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Stellar quarter; robust growth to continue

HG Infra (HG) reported strong performance in Q3FY22. PAT grew sharply by 36% YoY to Rs889m, above estimate of Rs804m (consensus: Rs682m), led by higher execution. Execution visibility for Q4FY22 remains strong, while robust order wins of Rs43bn in YTDFY22 strengthen the outlook for FY23/24E. HG has shown agility by securing 5 HAM projects in Telangana, Odisha and AP, outside its comfort zone of North/North Western states. HG is also actively evaluating/bidding for non-highway sectors like Railways, Metro, and Water. Within highways, HG is open to subcontracted orders from developers like Adani and IRB who have a strong pipeline of new HAM/ BOT projects. We expect the robust growth momentum to continue over FY22-24. Maintain BUY with a revised price target of Rs968.

Earnings beat led by higher execution and lower interest expenses

Revenue grew 25% YoY to Rs9.2bn (estimate: Rs8.7bn). EBITDA grew 23% YoY to Rs1.45n (estimate: Rs1.41bn) while EBITDA margin declined 20bp YoY to 15.9% (estimate: 16.2%). Interest cost declined 13% YoY to Rs125m. PAT grew sharply by 36% YoY to Rs889m, above estimate of Rs804m led by higher revenue and lower interest costs.

Balance sheet remains steady; monetization of 3 HAM assets likely in end FY23/24

HG’s receivables rose QoQ from Rs4.5bn in Sept-21 to Rs5.6bn in Dec-21 (~Rs430m increase due to SPVs). However, the company is confident of recoveries and has guided for receivables of Rs4bn by Mar-22. Net debt remained flat QoQ at Rs1.5bn while gross debt rose from Rs2.7bn in Q2FY22 to Rs3.1bn in Q3FY22. HG’s total equity requirement for its 9 HAMs is Rs11.4bn, of which Rs2.9bn has been invested till Dec-21 while pending equity is to be invested over FY22-25E. Monetization of three HAM projects (received PCOD for 1 HAM and expects PCOD for 2 HAMs in Q4FY22) is likely by end FY23/24, which could potentially release ~Rs2.8-3bn. We expect leverage to remain under control with net debt/equity of 0.1x and net debt/EBITDA of 1x/0.9x in FY23/24E.

Revenue guidance revised upwards; new orders strengthen visibility for FY23/24E

HG has revised its revenue guidance upwards from Rs34bn to Rs36bn for FY22, led by strong performance in 9MFY22. Order inflows have been strong at Rs43.3bn in YTDFY22, taking its order backlog to Rs88bn (2.4x TTM revenues). HG targets total order inflows of Rs50-60bn in FY22. Also, HG is open for subcontracting work of Ganga e-way which was awarded on BOT mode to Adani and IRB (HG is already a subcontractor for them).

Demonstrating ability to scale up profitably; maintain Buy

We expect robust revenue/EPS CAGR of 23%/26% over FY21-24E. Margins are likely to remain buoyant at 15-16% and leverage (Net Debt + Mobilization Advance)/EBITDA should remain low at 0.9x in FY24E. Valuations at 11.3x/9.9x FY23/24E EPS are cheap and at 20-30% discount to peers like PNC/KNR. As HG keeps delivering on growth and monetization targets, we see headroom for valuations to rerate. We value HG’s EPC business at 14x average FY23-24E EPS, with HAM assets valued at Rs127/share on 0.9x P/B basis. Maintain BUY, with a 12-month TP of Rs968.

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