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  • CMP : 746.8 Chg : 13.45 (1.83%)
  • Target : 700.0 (29.15%)
  • Target Period : 12-18 Month
Result Update

13 Nov 2022

A mixed bag performance…

About The Stock

HG Infra Engineering Ltd is a Jaipur (Rajasthan) based infrastructure company having primary focus on Roads and allied sectors. Additionally, the company is actively looking to diversify itself by targeting into railways, airport, and water infra segment.

  • Reported 27.9% revenue CAGR over FY17-22 with improved operating margin
  • Prudent management, lean balance sheet position, superior return ratios
Q2FY23 Results

HG Infra reported mixed bag performance during Q2FY23

  • Standalone revenue improved 0.3% YoY to ₹ 752.1 crore impacted by delay in receipts of Appointed Date in certain projects and prolonged monsoon.
  • EBITDA margin stood at an elevated level of 16.1% (down 19 bps YoY) aided by softening in commodity prices and better project mix. Effectively, EBITDA at ₹ 120.8 crore, was down 0.9% YoY.
  • PAT de-grew 7.5% YoY at ₹ 64.6 crore
What should Investors do?

HG Infra’s share price has doubled over the past four years (from ~₹ 270 in March 2018 to ₹ 542 levels in November 2022).

  • We maintain BUY rating as we expect execution pace to pick up considerably in the near-to-medium term. Also, margins are likely to improve hereon gradually with softened input prices and better project mix.
Target Price and Valuation

We value HG Infra at a target price of ₹ 700/share

Key Triggers for future price performance
  • HG Infra is likely to be one of the major recipients of thriving roads, railways and water supply segments. Healthy inflows to aid its order book position.
  • Strong order book position, receipt of appointed date in most of its projects, and execution pick-up to translate into 16.6% topline CAGR over FY22-24E
  • Current order mix with built-in raw material price variation clauses in most of its contracts provides margin sustainability at ~15.5-16%
  • Double-digit return ratios, and lean balance sheet position
Alternate Stock Idea

Besides HG Infra, we like KNR Constructions in Infra space

  • Play on strong execution and lean balance sheet
  • BUY with a target price of ₹ 310/share
Result Update
ICICI Securities – Retail Equity Research

Key Financial Summary

| crore FY19 FY20 FY21 FY22 5 Year CAGR(FY17-FY22) FY23E FY24E 2 Year CAGR (FY22-FY24E)
Net Sales 2,009.8 2,196.1 2,535.0 3,615.2 27.9 4,227.6 4,912.6 16.6
EBITDA 303.2 342.4 418.1 584.8 36.3 653.6 763.9 14.3
EBITDA Margin (%) 15.1 15.6 16.5 16.2 0.0 15.5 15.5 0.0
Net Profit 123.6 165.7 211.0 338.8 44.7 380.0 438.7 13.8
EPS (|) 19.0 25.4 32.4 52.0 0.0 58.3 67.3 0.0
P/E (x) 28.6 21.3 16.7 10.4 0.0 9.3 8.1 0.0
Price / Book (x) 5.4 4.3 3.4 2.6 0.0 2.0 1.6 0.0
EV/EBITDA (x) 12.6 11.1 8.5 6.5 0.0 6.1 5.2 0.0
RoCE (%) 22.7 23.2 25.9 28.7 0.0 25.1 24.0 -
RoE (%) 18.7 20.2 20.4 24.8 0.0 21.9 20.2 -
- - - - - 0.0 - - -
- - - - - - - - -
Source: Company, ICICI Direct Research

Key business highlight and outlook

Order book robust at 2.9x revenues; provides healthy visibility

As on 30th September 2022, HG Infra’s order book stood robust at | 10,851.6 crore (2.9x book to TTM revenues). Overall, the company has guided for order inflows of ~| 9,000-10,000 crore during FY23 (already secured ganga expressway project amounting to ~| 4,500 crore in Q1 FY23), to be driven by a strong order pipeline in roads segment and growing opportunities in the other infrastructure verticals such as railways, and water supply. On the execution front, the company expects significant ramp up in execution from Q3 FY23 onwards to be driven by a) its robust order book position, b) receipt of appointed date in most of its projects, and c) no major hindrances from external factors such as rains, etc. With these, the company has guided for 25% YoY growth in topline during FY23 (to | 4,600 crore) and ~22-25% YoY growth during FY24 (to | 5,800 crore).  Further, operating margin is likely to sustain at 15.5-16% going ahead with softening in input prices and better operating efficiencies.

Debt declined on QoQ basis; likely to hover at current levels

HG Infra’s balance sheet has remained lean over the years backed by its prudent strategy to mainly focus on an asset light business model and efficient manage working capital. At the end of Q2FY23, its gross debt, cash and cash equivalent at the standalone level stood at | 392.2 crore, | 40.5 crore, respectively (gross debt declined by | 55.3 crore on QoQ basis). Going forward, it has total equity requirement of | 1,137 crore (| 609.5 crore already invested till Q2 FY23; | 200 crore, | 190 crore, | 137.5 crore to be spent during balance period of FY23, FY24, FY25 respectively) towards already secured HAM projects. Despite these, its debt is likely to hover in the range of | 350-400 crore in the near term to be aided by healthy operating cash flow generation arising from improved profitability, better cash flow management and normalization in debtor days (backed by receipt of pending mobilization advances). Also, monetisation of HAM assets would free its invested capital, in-turn, increase its ability to bag newer projects.

