.8 2.0 2.2
set Turnover(x)
Efficiency Ratios
Receivable days 71 59 61 66 69 69 69 69 69
Inventory Days 36 34 37 39 45 45 45 45 45
Cash con-
version cycle 64 66 69 72 77 77 77 77 77
(days)

Growth Ratio
Net Sales
19.2% 25.5% 9.0% 29.5% 6.3% 10.2% 32.0% 25.0% 20.0%
growth (%)
PAT growth (%) 97.5% 19.1% 2.3% 50.7% -19.3% 1.6% 52.0% 41.8% 28.6%
Financial Stability Ratios

Total Debt/Eq-
1.1 0.8 0.7 0.9 0.9 1.1 1.0 0.8 0.6
uity(x)
Interest Cov-
3.0 2.8 3.5 5.8 4.0 3.5 4.0 5.0 6.3
er(x)
Valuation Ratios
Price to earn-
40.0 33.6 32.8 21.8 27.0 26.5 17.5 12.3 9.6
ings (x)
Price to book
6.6 5.8 4.9 4.2 3.8 3.3 2.8 2.3 1.8
value (x)
Price to sales
2.9 2.3 2.1 1.6 1.5 1.4 1.1 0.8 0.7
(x)

Market Data
Price on Sep 24, 2019 (Rs) 625
52-week High/Low (Rs) 1078/495
BSE Code 501423
NSE Code Not listed yet

No. of shares (m) 8.3
Free float (%) 48.9
Market cap (Rs m) 5,199
Face value (Rs) 10.0
FY19 DPS (Rs) 0.0
FY19 DPS (Rs) 0.0
Shareholding (%, June-19)
Category (%)
Promoters & Promoter group (%) 51.1
Institutions (%) 13.0
Other Public (%) 35.9
Total 100

Stock # 2
NGL Fine-chem
A Niche Player Which Has All the Qualities of Making It Big...
How do you identify a Phase One company?
These companies operate at a small scale and at a nascent stage of their business
cycle.
It is difficult to picture what will happen in 10-years.
So, here's what we look for in the companies:
• They should be operating in a niche market with limited competition.
• Their numbers (return ratios, operating margins) should be strong, indicating

it's not a cyclical or commoditised business.
• We want to see a strong focus on operational efficiencies to save costs.
• Finally, robust growth over many years indicating a strong business model
and a market for its products.
These are what we call basic sanity checks.
But can you see ten years ahead with these small companies?
Unlikely.
Most businesses struggle when they achieve a critical scale. The old way of working
when they were small, doesn't work anymore.
So how do you pick long term winners?
We believe what makes or breaks these small companies is the person running the
show - the management of the company.

Large players run on auto pilot mode through well-established processes built over
decades. But in a small company, management is involved 'hands on' in day to day
activities.
When the strength of the business and the management come together overtime, we
have a wealth creator on our hands.
Our candidate for this month passes all the basic sanity checks. We've met the
management not once, not twice but three times over the last two years.
These meetings have strengthened our conviction about the prospects of this
company.
NGL Fine-Chem Ltd (NGL) is a manufacturer of pharmaceuticals and intermediates

for use in veterinary/animal and human health.
Veterinary/animal Active Pharmaceutical Ingredients (API) products dominate the

business. It contributes 83% of total revenues.
Through constant focus on cost efficiencies and shrewd product selection, NGL has
maintained consistently higher margins than the industry.

The management of NGL has consciously taken a different approach from their
competitors. They play to their strengths to achieve outperformance.
You see, most of the animal API players from India have focused on regulated
markets like US and Canada due to the large sizes of these markets. NGL has stayed
away from these markets for now due to the high compliance costs incurred when
supplying to these markets.
Instead, NGL's focus has been on unregulated markets where there is limited
competition.
Also, NGL has focused on multiple step chemistry process (7-8 step chemistry) rather
than the simple 2-3 step chemistry which majority of the players in the industry get
into.
The result?
A 60% market share in the top three products that NGL supplies to its customers.
Now here is another kicker for the business...
The past few years were marked by limited growth due to capacity constraints.
With new capacity added recently, NGL is all set to move towards its next phase of
growth.
As per the management, the company is all set to grow in double digits, without fresh
capex for the next three years at least.
The stock is down nearly 18% from its 52-week highs. We believe the stock offers
a great opportunity to take partial exposure (Buy 50%) at a maximum price of
Rs 520 or lower.
Please refer to the 'Rationale for Valuation' section for details.
About the Company

Established in 1981, NGL Fine-chem manufactures and exports Human and Animal
APIs, advance intermediates and finished dosages in India and international markets.
It started as a very small player doing the Human API business. Post 1998, NGL

ventured into the value-added animal API business which is currently the major
contributor to its overall revenues (83% of total revenues).
NGL has 3 manufacturing facilities with two of them at Tarapur and one at Navi
Mumbai in Maharashtra.
In terms of geography, 79% of its revenues is from exports while 21% is from domestic
markets. In its export market, Europe is the biggest contributor with 51% of total
export sales.
Product-wise, NGL manufactures more than 20 APIs in the veterinary and 4 APIs for
its Human health division.
Its animal APIs are used in different therapeutic products like anthelmintics, ecto
paraciticides, endo paraciticides, growth nutrients and others which form 83% of its
total revenues.
Anthelmintics, one of NGL's major categories is used to treat infections of animals

with parasitic worms. Typically, these are dosages taken by animals on a regular basis
to remove worms from their bodies.
NGL's presence across 5 therapeutic segments ensures seasonality is reduced in

terms of demand for its products.
NGL's top 3 products contribute close to 45% of sales with its top product contributing
close to 18% of sales.

