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HG Infra’s (HG) 2QFY24 PAT at INR 617mn missed estimate of INR 730mn (consensus: INR 790mn) due to lower execution and higher interest costs. Gross debt increased from INR 4bn in Sept-22 to INR 6bn in Sept-23 due to rise in working capital levels. Order backlog moderated QoQ to INR 107bn (2.3x TTM revenue) as on Sept-23. Given the delay in receipt of ADs for few projects, HG lowered its revenue guidance from INR 55-56bn to INR 54bn in FY24. HG also lowered the inflow guidance from INR 70-80bn to INR 50-60bn in FY24 due to nil inflows in YTD. Having said that we expect order inflows to pick up materially in 2H due to INR 700bn bid pipeline in Highways and diversification efforts into Railways & Water. The completion of sale of 4 HAM assets over next 2-6 months should also strengthen the balance sheet. We expect 15% earnings CAGR over FY23-25E and valuations at 10.2x FY25E remains inexpensive. Maintain BUY with a revised price target of INR 1150.

* 2QFY24 earnings missed estimate due to lower revenue and higher interest costs: Revenue grew by 16% YoY to INR 8.7bn (JMFe: INR 9bn). EBITDA grew by 15% YoY to INR 1.38bn (JMFe: INR 1.4bn) and margins contracted by 20bps YoY to 15.9% (JMFe: 15.6%). Interest costs grew by 56% YoY to INR 216mn (JMFe: INR 200mn) due to rise in debt levels and interest rates. Gross debt increased sharply from INR 4bn in Sept-22 to INR 6bn in Sept-23 due to rise in working capital levels.

* Order backlog moderates due to nil inflows in YTD; lowers inflow guidance: HG’s order backlog moderated QoQ to INR 107bn (2.3x TTM revenue) as on Sept-23. HG has cut its order inflow guidance from INR 70-80bn to INR 50-60bn for FY24 given the nil inflows in YTD. Having said that, bid pipeline is strong at INR 145bn in Railways (submitted bids of INR 65bn already). HG is also bidding for metro and railway station redevelopment projects (submitted 2 bids of INR 10bn and will submit 2 bids of INR 12bn). Given the delay in receipt of ADs for few projects, HG lowered its revenue guidance from INR 55- 56bn to INR 54bn with EBITDA margins of 15.5-16% for FY24.

* Monetization on track, to provide growth capital: HG has signed SPA with KKR to sell 4 HAM assets for equity value of INR 5.3bn (1.55x P/B). It has received approvals from lenders and NHAI for 3 HAMs and deal is likely to close by Nov-23 end. For 4th HAM, it will start approval process by Nov-23 end. For its portfolio of 12 HAM assets, total equity requirement stands at INR 16bn of which INR 7.8bn is invested till Sept-23. Balance equity of INR 8.3bn is to be invested by FY26E.

* Order backlog to strengthen led by expected order wins; Maintain BUY: We like HG for its strong execution track record, robust earnings growth and lean balance sheet. Monetization proceeds from 4 HAMs will further strengthen the balance sheet and provide growth capital. Given the nil order intake in YTD, we have cut FY24/25 earnings estimates by 3.3%/4.7%. We expect 17%/15% revenue/EPS CAGR over FY23-25. The stock trades at an attractive valuation of 10.2x FY25E EPS. We value HG’s EPC business at 12x FY25 EPS and HAM assets at INR 128/share (1x P/B) to arrive at SOTP-based revised price target of INR 1,150. Maintain BUY.

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