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Execution momentum to continue

Our view

With appointed dates in place for all projects and better labor availability, the execution momentum is expected to continue. Operating margin is expected to remain healthy at ~15% levels. While the Order inflows have been disappointing, the current bid pipeline would ensure opportunity to bag orders over the next few months. Improving working capital position (certain slow moving debtors getting cleared) provides comfort. Expected Monetization of HAM projects to support balance sheet and improve bidding capacity. We marginally increase our estimates for FY21 to incorporate the better than expected performance and maintain our BUY rating for target of Rs.297 (based on SOTP valuation).

Q3 FY21 Concall Highlights:

* With better labor availability, monsoon largely behind and appointed dates in place for several projects, execution jumped 28% yoy and 57% qoq during Q3 FY21. The Company clocked very strong margins of 16% driven by tight cost control and higher execution.  

* Order book: Currently order book stands at Rs.59.7 bn of which HAM and EPC mix is at 22%:78%. The company saw no new order inflows during the quarter as competition was high and Company did not want to compromise on margins. The one order of IRCON where Company stood L1 was cancelled as HG Infra’s bid was higher than authority estimates. The Company was unwilling to negotiate on price after being declared L1 and hence the project got cancelled. There has been minor change in scope of work in certain existing projects which has increased the order book by Rs.2‐3 bn.  

* Order pipeline: The bid pipeline is strong and HG expects Rs.35‐40 bn worth of project wins during Q4 FY21. The Company has currently bid for Rs.140 bn worth of projects (Rs.80 bn is HAM and rest is EPC) where bids are yet to open. It is also seeing bid pipeline of Rs. 400 bn which would be up for bidding in near term. It is also participating in some projects in Railways and Water segment where the combined bid pipeline is to the tune of Rs.40 bn.  With the appointed date received for all projects, the company is targeting to end FY21 with flat growth over FY20. The Company expects margins to sustain at 15%+ levels.

* The Company has invested ~Rs2 bn of Equity in the existing HAM projects. Going forward, HAM projects would require Equity of Rs. 750 mn in Q4 FY21, Rs. 700 mn in FY22 and Rs. 250 mn in FY23.

* The Company has received large part of its Rajasthan receivables and the overall Debtor position now stands at Rs. 4.9 bn. Key receivables outstanding include the receivables from SPV (Rs. 800 mn), Tata Projects, IRB and Adani (combined value Rs.1.4 bn), Maharashtra projects (Rs.420 mn) and NHAI (Rs.1 bn).  

* As at end of December, Inventory stood at Rs1.6 bn, Retention money outstanding at Rs.1.25 bn, Mobilization Advance at Rs.2.7 bn, Creditors at Rs.4.35 bn and Unbilled revenues at Rs.2.8 bn.

* Capex addition stood at Rs.400 mn during 9M FY21. Rs.600‐700 mn is capex target for FY21.  

* The Company is in advanced stages of its HAM asset monetization. It expects some development on this in the next few quarters.

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