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We maintain BUY on HG with SOTP of Rs 462/Sh, valuing the EPC business at 15x FY21E EPS. We have marginally cut our FY20/21E EPS by 0.7/0.3% to factor in higher interest costs as share of interest bearing mobilization advances increase in the mix.
* All round strong performance during FY19, debt reduction the only miss: In a year since its IPO (in Mar-18), HG has recorded robust 44.3/46.8% Rev/APAT growth to Rs 20.1/1.2bn. It ended FY19 with inflows of Rs 38.9bn and a robust order backlog of Rs 62.2bn. Though, 4QFY19 performance was a miss despite in line Rev/EBIDTA as higher interest costs resulted in a 13.1% APAT miss. Debt remained at Rs 3.8bn vs guidance of Rs 2.7bn and was a big miss.
* Debt reduction to pan out by Sep-19, net D/E at 0.4x: HG missed its Rs 2.7bn end FY19 gross debt guidance. It was attributed to delays in receipt of mobilization advances and higher debtors on account of extended elections in Rajasthan (both State followed by Central). The ensuing model code of conduct resulted in a delay in debtors’ realization and HG had to take short term loans. By Sep-19-end it expects to retire almost Rs 800mn of debt, resulting in Rs 3bn of gross debt (includes Rs 0.6bn promoter loan as well).
* HAM projects: HG has ~Rs 2.2bn equity requirement across 3 HAM projects (over the next 2.5yrs, ~Rs 1bn each in FY20/21E). It is evaluating a strategic sale in its HAM portfolio. Both the new HAMs (Rewari and Narnaul) and the Delhi Vadodara EPC project are expected to kick off only post Sep-19.
HG delivered a strong performance during FY19. The focus should now be on debt reduction. There has been a marginal deterioration in NWC days owing to increase in FY19 debtors even as HG expects to realize it soon and revert to 65days of NWC. ~Rs 12/27bn of orders will move into execution from 1QFY20-end/3QFY20 leading to a strong pickup in revenue from 2HFY20. Hapur project’s AD is expected to come in the next 15days. The EPC bid pipeline is strong (HG plans to bid for ~Rs 250bn in EPC and selectively in HAM) and it stands to benefit from the upcoming ordering in the roads segment (incl. State projects). We maintain BUY.
(1) Slowdown in NHAI ordering;
(2) High interest rates; and
(3) Delay in appointed dates for HAM.
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HDFC Securities Limited (HSL) is a SEBI Registered Research Analyst having registration no. INH000002475
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