NGL has moved from an agent driven model around 3-4 years ago to selling directly to
customers. From a 4-6 product animal API supplier, NGL now has around 18 products.
This wide basket helps in marketing and improving their reach with customers.
In terms of Research and development (R&D), NGL has 30 people in its R&D
department with 3 PHD's. This number used to be around 4-5 people with 0 PHDs
4-5 years back. The R&D team is responsible to improve processes and develop new
products for NGL. NGL has a laboratory at Nupur remedies in Jogeshwari, Mumbai.
This is a related party of NGL. NGL prefers taking this space on rent as it believes
buying a new property would incur substantial investment at the current market rate.

Mr Rahul Nachane is the Managing Director of the Company. Mr Nachane is
involved with NGL since 1989. He is a Chartered Accountant and Master of Management
Studies. With over 30 years of experience in the pharmaceutical industry, Mr Nachane
is responsible for the overall management of the company and is mainly involved
with marketing and production activities at NGL.
Mr Rajesh Narayan Lawande is the Executive director and CFO of the company.
Mr Lawande has completed his M.Sc from IIT Bombay and PGDM from IIM Lucknow.
He joined NGL in 2002 and is mainly responsible for R&D, sales and production at
NGL.
Key Investing Rationale

• Strong Entry Barrier due to long approval process
The vendor approval process for NGL varies from 3 months in countries like
Bangladesh to 5 years in regulated markets like Europe.
NGL starts by sharing a sample. If the sample is approved post stability studies,
it is asked for a batch. Only after multiple quality checks, the commercial
supplies begin. Even for selling new products to the same customers, NGL
must go through the entire process of vendor approval.
This acts as a big entry barrier for new competition to enter the business.
NGL being in the animal API business for two decades now has built a decent
customer base and has been able to retain customers (99%) over the years

making switching to new players difficult.
• Focus on Niche products with High Margins
In NGL's Animal Health business, products range from a 3-step chemistry

product to a 13-step chemistry product.
For high step products, material cost is low and processing cost is high whereas
for a low step product, material cost is high and processing costs are low.
NGL mostly focuses on niche 7 to 10 step process products. These are products
where volumes are low but margins are high. These products also attract less
competition than the general 2 to 3 step process products.
NGL's top 3 products (involving high step chemistry) contribute to around 45%
of overall sales. NGL's market share in these 3 products is close to 60%. This
has enabled NGL to maintain better margins than the overall industry.
• Long Runway for Growth ahead through new related business segments
With respect to Phase one alert companies, the business path over ten years
won't be crystal clear. A typical Phase one company focuses on and establishes
itself in one segment and then sets the next milestone accordingly .
The thing we would like to look at would be what happens once they're
established. Is there further room for growth? If it's in a related segment, it
would be ideal.
For NGL, it currently caters only to the unregulated markets mainly to enter
products where there is limited competition. Its competitors like Sequent
scientific, Hikal cater to the regulated segment.
The management is working with a 2 to 3-year plan to set up a decent scale

and expand the business in stages from there.
The next phase for NGL, once it establishes a decent scale in terms of plant
capacity and reputation, would be entry and expansion in regulated markets
like North America (the largest market for animal healthcare).
Also, NGL's capacity constraints in its past few years meant low R&D effort on
new products (4 new products in the last 2 years). With additional capacity on
stream from this year, NGL will be able to further add to its product basket...

And that too without needing incremental capex for the next three years.
They are also testing new products for the Poultry industry. It is a much bigger
industry but with lower margins. NGL's focus will be on molecules/products
with higher margins.
NGL has maintained an annual objective of introducing 4 new products every

year. At any point of time, NGL is working on 7-8 new products which they feel
has decent future potential.
A combination of new geography and product potential will help NGL scale to
its next level of growth going forward.
• Strong Focus on Cost Efficiency and Product Quality
For NGL, cost efficiency is one its key priorities. The focus is not only at the
board level but has percolated down to the staff working at the plant.
Cost is also one of the reasons NGL has stuck to unregulated markets and
not ventured into the regulated markets for now. A US regulated plant would
need greater expenses for maintenance, increased expenses related to audit,
quality checks. And while the market potential is huge, the decision to enter
makes sense once the business has achieved a critical mass...which the
company expects to do in next 2 to 3 years.
Meanwhile, in the existing markets, focus on energy conservations and water

recovery has enabled NGL to maintain better operating margins over its peers.
While cost efficiency is paramount, NGL hasn't compromised on product

