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CBI raid triggers uncertainty...

About the stock: GR Infraprojects (GRIL) is a leading player in the roads and highways sector having overall order book size of | 20,210 crore.

* The company has delivered 26.6% revenue CAGR during FY16-22, wellcomplemented by 33.6% EBITDA CAGR and 39% PAT CAGR

* Lean balance sheet position, superior return ratios

Event highlights:

* The company informed that a team of Central Bureau of Investigation (CBI) conducted a search at the residence of Vinod Kumar Agarwal (Chairman), the corporate office at Gurugram (Haryana) and various other sites on June 13, 2022. The examination at the residence of the Chairman is complete as of now while the search is still in process at other premises

* As per media reports, the case pertains to a road contract in the north eastern region executed in 2018 for which discharge certificate was to be issued by NHAI after completion of four years of mandatory maintenance on March 31, 2022. It has been alleged that the NHAI officials have favoured GRIL in processing and clearance of final bills, getting bank guarantees and release of discharge certificate. The bribery amount was | 4 lakh

* Following these, the CBI has arrested five people (including two officials of NHAI from regional office and three functionaries of GR Infra including Mr Agarwal). There may be further action depending on the findings

What should investors do? GRIL has built an efficient business model powered by robust execution skills and delivered strong revenue growth with elevated margins.

* However, recent development with regard to CBI’s raid would remain a key overhang on the stock’s performance. Till we get decent clarity, we revise our rating from BUY to REDUCE

Target Price and Valuation: We value GRIL at | 1,080 based on SOTP valuation

Key triggers for future price performance:

* Decent order book position and execution pick-up to translate into 12.4% topline CAGR over FY22-24E. Current order mix with built-in raw material price variation clauses provides margin sustainability at ~16%

* No major negative disclosure from the CBI raid

Alternate Stock Idea: We like HG Infra Engineering in the infra space.

* Play on strong execution and lean balance sheet

* BUY with a target price of | 735/share

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