Published on 30/06/2020 9:19:14 AM | Source: Yes Securities Ltd

Buy HG Infra Engineering Ltd For Target Rs.270 - Yes Securities

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* HG Infra reported 7.4% yoy topline growth during Q4 FY20 despite 10 days of work impacted owing to COVID related lockdown. Its operating margin remained robust at 16.3% (up 20bps yoy). Also, muted depreciation and interest cost coupled with lower tax outgo led to a 39.4% jump in net profit.  

* At the end of Mar’20, HG Infra’s order book stood at ~Rs.71bn (3.2x FY20 revenues). Share of EPC projects stood at 76% with balance from HAM segment.  

* The company has faced significant execution issues related to labor and supply chain during the initial phase of lockdown. However, the situation has now improved with ~50% labor availability and expects it to normalize by end of Monsoon period.  

* In the Rewari Package 4 HAM project, ~60% land is currently available and it is likely to improve to 90% by Sept’ 20. The company has already applied for financial closure and expects appointed date by Oct’ 20.

* As per the Company, ~Rs.700bn of orders were in pipeline from NHAI during Mar’20 which could not be bid out due to COVID related lockdown, The Company expects a large part of these orders to be bid out in next 2‐3 quarters.


Our View

* We expect, labour shortage to impact execution during H1 FY21. However, the timely receipt of appointed date in Rewari project would support execution in H2 FY21. On overall basis, we expect revenue during FY21 to remain subdued.

* Operating margin is likely to come under pressure during H1 FY21 due to sluggish execution while fixed costs continue.

* While order book remains strong, new project wins is crucial to maintain growth momentum beyond FY22.  



* With the COVID impact on topline and margins, we cut our estimates for FY21 and FY22. However, we believe, the Company is well placed to speed up execution as COVID related impact settles.

* Decent balance sheet position provide comfort. We maintain our BUY rating on the stock for revised target of Rs.270 (Based on SOTP valuation).


Risk to our call

* Delay in appointed date in pending HAM project.

* Slower than expected ramp up in execution.


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