quality. This is reflected in its strong customer retention rate (around 99%)
over the past 20 years. This focus on quality will also ensure a seamless
transition if and when NGL decides to foray into regulated markets.
• Strong Fundamentals over the Years
For Phase one alert candidates, an important criterion should be strong

fundamentals which should show up in numbers. A company earning return
on capital much higher than its cost of capital is a good sign. Also, one that
can sustain its operating margins and is able to grow without taking on

excessive debt would be ideal. Most importantly, the profits generated should
show up in operating cash flows and should not get stuck in working capital
requirements. All these factors signal strength in the business model and
execution capabilities of the management.
NGL has been keenly focused on all the above aspects. It has been able to
grow at a healthy rate without taking on too much debt. NGL's bad debt over
the past 10 years has been around Rs 6 million for sales of around Rs 8 billion
over 10 years (just 0.1% of sales not recovered).
Strong Fundamentals
Sales Growth 14%
Net Profit Growth 60%
ROE 20%
ROCE 18%
Debt to Equity 0.31
Cash Flow from operations / Net Profit (CFO/PAT) 0.93
Key Investment Concerns

• Raw material price and Currency risk
NGL imports 15-20% of its raw material requirements while the rest is locally
sourced. Almost 80% of its imports are from China. China has been under
environmental scrutiny due to which raw material prices for APIs had gone up.
While NGL was able to pass these price increases last year on to its customers,
a substantial increase in prices remain a risk.
NGL's exports constitute 79% of total sales and the transaction with all its
customers in any region are done in US dollars. NGL has benefited from US
dollar price appreciation in recent times. Any depreciation of the US dollar
versus the rupee remains a key risk. A cushion is in the form of around 20% of
the raw materials that NGL imports which provide a natural hedge.

• Environmental risk
Environmental risk with respect to chemical manufacturing remains a key risk

for NGL. Getting an environmental clearance (EC) is a time-consuming process
in India. NGL faced issues for a long time (around 3-4 years) to get an EC for
its Tarapur plant.
NGL also had a fire at its Tarapur plant in 2018 which delayed its capacity
expansion plans.
Although NGL has tightened its safety norms, any such occurrences in the
future can have an adverse impact on the company.
• Capital Allocation
Remuneration of key management personnel for NGL stands at close to 15%

of FY19 net profits which we feel is on the higher side in percentage terms.
Also, in terms of current investments around Rs 86 million (6% of total assets)

is parked in equity funds for any future expansion needs. Although it forms a
small portion of its total assets, we believe it could have been deployed in less
risky instruments for future use.
• Product and client concentration
In terms of products, NGL's biggest product accounts for around 18-20% of

total sales (used to be 90% 4 to 5 years ago). Its top 3 products account for
around 45% of total sales.
Also, its biggest customer accounts for 9% of total sales.
Any issue with its largest product or client could have an adverse impact on
NGL's business.
Valuation Rationale
NGL recently acquired Macrotech Polychem Private limited for a cash consideration
of Rs 70 million. The acquisition is aimed at providing supply of intermediates for its
existing API products.

It has also finally completed a brownfield expansion at its Tarapur plant. Incremental
revenue at peak utilization from this facility will be close to Rs 750 million i.e. around
50% of the current sales.
With the completed brownfield expansion, NGL can generate revenues up to 2.25 to
2.5 billion from its existing facilities.
Once this newly commissioned plant hits 50% utilization, NGL will start on setting up
additional capacity. It has already identified a place in Tarapur for the same. Since
Environmental clearance for a new plant takes time, NGL has already taken one for
the new plant. It has also started civil work at this new plant.
With capacity in place, we believe NGL is all set for its next phase of growth. For a
business like NGL, we believe monitoring the progress every 2-3 years will be crucial.
We have taken a reasonable estimate for sales growth of 14.5% over the next four
years (FY19-23). As the current capacity is better utilized, we expect margins to be
maintained over the years.
We expect net profits from FY19-23 from continuing operations to grow at 19.5%
CAGR. With strong return ratios and previous track record of growth without taking
on excess debt, we have valued NGL at 15 times earnings. The 5-year median
Price to earnings ratio for NGL stands at 15 times earnings.
On the basis of our estimates, we have arrived at a target price of Rs 800 (for
FY23E) for the company which implies a point to point upside of 54%, and a
CAGR of 13%.
Given the upside and CAGR return expectations, we believe it makes sense for
subscribers to consider taking partial exposure (50% Buy) at current valuations.
The maximum buy price for 50% exposure will be Rs 520.
The Best Buy price for a full exposure will be at Rs 420 or lower (19% correction
from current levels).

