Initiating Coverage - HG Infra Engineering - ICICI Direct

HG Infra Engineering (HG Infra), in a span of 18 years, has successfully emerged as an efficient road contractor led by the expertise gained over time to execute large-ticket road projects. Additionally, its scaled-up pre-qualification, expansion in different geographies and decision to bag EPC/HAM projects selectively has resulted into robust topline, bottomline growth (32.5%, 78.9% CAGR over FY16-20, respectively). Going forward, it is well on track to achieve healthy 17.8%, 20.5% revenue, PAT CAGR, respectively, in FY21-23E given remarkable execution track record, strong order book-to-sales ratio and likely continued momentum in road sector.

Scaled-up pre-qualification; road opportunities remain robust

HG Infra's pre-qualification to bid independently for NHAI's projects has improved by a whopping 8x to Rs. 2,000 crore in FY15-20. This is likely to aid the company with a) eligibility to bid for most road projects (>95% of total NHAI's awards have order value
Order book to drive growth; diversification to de-risk business

HG Infra's order book (at the end of December 2020) was healthy at Rs. 5,971 crore (2.8x TTM book-to-bill). Additionally, the company has secured four projects in Q4 worth Rs. 2,564 crore, which has strengthened its order book further, providing revenue visibility over the next couple of years. Further, incremental expected inflows of Rs. 3,500 crore, Rs. 4,000 crore in FY22E, FY23E, respectively, will buoy sustained growth thereafter. Diversifying to other infra allied businesses such as railways and irrigation, and geographically to eight different states and foray into HAM projects are likely to de-risk its business.

Valuations & Outlook

Healthy operating margin of 15%+, comfortable balance sheet position (net debt equity of ~0.1x at standalone levels), controlled working capital cycle (driven by apt mix of private/government projects coupled with efficient project management) and healthy return ratios remain key positive features of HG Infra. Furthermore, valuation at 7.6x FY23E standalone P/E is at a discount to peers. We initiate coverage on HG Infra with a BUY rating and an SoTP based target price of Rs. 380/share. Key risks to our call include increase in competitive intensity, which may impact ordering/margins and execution delays that may impact overall topline/profitability growth.

For details, click on the link below: https://www.icicidirect.com/mailimages/IDirect_HGInfra_IC.pdf

Shares of H.G. Infra Engineering Ltd was last trading in BSE at Rs.296.25 as compared to the previous close of Rs. 297.45. The total number of shares traded during the day was 6260 in over 269 trades.

The stock hit an intraday high of Rs. 303.45 and intraday low of 294.55. The net turnover during the day was Rs. 1865751.

Source : Equity Bulls

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