Key conference call takeaways                

  • HG Infra has lowered their topline guidance to ~| 4,600 crore for FY23 (vs | 5,000 crore guided earlier) due to a) potential revenue loss during H1 FY23 because of prolonged monsoon season, and b) delay in receipt of Appointed date for certain projects including Ganga Expressway.
  • HG Infra has faced several headwinds during FY22 which includes rising prices of key raw material and various input cost, several wave of Covid-19 disrupting operations, higher crude prices and prolonged monsoon season. However, its strategy towards selective bidding, and growing operational efficiencies has enabled company to protect overall margin profile during FY22. Going forward, the management expects margins to remain at an elevated level of 16%+ during H2FY23/ FY24 with diversified project mix and softening in input prices.
  • At present, HG Infra has bided for ~| 15,000 crore worth of projects spread majorly across roads (| 11,000 crore), and water and railways vertical (| 4,000 crore). Additionally, the management believes ordering pipeline in the road sector from NHAI to improve ahead with authority targeting projects spanning 6,500 km to tender during FY23.
  • HG Infra is targeting to diversify its project portfolio towards water supply, and railway redevelopment sectors. In line with that, the company has participated in the tenders for few stations announced in the recent past and is optimistic to bag some of them over next few months (the government has identified 1,253 railway stations for modernization, wherein 197 stations are likely to be awarded during FY23). Further, HG infra has bided for Jal Jeevan Mission jobs in Rajasthan and Madhya Pradesh states.
  • Overall, the company has guided for | 9,000 – | 10,000 crore of order inflows during FY23 largely targeting from HAM - Roads (| 3,500 crore), EPC - Roads (| 4,500 crore) and non-road (| 1,500 crore) segments. The management expects competitive intensity to decline ahead.
  • During Q1 FY23, HG Infra has secured sub-contracting job from Adani Road Transport Ltd for Ganga Expressway (Group-II) project (design length: 151.7 km) in the State of Uttar Pradesh on EPC basis. The overall order size stands at | 4,970.1 crore (inclusive of GST) to be completed in 27 months. The company has secured appointed date on 3rd November 2022 (vs earlier expectation during Q2 FY23) and the execution on the project has commenced now. The management expects revenue of | 700 crore; | 2,000 crore during FY23, FY24 respectively with margin hovering at 15%+.
  • Among key EPC projects, HG Infra has completed a) 99.7% execution in Delhi Vadodara Pkg-4, b) 94% in Hapur Moradabad, c) 92% in Delhi Vadodara Pkg-8 (to be completed in Q3FY23), d) 81% in Delhi Vadodara Pkg-9 (to be completed by February 2023), and e) 72% in Mancherial – Repallewa projects (completion likely by FY23-end).
  • The execution in Karala-Kanjhawala UER EPC project has commenced with receipt of appointed date w.e.f. 28th October 2021. However, the implementation got impacted during initial phase due to imposing of the ban on construction activities in Delhi-NCR region and adverse weather affecting operational efficiencies. With the lifting of the ban, the project is making good progress and it is now completed 27.4% by September 2022-end. In the Neelmangala-Tumkur EPC project, the company has secured appointed date during August 2022 and is under execution.
  • HG Infra has secured appointed date (AD) in the newly won HAM projects i.e. a) Raipur Visakhapatnam OD (Pkg 5): 30th May 2022, b) Raipur Visakhapatnam OD (Pkg 6): 1st June 2022, and c) Khammam Devarapalle HAM project (Pkg - 2): 13th September 2022. With the receipt of AD, the construction work has picked-up pace
  • The company has achieved financial closure for Khammam Devarapalle Pkg – 1 (bid project cost: | 772.1 crore) on 15th September 2022, and expects AD by November 2022-end (with 86% land availability)
  • HG Infra is in advanced stage of discussions with three potential investors for monetisation of its 4 HAM assets (3 completed: Gurgaon-Sohna, Rewari Ateli Mandi and Narnaul Bypass 1; advanced stage of completion: Rewari Bypass Pkg-4) and expects positive outcome by FY23-end. The total equity invested till Q2 FY23 in these 4 HAM projects stands at | 324 crore.
  • HG Infra has incurred | 149 crore towards capex during H1 FY23. Additionally, the management has guided for ~| 45 crore of gross capex during H2 FY23 (disposal of assets would be ~| 45 crore; net addition would be zero) required to be spent for newer projects and jobs in newer targeting segments.
  • HG Infra has achieved PCoD for three HAM projects namely a) Gurgaon-Sohna, b) Rewari Ateli Mandi (by completing 170 days ahead of scheduled date) and c) Narnaul Bypass (by completing 255 days ahead of scheduled date). The company is eligible for early completion bonus in two projects (amounting to ~| 26 crore) and expects receipt during Q3 FY23.

Considering its healthy executable order book position and robust execution skill, we expect execution pace to pick up considerably in the near-to-medium term. Also, margins are likely to improve hereon gradually with softened input prices and better project mix. Additionally, strong return ratios, healthy working capital cycle, and lean balance sheet position remains key positive. We maintain BUY rating with a TP of | 700/share (based on SoTP based valuation). We value core business at 9x FY24 P/E and HAM projects at 1x equity invested.

Disclaimer

ANALYST CERTIFICATION

I/We, Bhupendra Tiwary, CFA, MBA, Lokesh Kashikar, MMS, Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. It is also confirmed that above mentioned Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months and do not serve as an officer, director or employee of the companies mentioned in the report.                       

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Pankaj Pandey

Head – Research

pankaj.pandey@icicisecurities.com

 

 

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