An important note:
Subscribers must note that the target price shared here is just the initial
milestone set for tracking Phase one stocks through their entire journey. For
the Phase One businesses that keep executing, we believe the runway and the
upside will be stronger. As we track the stocks through their journey, we will
keep revising the estimates and the upside for the businesses that deliver.
Further, NGL Fine Chem Ltd is a stock with low liquidity, as such there is an inherent
volatility risk. We recommend subscribers should not consider buying any Phase
One above the maximum buy price. Further, we believe there will be multiple
buying opportunities in case of Phase One stocks where business turns as out as
expected. As such, it makes sense to have a staggered buying approach. And
under no circumstances should one compromise on margin of safety.
According to us, in a scenario of ideal allocation of funds, Phase One stocks

could be considered to comprise of not more than 10% of one's total equity
portfolio. Further, we believe that a single Phase One stock should ideally not
form more than 2% of the total portfolio. Since we have a Partial Buy view on
NGL Fine Chem, the maximum allocation to to the stock could be 1% of one’s
portfolio. However, please note that this allocation will vary from person to person.
For something that works best for you, we recommend you talk to your investment
advisor.

(Rs m) FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E FY23E
Sales 883 963 997 1137 1532 1734 1994 2293 2637
Sales growth 12.0% 9.0% 3.6% 14.0% 34.8% 13.2% 15.0% 15.0% 15.0%
Operating profit 150 220 252 213 320 364 419 481 554
Operating profit
16.9% 22.8% 25.3% 18.8% 20.9% 21.0% 21.0% 21.0% 21.0%
margin (%)
Reported Net
83 114 149 126 201 197 234 283 331
profit (Rs m)
Net profit margin
9.4% 11.8% 14.9% 11.1% 13.1% 11.3% 11.7% 12.3% 12.5%
(%)
Net Profit (con-
tinuing opera- 64 114 137 102 162 197 234 283 331
tions)
Net profit Growth
22.3% 77.7% 19.8% -25.1% 58.3% 21.4% 18.8% 21.2% 16.8%
(%)
Balance Sheet
Fixed Assets 185 257 406 594 608 602 589 568 541
Other non-cur-
40 20 111 137 100 100 100 100 100
rent assets
Inventories 121 100 118 168 186 211 242 279 320
Receivables 260 324 301 277 331 375 431 496 570
Other current
59 74 86 117 197 287 430 526 783
assets
Total Assets 665 775 1022 1293 1422 1574 1791 1969 2315
Networth 328 445 594 720 921 1,098 1,308 1,563 1,861
Long term debt 16 3 95 124 80 80 50 10 10

Short term debt 96 124 109 113 153 100 100 20 20
Other non cur-
12 24 31 44 39 39 39 39 39
rent liabilities
Current liabilities
barring short 214 178 193 292 229 257 294 336 385
term debt
Total Liabilities 665 775 1,022 1,293 1,422 1,574 1,791 1,969 2,315

Valuation
Key Financial
FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E FY23E
Ratios
Operational & Financial Ratios
EPS (Reported)
13.5 18.5 24.1 20.4 32.6 31.8 37.8 45.8 53.5
(Rs.)
EPS (Continuing
10.4 18.5 22.1 16.5 26.2 31.8 37.8 45.8 53.5
Ops) (Rs.)
Cash EPS (Con-
tinuing Ops) 14.6 22.9 27.1 23.9 36.4 44.2 51.3 60.4 69.2
(Rs.)
Book Value per
53 72 96 117 149 178 212 253 301
share (Rs)
Dividend Payout
0% 0% 0% 0% 5% 10% 10% 10% 10%
Ratio (%)
Margin Ratios
PBITDM (%) 16.9% 22.8% 25.3% 18.8% 20.9% 21.0% 21.0% 21.0% 21.0%
PATM (%) 9.4% 11.8% 14.9% 11.1% 13.1% 11.3% 11.7% 12.3% 12.5%
Cash Profit Mar-
10.2% 14.7% 16.8% 13.0% 14.7% 15.7% 15.9% 16.3% 16.2%
gin (%)
Performance Ratio
ROA (%) 10% 15% 13% 8% 11% 12% 13% 14% 14%
ROE (%) 20% 26% 23% 14% 18% 18% 18% 18% 18%
ROCE (%) 28% 34% 28% 18% 22% 23% 23% 25% 24%
Tax adjusted
18% 23% 18% 13% 16% 17% 17% 18% 18%
ROCE (%)
Gross Fixed Asset turnover (x)
Efficiency Ratios
Receivable days 107 112 110 89 79 79 79 79 79
Inventory days 50 38 43 54 44 44 44 44 44
Cash conversion
87 99 101 67 85 85 85 85 85
cycle (days)

Efficiency Ratios
Net Sales
12.0% 9.0% 3.6% 14.0% 34.8% 13.2% 15.0% 15.0% 15.0%
growth (%)
PAT growth
(continuing 22.3% 77.7% 19.8% -25.1% 58.3% 21.4% 18.8% 21.2% 16.8%
ops) (%)
Growth Ratio
Total Debt/Eq-
0.3 0.3 0.3 0.3 0.3 0.2 0.1 0.0 0.0
uity (x)
Interest Cover
8 13 31 11 11 17 24 139 161
(x)
Valuation Ratios
Price to earn-
49.8 28.0 23.4 31.2 19.7 16.2 13.7 11.3 9.7
ings (x)
Price to book
9.7 7.2 5.4 4.4 3.5 2.9 2.4 2.0 1.7
value (x)
Price to sales
3.6 3.3 3.2 2.8 2.1 1.8 1.6 1.4 1.2
(x)

