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  • CMP : 755.4 Chg : -9.45 (-1.24%)
  • Target : 765.0 (31.22%)
  • Target Period : 12 Month
Result Update

04 Aug 2022

Decent performance; healthy outlook ahead…

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 during FY17-22; operating margin improved from 14.9% in FY17 to 16.2% in FY22
  • Prudent management, lean balance sheet position, superior return ratios
Q1FY23 Results

HG Infra reported decent set of numbers during Q1FY23

  • Standalone revenue improved 16.6% YoY to ₹ 1,065.7 crore. On QoQ basis, the company has reported 3.9% growth. Its topline was largely backed by its strong executable order book position, pick-up in execution, and receipt of appointed date in most of its projects
  • EBITDA was at ₹ 162.5 crore, up 8% YoY, with margin at 15.2%
  • PAT stood at ₹ 97.6 crore (up 9.8% YoY)
What should Investors do?

HG Infra’s share price has grown ~2.2x over the past four years (from ~₹ 267 in March 2018 to ₹ 582 levels in July 2022).

  • We maintain BUY rating on the company
Target Price and Valuation

We value HG Infra at a target price of ₹ 765

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 18.4% 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

Particulars

Particulars (₹ crore) Amount
Market Capitalization 4,922.7
Debt (| crore) FY22 410.6
Cash (| crore) FY22 158.5
EV (| crore) 4,051.6
52 week H/L (₹) 1,559.0/750.5
Equity Capital 65.2
Face Value (₹) 10.0

Price Chart

Key Risks

Key Risks: (i) weaker-than-expected execution; (ii) low order inflows

Research Analyst

Bhupendra Tiwary
bhupendra.tiwary@icicisecurities.com

Lokesh Kashikar
lokesh.kashikar@icicisecurities.com

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 0.3 4,227.6 4,912.6 0.2
EBITDA 303.2 342.4 418.1 584.8 0.4 653.6 763.9 0.1
EBITDA Margin (%) 15.1 15.6 16.5 16.2 - 15.5 15.5 -
Net Profit 123.6 165.7 211.0 338.8 0.4 380.0 438.7 0.1
EPS (|) 19.0 25.4 32.4 52.0 - 58.3 67.3 -
P/E (x) 28.6 21.3 16.7 10.4 - 9.3 8.1 -
Price / Book (x) 5.4 4.3 3.4 2.6 - 2.0 1.6 -
EV/EBITDA (x) 12.6 11.1 8.5 6.5 - 6.1 5.2 -
RoCE (%) 22.7 23.2 25.9 28.7 - 25.1 24.0 -
RoE (%) 18.7 20.2 20.4 24.8 - 21.9 20.2 -
Source: Company, ICICI Direct Research

Key business highlight and outlook

Order book robust at 3.1x revenues; provides healthy visibility

As on 30th June 2022, HG Infra’s order book stood robust at | 11,508 crore (3.1x book to TTM revenues) aided by Ganga Expressway sub-contracting EPC job (worth | 4,970.9 crore) secured during Q1 FY23. Overall, the company has guided for order inflows of ~| 9,000-10,000 crore during 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 improved momentum is likely to continue with a) its robust order book position, b) receipt of appointed date in most of its projects and c) pick-up in execution. With these, the company has retained its guidance of ~| 5,000 crore, ~| 6,000 crore of topline directed for FY23E, FY24E respectively (vs | 3,615 crore posted in FY22). Also, operating margin is likely to sustain at 15.5-16% during FY23 with softening in input prices and better operating efficiencies.

Debt increased on QoQ basis; likely to normalize

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. However, its gross debt at the end of Q1 FY23 on standalone level has jumped to | 447.5 crore (vs | 314.7 crore at FY22-end) mainly due to a) increase in debtors from various SPVs, and b) higher equity and working capital requirement in newly commenced HAM projects. Going forward, it has total equity requirement of | 1,137 crore (| 529.5 crore already invested till Q1 FY23; | 286 crore, | 208 crore, | 113 crore to be spent during balance period of FY23, FY24, FY25 respectively) towards already secured HAM projects. Despite these, its debt is likely to normalize with 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 guided for | 5,000 crore of revenue during FY23 largely to be contributed by pick-up in execution from under-execution projects including three packages of Raipur—Visakhapatnam (| 3,500 crore), Appointed date (AD) pending/newer projects (| 500 crore) and Ganga Expressway (| 1,000 crore).
  • The company 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 (at >16%). While change in project mix and input cost rise has impacted its margin in Q1 FY23, it is likely to improve to ~15.5-16% in FY23 and 16%+ in FY24 with diversified project mix and softening in input prices.
  • At present, bid pipeline for the company stands at ~| 7,000 crore spread majorly across roads, metro, water projects. Additionally, the management believes ordering pipeline in the road sector from NHAI to improve ahead with authority targeting projects spanning 6,000 km to tender during FY23.
  • 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 (~| 5,500 crore) and non-road (~| 1,000 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. Margin expectation stands at ~15%. The management expects execution on the project to begin by September’22-end with receipt of appointed date.
  • HG Infra has secured appointed date (AD) in the newly won HAM projects i.e. Raipur Visakhapatnam OD - Pkg 5 and 6 projects on 30th May 2022 and 1st June 2022 respectively.  With the receipt of AD, the construction work has picked-up pace and the company has completed 5% and 6% work as on 30th June 2022 for Pkg 5 and 6. Among other key HAM jobs, the company has completed a) 96% in Rewari Ateli Mandi, and b) 10% in Raipur-Visakhapatnam AP-1 project.
  • The company has achieved financial closure for Khammam Devarapalle Pkg – 2 (bid project cost: | 637 crore) on 20th July 2022, and expects AD by mid-October 2022. For Khammam Devarapalle Pkg – 1 (bid project cost: | 772 crore), the company is likely to sign concession agreement soon with significant progress witnessed in land acquisition (52% land available as on 30th June 2022) and expects receipt of AD by November’22.
  • HG Infra has completed execution in Delhi Vadodara Pkg-4 and Hapur Moradabad projects. Among other key EPC projects, the company has completed a) 84% in Delhi Vadodara Pkg-8, b) 73% in Delhi Vadodara Pkg-9, and c) 64% in Mancherial – Repallewa projects.
  • 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 ~14% by June’22-end. In the Neelmangala-Tumkur EPC project, the company expects appointed date during August’22-end.
  • HG Infra has incurred | 45 crore towards capex during Q1 FY23. Overall, the management has guided for ~| 135 crore of gross capex during FY23 (net addition of ~| 90 crore considering disposal of assets) required to be spent for newer projects and jobs in newer targeting segments.
  • 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 Q1 FY23 in these 4 HAM projects stands at | 324 crore.
  • 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 over next six months.

 

Considering its healthy executable order book position and robust execution skill, we expect execution momentum to continue in the near-to-medium term. While operating margin has moderated during Q1FY23, it is likely to improve hereon gradually with softened input prices. Additionally, strong return ratios, healthy working capital cycle, and lean balance sheet position remains key positive. We maintain BUY rating with a TP of | 765/share (based on SoTP based valuation). We value core business at 10x 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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Buy: >15%

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Head – Research

pankaj.pandey@icicisecurities.com

 

 

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