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Strong execution with steady margin...

HG Infra Engineering Ltd. (HG Infra) is one of the emerging EPC players in India, with over two decades of rich experience in road construction. It is primarily engaged in roads and allied sectors like flyovers, bridges, and irrigation.

* In Q1FY25, HG Infra registered a better than estimated revenue growth of 18% YoY, led by superior execution of projects.

* The order book grew by 34% YoY to Rs. 15,642cr (~3x TTM revenue), providing revenue visibility for the next 2 to 3 years.

* Gross margin improved by 175bps YoY to 55.2%, owing to strong execution and cost control measures, while EBITDA margin remains steady at 16.2%.

* The company maintains an order inflow of Rs 11,000cr to Rs12,000cr in FY25, and we expect the order book to grow at a CAGR of 33% over FY24-FY26E.

* The order inflow pipeline remains healthy and HG Infra expects traction in highways, railways, water and solar orders in FY25

* Therefore, we maintain our Accumulate rating and value the standalone business at a P/E of 17x FY26E and HAM projects at 0.7x P/BV with a TP of Rs.1,788.

Execution picked up pace...

In Q1FY25, revenue grew by 18.4% YoY to Rs1,506cr, which is above our estimate due to the pickup in execution of highways and railway projects. We expect the execution to pick up pace in the coming quarters as most of the projects are in the execution stage. The company guided for 15 to 20% of revenue growth in FY25, led by strong execution in road, railway, and solar projects. However, the company has witnessed slow progress in Neelamangala–Tumkur highway EPC projects (Rs681cr unexecuted portion) due to a delay in acquiring further land (~24% execution completed). We, increased our revenue estimate by 2% and 6% respectively for FY25/26. Gross margin during the quarter improved by 175bps YoY to 55.2% due to strong execution, while EBITDA margin remains steady at 16.2%. We expect margins to remain at a strong level of 15.5% to 16% for FY25/FY26 on account of pick-ups in execution.

Order book to grow at a CAGR of 33% over FY24-FY26E…

HG Infra’s order book remains healthy at Rs 15,642cr in Q1FY25, which is 2.9x TTM revenue and provides revenue visibility in the coming years. The company expects an order inflow of Rs 11,000cr to Rs 12,000cr in FY25. The company has received Rs 4,142cr orders in Q1FY25. The company’s order book comprises road (73%), rail (16%), and solar (11%). The management is targeting to increase the non-road projects in FY25 due to the traction seen in solar, railway, and water projects. The majority of the orders are coming from Maharashtra (33%), followed by Jharkhand (15%), UP (13%), Rajasthan (11%), and AP (6%). The total equity investments in HAM projects stand at Rs 728cr and are expected to invest Rs505cr in FY25E. We expect traction in new orders in FY25/FY26E, which will aid its order book to grow at a CAGR of 33% over FY24-FY26E.

Valuation & Outlook…

The increasing opportunities in road, solar, railway and solar projects, along with a current order backlog at 2.9x TTM revenue, ensure strong business visibility. The management is prioritizing the diversification of the order book and maintaining a healthy margin profile to drive future growth. We reiterate our Accumulate rating & value standalone businesses at a P/E of 17x FY26E EPS and HAM projects at 0.7x P/BV with a TP of Rs.1,788.

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