Market Data
52 week H/L 620/380
BSE symbol NGLFINE
BSE code 524774

No. of shares (m) 6.2
Face value (Rs) 5.0
FY19 dividend/share (Rs) 1.8
Dividend yield 0.3%
Free float (%) 34.6%
Avg. 52-week liquidity (BSE+NSE combined) (in millions) 1.2
Price to book* (times) 3.5
Price to earnings* (times) 15.9

*Based on FY19 figures
Category (%)
Promoters 65.5
Banks, Fis and MFs 0.0
Public 34.6
Others 0.0
Total 100

Stock # 3
PSP Projects Ltd
A Construction Company that Operates on a Negative Working Capital Cycle…
Real estate isn't a sector I'm normally too comfortable picking stocks in.
Asset heavy business, stretched working capital cycle, debt ridden balance sheets,
inefficient regulations, delay in executions and poor returns...It would not be
exaggeration to call this sector an anathema to value investors.
Imagine my surprise when my screener threw up a real estate company with a

negative working cycle!
PSP Projects Ltd is the firm that has achieved this feat.
My curiosity to know more about this company took me to Ahmedabad last year.
The Backstory
The company is named after its promoter Mr Prahladbhai Shivrambhai Patel (a tid bit
that I got to know while speaking to Mr Patel). For around two hours, Mr Patel shared
his journey and that of the company. Listening to him, I knew that I had landed at the
right place.
For Phase One Stocks, the biggest make or break factor is the management. So let me
introduce you to Mr Patel.
Mr Patel is a first-generation entrepreneur. He started his career as a civil engineer in

1985 with a Gujarat based private company. Unlike today, those were the times when
engineers, especially civil engineers were rare and hence in good demand.
Extremely passionate about construction and building things, it did not take Mr Patel
much time to learn the ropes. The clients were happy. And so were his employers.
For 1991 to 1996, he worked as a sales partner.

A few years later, he caught the entrepreneurial bug and decided to start his own
business in the same field. But by now he had become a critical resource for his
company. So much so that he was offered 25% stake in the business by his employer
(just for his human capital). Respecting his employer's wishes, he decided to continue.
But not for long. What made him leave this time was the fact that his employer had
taken fancy to oil business. Mr Patel saw no synergies in it. Funds were being diverted
from construction business to oil subsidiary. Mr Patel, being the face of the company
and directly dealing with clients, was not comfortable with this arrangement. He
decided to venture on his own.
PSP Projects Ltd - The Beginnings

In 2008, PSP Projects Ltd was incorporated. Mr Patel used his personal savings to
start the company.
By then, he had established good relationships with the clients. The work came mainly
from power stations, Amul dairy, hospitals and especially pharma companies. You
see, timelines and compliances in Pharma companies are important. They wanted
someone who could deliver quality and within the decided timelines. Something that
PSP Projects excelled at.
The start was slow, but firm. In the initial years, order value averaged lower than
Rs100 million.
In 2012, the company got the opportunity to do construction work for Medical college,
hospital and residential building for Gujarat Cancer Society. It was its biggest project
so far, worth Rs 1,240 million.
In the following year, it added another feather in the cap. It completed civil construction
of two blocks plus interior work for Vidhan Sabha (one of these for Mr Modi's office
when he was Chief Minister).
PSP further strengthened its positioning for timely delivery and quality construction.
And kept growing its execution capabilities. All this helped it in getting not just new
orders, but made clients offer repeat work.

Since inception in 2008, it has executed 14 projects for Cadila Healthcare Limited
and its affiliates, six projects for Torrent Pharmaceuticals Limited and its affiliates
and four projects for Nirma Limited and its affiliates. It has also executed various
works in relation to prestigious projects such as GIFT city in Gujarat (first smart city),
Sabarmati Riverfront Development project at Ahmedabad and Swarnim Sankul 01
and 02 at Gandhinagar (the office of the Chief Minister and the Cabinet Ministers).
Amul is one of the company's clients. All in record time. Mind you, a lot of these
projects will offer repeat work to the company. The average ticket size of the projects
overtime is up from Rs 85 million to Rs 429 million. From 15 employees in 2008, PSP
now employs over 1200 direct employees plus over 8,000 contract employees.
How could such a small company, started by a single man manage to survive
and thrive in a difficult sector?
Well, to answer this, you will have to understand what the company does (and what
it does not do).
What it does not do is owning a land inventory,or taking up typical developer's work.
PSP Projects executes construction projects. The onus of securing land and site
approvals is up to the client.
Further, it evaluates the client's capacity to pay. And always secures mobilization
advance (almost 5% -10% of the contract value) from the client.
This explains its (average) negative working capital cycle, almost debt free balance
sheet and asset light model.

