Steady Performance Persists; Maintain BUY
HG Infra Engineering (HGINFRA) continued to report a steady performance in 2QFY19 as well despite challenges pertaining to soft order inflow and extended monsoon impacting execution. While revenue came in-line with estimate at Rs4.74bn (+11% YoY and -10% QoQ), EBITDA stood marginally ahead of estimate at Rs733mn (+18% YoY and -8% QoQ) mainly led by better-thanexpected margin at 15.5% (+94bps YoY and +35bps QoQ). Better operating performance and lower interest expenses (-12% QoQ) aided HGINFRA to report higher-than-expected PBT (better than the industry average) of Rs474mn (+25% YoY). Further, lower tax rate led by adoption on new ETR and re-measurement of DTAs resulted in a stellar 57% YoY (12% QoQ) growth in net profit to Rs386mn vs. our estimate of Rs330mn. It has witnessed improvement in receivables and working capital, which enabled the Company to generate interest adjusted OCF to the tune of Rs744mn as against Rs370mn in entire FY19. While the Management has cut its revenue growth guidance for FY20E on the backdrop of delay in obtaining Appointed Dates (ADs) and soft order inflow, it has broadly maintained its FY21E revenue target at >Rs30bn. Execution ramp-up in the key projects, obtaining ADs for the balance 2 HAM projects/ Delhi-Vadodara projects and new order additions will be the near-term catalysts for the stock, in our view. While we upgrade our earnings estimates by 4%/7% for FY20E/FY21E mainly to factor in lower ETR, we cut our PE Target multiple to 12x (from 15x earlier) mainly due to uncertainly prevailing in road segment and ambiguity over future ordering. We maintain our BUY recommendation on the stock with a revised Target Price of Rs360 (from Rs385 earlier).
Delay in ADs & Extended Rains Impact Revenue; Margins Remain Stronger
A persistent delay in obtaining ADs for select projects and extended monsoons impacted its revenue booking as revenue grew by mere ~11% YoY to Rs4.74bn, which is broadly in-line with our expectations. However, EBITDA grew by 18% YoY to Rs733mn, while EBITDA margin stood at strong 15.5%. Looking ahead, we expect HGINFRA’s growth momentum to pick-up due to recent commencement of Hapur-Moradabad project and likely start of Delhi-Vadodara and other HAM projects. We expect HGINFRA’s revenue to clock 19% CAGR through FY19-FY21E.
Order Inflow Remains Subdued; Pick-up Expected Soon
Having witnessed robust order inflow of Rs39bn in FY19, HGINFRA bagged orders worth Rs9.5bn only in FY20YTD, as model code of conduct for the General Elections and funding issues of the NHAI impacted new order awarding. HGINFRA toned down its order inflow guidance for FY20 to Rs30-35bn, and expects ordering activities to pick-up from Dec’19 onwards. Its order book, which stands at Rs62.7bn (2.9x of TTM revenue) as on date, still offers healthy revenue visibility.
Outlook & Valuation
HGINFRA continues to report steady performance amid challenges. Despite reducing our revenue estimate by 4-6%, we still expect its earnings to clock 33% CAGR in the next 2 years. At CMP, the stock trades at 7.3x of FY20 and 5.8x of FY21 earnings with >20% return ratio. Reducing our target multiple to 12x (from 15x earlier) mainly to factor in ambiguity over roads/highway space, we maintain our BUY recommendation on the stock with a revised Target Price of Rs360 (12x of 1-Yr Fwd. EPS).
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