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GR Infraprojects Ltd (GRIL) is one of the leading listed construction EPC players, with a large orderbook and a healthy growth outlook. With its primary focus on road sector, GRIL has successfully executed >100 projects over the past 15 years across the country. Its current orderbook of Rs131bn (as of end-FY22), including its HAM (hybrid annuity model) portfolio of 22 assets, provides good visibility, which will likely be boosted further by the strong NHAI award outlook (14,389km worth of highway projects over FY23-24). GRIL is also looking to diversify beyond roads into railways, metro, power transmission, ropeways and hydroelectric projects, and is building up capabilities in these areas through project execution itself. We believe the company’s strong balance sheet and cash generation will be sufficient for its upcoming HAM equity requirement. However, its EBITDA margin may stabilise at ~15-16% going forward, owing to high competition, high commodity prices and execution of lower-margin projects in new lower-margin segments. We initiate coverage on GRIL with BUY rating and SoTP-based target price of Rs1,621.

GR Infraprojects Ltd (GRIL) is one of the leading listed construction EPC players, with a large orderbook and a healthy growth outlook. With its primary focus on road sector, GRIL has successfully executed >100 projects over the past 15 years across the country. Its current orderbook of Rs131bn (as of end-FY22), including its HAM (hybrid annuity model) portfolio of 22 assets, provides good visibility, which will likely be boosted further by the strong NHAI award outlook (14,389km worth of highway projects over FY23-24). GRIL is also looking to diversify beyond roads into railways, metro, power transmission, ropeways and hydroelectric projects, and is building up capabilities in these areas through project execution itself. We believe the company’s strong balance sheet and cash generation will be sufficient for its upcoming HAM equity requirement. However, its EBITDA margin may stabilise at ~15-16% going forward, owing to high competition, high commodity prices and execution of lower-margin projects in new lower-margin segments. We initiate coverage on GRIL with BUY rating and SoTP-based target price of Rs1,621.

*Large HAM project base with healthy orderbook: Currently, GRIL has 1 operational BOT annuity project, 22 HAM projects and 1 power transmission BOT project. Of the 22 HAM projects, 7 are operational, 7 are under construction and for 8 projects the appointed date is awaited. Orderbook as of FY22-end, stood at Rs131bn, while the unexecuted order value was ~Rs202bn, which includes L-1 declared projects value as well.

* Strong NHAI order outlook over FY23-24: NHAI aims to award 14,389km worth of highway projects (balance length under the Bharatmala programme to develop 34,800km of National Highway corridors) over FY23-24. Nearly 55% of the projects are expected to be awarded under the hybrid annuity model (HAM), while EPC contracts will be 40-45%

* Diversification to provide comfort on growth: Although GRIL continues to focus on road projects, as a part of its growth strategy, it intends to utilise its engineering capabilities to diversify further into projects related to: 1) Railways and metros, 2) power transmission, 3) ropeways and 4) hydro power. While it is already executing projects in railways and transmission, it is L1 in Gurugram metro project. As GRIL is building up its capabilities in these segments, initial projects may be executed at lower margins in our view

* InvIT planned to release growth capital: To monetise operational projects and release capital for reinvestment in future projects, GRIL is working on setting up an InvIT and aims to monetise up to 7 of its operational HAM projects.

* Margins to stabilise going forward; balance sheet to remain robust: While we expect GRIL’s revenue / profit to grow at a CAGR of 11% / 10% over FY22-25E, its EBITDA margin may stabilise at ~15-16%, lower than its historical range of 18-20%, mainly due to higher competition in road projects, higher commodity costs and lower margins in some of its projects in other segments. As of FY22-end, GRIL’s net debt to equity was at a comfortable 0.23x and we believe it will generate sufficient cash to cater to its upcoming HAM equity requirement (~Rs21bn) as well as bid for more projects.

* Valuations and risks: We value GRIL’s EPC business at 18x FY24E EPS and its HAM projects at 1x FY24E book, and initiate coverage on GRIL with BUY rating and target price of Rs1,621/sh. Key risks: 1) Delay in declaration of appointed date, 2) delay in commissioning of ongoing projects, and 3) inability to win new projects.

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