Financial Snapshot
14000 16.0 10.0 3.0
11000 13.5 8.0

2.0
6.0
8000 11.0
1.0
4.0
5000 8.5
2.0 0.0
2000 6.0 FY15 FY16 FY17 FY18 FY19
FY15 FY16 FY17 FY18 FY19
PAT Margin (%)
Sales (Rs m) EBITDA Margin (RHS, %) Operating Cash Flow/Net profit (RHS, Earnings Quality)
50 1.00
40 0.75
30 0.50
20 0.25
10 0.00
FY15 FY16 FY17 FY18 FY19 FY15 FY16 FY17 FY18 FY19
ROCE (%) RoE (%) Debt to Equity Ratio
But if it so easy, why isn't everybody else doing it?
Well, it's because of unmatchable track record of this company when it comes to
timely execution and quality.
Mr Patel credits this to the culture and discipline in the DNA of the company
that sets it apart from its peers. The organization structure is lean unlike in big
firms. The processes are set in a way that make decision making faster, efficient and
simpler. This is unlike big companies where layers of hierarchy and bureaucracy
cause unnecessary delays in day to day decision making processes and jeopardize
the execution. In other companies, the project manager is mostly an employee. At
PSP, Mr Patel is actively involved. He takes the ownership of every project and is
answerable to clients. He has instilled the same culture in the other employees as
well.
PSP Projects Ltd is a rare construction company which uses SAP as an ERP system for
its processes. This helps in streamlining materials and other functional domains of
different projects.

All this has allowed the company to raise its prequalification (capacity and eligibility
to bid for contracts) and has earned it long standing relationships with clients that
offer it significant repeat business.
Impressed? The best is yet to come.
From PSP1 to PSP2

Until mid-2017, the company used to deal in low ticket size contracts.
One such project was under Mukhyamantri Awaas Yojna. Here, the company
completed a Rs 2.4 billion project with 28 buildings in 24 months versus a deadline
of 30 months. Little did the promoter know that this act would help him bag perhaps
the most important contract of his life... One that would have the potential to catapult
it into the league of top national level players like L&T, Shapoorji Pallonji and so on.
The contract I'm referring to is Surat Diamond Bourse Project (SDB), supposedly the
largest project in Asia with an area of 66 lac square feet, worth Rs 1,575 crores (Rs 16
billion), excluding GST.
Mind you, PSP projects Ltd had primarily been a regional level player so far...too
small to meet the prequalification criteria.
Yet, Mr Patel was given a chance to present his plan and strategy for this project.
Reason - earlier, the Diamond bourse project in Mumbai was undertaken by a big
player and had taken 5 years to be ready. The clients wanted a fast execution. And
had heard of efficient execution of Mukhyamantri Awaas Yojna Project by PSP Projects.
They invited Mr Patel for a presentation.
While presenting, the clients asked Mr Patel about his strategy to undertake and
execute such a huge project, given the company was a small player and had executed
relatively low value projects until then.
Mr Patel's answer was:
I do not look at it as building 66 blocks (It is a 66 building project). I look at it as 3

projects of 22 buildings. I had completed the Nanpura housing colony (Surat)of 18
buildings in 18 months. Completing 3 projects if 22 buildings each in 30 months
shouldn't be a problem.

Mr Patel gives 3 major reasons for bagging the project:
1. His confidence due to his past execution record and plans for the project.
2. The project was based in Gujarat where the company has enough and
impressive track record
and last but not the least...
3. The clients were wary of a big player undertaking the project (they did not
want to repeat the experience of Mumbai Diamond Bourse Project). You see,
in case of big players, it's an employee (the project manager) who is in charge
and deals with the clients. The ownership and commitment towards the project
is limited. Rule books are followed which at times leads to unnecessary delays
and bureaucracy.
With Mr Patel, they had direct access to the owner, and hence more control over the
execution of the project. It ultimately boils down to the personal commitment of the
party responsible for execution, where PSP Projects Ltd scores quite well. Mr Patel
considers it a matter of prestige to offer quality and timely execution.
The work on the project has already begun.
As on 30 June 2019, revenue of Rs 5.1 billion was already booked from the SDB Project.
Currently, around 6500 people are employed for the SDB project of nine blocks. PSP
expects the SDB project to be completed by around December 2020. The outstanding
order book from the SDB project stands at Rs 10.7 billion as on 30 June 2019.
Mr Prahlad likes to call it PSP2. He has kept the execution independent of existing
projects so that the company does not get overwhelmed with one project and fresh
business opportunities are not lost. Mr Patel along with his daughter Pooja Patel (a
civil engineering graduate) is looking after the project. Three teams are working in
parallel under different project managers (exactly as Mr Patel had explained to its
clients). The capex for this plant is expected to be around Rs 57 crore. Remember,
the company has already received mobilization advance. The timeline for this project
is 30 months.
The billing will be monthly (unlike in case of residential projects where payments are
based on milestones and hence strain working capital cycle).

In terms of work status at SDB, the management has said that the work which was
expected to be completed by June 2020 will get delayed by 3 to 4 months. The delay
is mainly due to finalization of the flooring and finishing rate by the client.
Beyond Surat Diamond Bourse Project...

