The last three Budgets have kept the infrastructure theme in the spotlight, given the government’s push to the sector and the increased capex targets. The current budgetary allocation to Ministry of Roads, Transport and Highways is ₹2.7 lakh crore, which is 25 per cent higher YoY. This thrust has played out well for many infrastrucure related players and road construction companies. HG Infra Engineering is one such company that has benefitted from this theme.

At bl.portfolio, in the edition dated September 17, 2022, we had recommended that investors buy the stock of HG Infra Engineering given its good business prospects, cheaper valuations and strong financials.The stock has delivered around 50 per cent return since then. It is currently trading at a one-year forward PE of 11.9 x against its historical average (5 years) of 9.3x. The one-year forward EV/EBITDA multiple of the company is 8.9 x now against its five-year average of 6x. The company also has a good execution track record, robust order book and strong financials.

From levels a year back, valuations have expanded and are at a premium to historical average. At the same time, growth, while decent, is tapering due higher base. Hence, we now recommend that investors accumulate the stock on dips..

Business and prospects

H.G. Infra Engineering is a major player in the road EPC and infrastructure development space with 21 years of experience. It has pan-Indiapresence, with 17 active projects. The company is primarily focussed on road infrastructure projects but is looking to diversify into railway and water infrastructure also.

The company has 53 per cent of its order book (as on June 30, 2023) as EPC projects and 47 per cent HAM projects. It derives 70 per cent of projects from government agencies and remaining from private players. The company currently is operating in 11 States with major concentration in Uttar Pradesh, which forms 34 per cent of its order book, followed by Odisha (11 per cent) and Telangana (9 per cent).

The order book as on June 30, 2023, was ₹11,674 crore of which ₹10,421 crore was for highway projects and the rest metro and railway projects. The book to bill ratio (based on FY23 earnings) is 2.5x which implies revenue visibility of 2.5 years from now.

Although the bid pipeline of the projects is considerably large, recently there appears to be some sluggishness in awarding activity by NHAI and other agencies. Accordingly, the company has revised its order inflow target to ₹7,000-₹8,000 crore from ₹8,000-₹9,000 crore. According to the management, the bid pipeline available for FY24 including NHAI, MSRDC(Maharashtra State Road Development Corporation) and railway projects (including Metro projects) is around ₹1.5 lakh crore and HG Infra plans to bid for ₹90,000 crore overall. The company believes that even with the historical bid strike of 7-8 per cent it will be able to achieve the order inflow target.

Recent events

In the first week of May 2023, the company inked a deal with KKR Highways InvIT to monetise four of its HAM projects — Gurgaon Sohna, Rewari-Ateli, Ateli-Narnaul, and Ateli-Rewari bypass. The company will be selling 100 per cent of its stake in these assets. The enterprise value for the transaction is ₹1,394 crore, with an equity value of ₹531 crore. The valuation of the deal is around 1.55x the price to book. Equity and debt commitment for all four HAM assets are ₹343 crore and ₹996 crore, respectively.

The asset monetisation is expected to unlock funds for equity investment in the current and new projects. The equity requirement of the company’s 12 HAM projects is ₹1,592.6 crore of which ₹758.7 crore is already invested and the projected investment for FY24 is around ₹407 crore. The balance will be invested in FY25 — ₹268 crore and FY26 — ₹158 crore.

Financials

In Q1FY24, the company reported a revenue growth of 22.2 per cent YoY at ₹1351.2 crore. The EBITDA for June 2023 quarter was ₹281 crore which was up 41.1 per cent and the EBITDA margin also rose 280 basis points to 20.8 per cent. The net profit in June 2023 quarter was ₹150.4 crore which is 37.4 per cent higher YoY and the net profit margin also expanded 120 basis points YoY to around 11 per cent. The company gave revenue guidance of ₹5,500-5,600 crore for FY24.

The consolidated debt for June 2023 quarter is ₹2,131.2 crore which is 52 per cent higher YoY. The higher debt as on June 30, 2023, was due to delayed receivables from the company’s SPVs and NHAI, which is a one-time occurrence, and the debt levels will normalise. The net debt/EBITDA at 2.8x may appear on the higher side slightly. However, with asset monetisation on track, this is expected to moderate.

As per management, by this year end the debt will reduce by ₹400 crore. Based on Bloomberg consensus estimates for FY24 EBITDA, this implies a reasonable net debt/EBITDA ratio of around 2 times by end of the year.

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