Buy HG Infra Engineering Ltd For Target Rs. 1130 - Emkay Global Financial Services
HG Infra, having demonstrated its execution capabilities in the roads sector with 26%/38% revenue/PAT CAGR (FY19-23), is steadily adopting the diversification strategy — Over FY23, it bagged orders worth Rs15bn in the rail/metro segments, thus opening up larger avenues of growth ahead. HG targets non-roads inflow at 20-25% of the overall inflows, in coming years. Further, it recently entered into a share purchase agreement for four HAM projects at 1.55x P/B which, we believe, will give investors’ confidence on the company’s bidding strategy for HAM projects. Given that HG Infra is expected to bid for more projects during FY24 vs FY23 in both, the roads and rail sectors, and that tendering in the roads sector (Apr-May ’23) is up 25% YoY, its FY24 inflow target of Rs80-90bn looks achievable. We have a BUY with TP of Rs1,130
Demonstrated profitable execution capabilities
During the last 5 years, HG has clocked 28%/38% EBITDAM/CAGR, with 23% orderbook growth over the same period. This has been possible on the back of a disciplined project-bidding strategy and investment in a modern construction equipment fleet. RoE has been in excess of 20%, with NWC in the 25-45-day range.
Diversification already started
HG’s relentless bidding for non-roads sector projects since some time now has finally seen success (Rs15bn order inflow during FY23). Company is focusing on rail/metro and water projects in key states, and targets achieving 20-25% inflow from the non-roads sector in the next few years. This will alleviate concerns about HG being a single-sector EPC player. Opportunity size will increase, with valuations expanding as well.
Monetization of HAM projects a confidence booster
The company recently entered into a share purchase agreement for four HAM projects at 1.55x P/B. This is a clear demonstration of its prudent bidding strategy for HAM projects.
Roads tenders have seen 25% growth in 1QFY24 to date
Tenders in the roads sector have grown 25% during Apr-May ’23 which will fructify into order finalization in coming months. Tendering data for Rail/water supply has also been healthy. Hence, we believe HG will be able to achieve inflow of Rs80-90bn.
Valuation
At CMP of Rs866/share, excluding the value of HAM projects, core EPC currently trades at ~7x FY25 EPS. We factor-in ~20% sales/PAT CAGR over FY23-25E. We build-in EBITDAM of 15.5% in FY25E vs 16.1% currently. We believe that given the company’s diversification strategy, the opportunity size for EPC over the medium term expands considerably; hence, the PER would improve going forward. We maintain BUY on the stock, with TP of Rs1,130/share (core EPC valued at 10x P/E, implying Rs926/share).
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