Needless to say, this project could be a gamechanger for PSP Projects for many
reasons.
If executed well (and given the company's track record we have reasons to be
optimistic), this will raise PSP's pre-qualification and make it eligible for projects worth
higher value. The efficient execution would boost visibility and image of the company
and could make it a national level player. After this project, the company will have the
scale to bid for projects that so far had been out of bound and limited only to the top
five or six players at the national level (such as L&T, and Shapoorji Pallonji).
The management believes that even after this project, there is more potential in
Surat market (better than Ahmedabad). It also serves PSP Projects well that clients
in Surat have better paying capacity and organized players (competition) are almost
non-existent.
Apart from Surat project, the management expects to get order inflows worth Rs
200-250 crores every quarter for the next one year. The company has already bid for
projects in and outside Gujarat (Rajasthan, Andhra Pradesh, Karnataka).
In the recent quarter (Q1 FY20), PSP Projects bagged orders worth Rs 7.6 billion taking
the total orderbook to Rs 34 billion at the end of Q1FY20. This compares to a topline
of Rs 7.5 billion in FY19.
The major order was under the Pradhan Mantri Awas Yojana (PMAY) worth Rs 6 billion
for a project at Bhiwadi, Maharashtra.
In terms of order book, the management expects to win orders in the range of Rs
15-16 billion for the full year FY20. Most of the orders have a completion period of
around 24 to 30 months.
Considering all this we have assumed an order book growth (CAGR /compound
annual growth rate) of 13.5% for FY19-FY22E in our estimates. We expect operating

profit margin to average at 13% over next few years. The resultant growth in the
bottomline is expected at 20% CAGR. The average return ratios for the company over
the next four years are north of 20%. Dividends payment (payout of 20% in FY19) is
a cherry on the cake.

Prahaladbhai Shivrambhai Patel, aged 53 years, Chairman, Managing Director
and CEO, holds a Bachelor's degree in civil engineering. Prior to incorporation of
PSP Projects, he had been carrying on the business of civil construction by way of a
proprietorship firm. He has over 30 years of experience in the business of construction
and has played a significant role in the development of the business. He has also been
featured in the book titled "Business Game Changer: Shoonya se Shikhar" authored
by Prakash Biyani and Kamlesh Maheshwari business for completing government's
infrastructure project before the scheduled time for which he also received
appreciation of Prime Minister, Mr. Narendra Modi. He has also been awarded by
the Gujarat Innovation Society with the Dena Bank Hercules Award on "An innovative
and quality makes them fastest growing Construction and Infrastructure Company".
Maulik Patel, Director - Procurement, has been associated with company since
its establishment and has played a vital role in company's success story. He holds a
Bachelor's Degree in Commerce
R.B. Parmar, General Manger - Tender, holds a Diploma in Civil Engineering. He has
30 years' experience in contracts and tendering in Construction Industry.
Pratik Thakkar, Sr. Manager - Business Development, holds a Bachelor's Degree

in Commerce and a Diploma in Marketing Management. He has 10 years' experience
in Business Development in Construction Industry.
Hetal Patel, aged 43, Chief Financial Officer, holds a Master's degree in commerce
from Gujarat University. She is a member of the Institute of Chartered Accountant of
India. She is also a certified internal auditor from the Institute of Internal Auditors,
USA. She has several years of experience in accounts and finance. Prior to joining
PSP Projects, she worked with Arabian Odessey Travel & Tourism LLC, Ramky
Infrastructure Limited and Sterling Addlife India Limited. She was appointed with
effect from March 7, 2013.

Please note that Mr Patel's daughter, Pooja Patel, holds a bachelor's degree in civil
engineering from Gujarat Technological University. She is currently pursuing a
diploma in financial management from Ahmedabad Management Association. She is
actively involved in execution of the Surat Diamond Bourse Project.
Besides, Mr Patel's son Sagar Patel is pursuing studies in civil/structural engineering

and later on plans to join the family business.
Coming to Valuation…
We have forecasted the growth in the order book at 13.5% CAGR (FY19-FY22E). With big
ticket size projects, we expect operating leverage benefits to kick in for the company.
As per our estimates, the average operating profit margin comes to around 13% for
FY19-FY22E. The resultant growth in the net profit is 19.6% CAGR (FY19-FY22E).
Since the business is asset light and does not involve much use of debt, we have
valued PSP Projects Ltd on a price to earnings basis. The average returns on equity
for PSP Projects stand at 30% for FY19E-FY22E as per our estimates. We expect the
company to operate with very efficient working capital cycle. The company has also
been paying dividends which is a cherry on the cake.
Given the limited stock price history (the stock got listed in May 2017), there is not
enough historical data to consult when it comes to valuing the company. We have
assigned a target P/E multiple of 20 times (as compared to current P/E of 21.3 times)
to the earnings in FY22.
An important note: Maximum buy price at which one could consider full
exposure to PSP Projects Ltd (2% of one’s portfolio) is Rs 450.We recommend
subscribers to consider putting in only 50% of the sum intended to invest into
the stock of PSP Projects Ltd at current valuations (Maximum buy price for 50%
exposure: Rs 540 per share).
We believe that with a little wait in the short run one may get a better entry
point in the stock. That said, even at these valuations, one cannot ignore the
long-term story and can consider participating with 50% exposure.

Best Buy price: Please note that we will send a special update as and when the stock
price corrects to the best buy price. We do not recommend subscribers to act on
short term price movements until such update.
Action to Take
The maximum buy price for 50% exposure in the stock stands at Rs 540.
In our opinion, not more than 2% of the portfolio should be allocated to a single
Phase One Stock (10% for all Phase One Stocks). Since we are recommending a
partial exposure to PSP Projects, one could consider a maximum allocation of
1% to the stock.
Please note that this allocation will vary from person to person. To find what
works best for you, we recommend you talk to your investment advisor.
For the original recommendation report, please click here.

(Rs m) FY15 FY16 FY17 FY18 FY19
Sales 2,805 4,760 4,569 7,516 10,504
Sales growth (%) 33.3% 69.7% -4.0% 64.5% 39.7%
Operating profit 224 349 668 1,046 1,486

Operating profit margin (%) 8.0% 7.3% 14.6% 13.9% 14.1%
Net profit 141 228 412 655 892
Net profit margin (%) 5.0% 4.8% 9.0% 8.7% 8.5%
Balance Sheet
Fixed assets 335 536 533 798 1,032
Other assets 138 170 310 947 843
Inventories 42 98 68 338 750
Receivables 239 202 589 1,235 1,479
Current assets 1,387 1,820 2,491 4,267 5,415
Total Assets 1,859 2,526 3,334 6,013 7,290
Net worth 469 645 1,058 3,025 3,702
Long term debt 4 10 34 17 4
Short term debt 325 449 719 264 294
Other non current liabilities 1 6 9 0 0

Current liabilities barring short term
1,059 1,416 1,514 2,707 3,290
debt
Total Liabilities 1,859 2,526 3,334 6,013 7,290
*For the original estimates, please click here.

Market Data
52-week High/Low (Rs) 358 / 617
BSE Code 540544
NSE Code PSPPROJECT

No. of shares (m) 36
Free float (%) 26.7
FY19 DPS (Rs) 5.0
Dividend Yield % (FY 19 at current price) 0.9%
Trailing 12 months Price to Earnings (P/E) 21.9
Category (%)
Promoters & Promoter group (%) 73.3
Institutions (%) 8.1
Other Public (%) 18.7
Total 100

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3 Phase One Stocks To Consider Buying | 2

3 | 3 Phase One Stocks To Consider Buying

Hence, one needs to dig deeper for better returns.

In short, the recipe to extra ordinary returns is:

So, what is Phase One process all about?

Well, I have divided this into four steps.

3 Phase One Stocks To Consider Buying | 4

5 | 3 Phase One Stocks To Consider Buying

I Waited for 3 Years to Recommend this Phase One Stock...Here's Why

This company that I recently recommended to my subscribers has been under my

3 Phase One Stocks To Consider Buying | 6

• In association with IDC (Industrial Design Company, UK), Shaily designed

• SEPL has an expertise in making complex precision components and

7 | 3 Phase One Stocks To Consider Buying

And that's just one facet of the multiple growth opportunities.

It has a portfolio of 13 drug delivery devices in different stages of development. These

Now, this company is still very small.

But what about valuations?

Well, this brings me to the opening lines.

3 Phase One Stocks To Consider Buying | 8

Institutional Stake and Stock Price

9 | 3 Phase One Stocks To Consider Buying

About the Management

3 Phase One Stocks To Consider Buying | 10

Note: Ideally, we would have preferred lower management remuneration... Currently it

Key Investing Rationale

Order Wins in 1QFY20

As per my interaction with the management at the Corporate office in Baroda

11 | 3 Phase One Stocks To Consider Buying

Order Wins in FY19

3 Phase One Stocks To Consider Buying | 12

• High Utilization and New Segments to Improve Margin Profile

13 | 3 Phase One Stocks To Consider Buying

Key Investment Concerns

3 Phase One Stocks To Consider Buying | 14

• Rise in Competitive Intensity

While Shaily cannot be compared to other plastic processing companies like

15 | 3 Phase One Stocks To Consider Buying

The carbon steel segment remains a highly competitive area already.

• Delay /Slowdown at Client's or Company's End

3 Phase One Stocks To Consider Buying | 16

17 | 3 Phase One Stocks To Consider Buying

It manufactures precision injection moulded plastic components, subassemblies,

3 Phase One Stocks To Consider Buying | 18

19 | 3 Phase One Stocks To Consider Buying

On the basis of our conservative estimates, we have arrived at a target price of Rs

3 Phase One Stocks To Consider Buying | 20

We recommend subscribers to consider buying the stock of Shaily

21 | 3 Phase One Stocks To Consider Buying

3 Phase One Stocks To Consider Buying | 22

23 | 3 Phase One Stocks To Consider Buying

3 Phase One Stocks To Consider Buying | 24

Financial Stability Ratios

25 | 3 Phase One Stocks To Consider Buying

52-week High/Low (Rs) 1078/495

BSE Code 501423

NSE Code Not listed yet

FY19 DPS (Rs) 0.0

Face value (Rs) 10.0

FY19 DPS (Rs) 0.0

Shareholding (%, June-19)