Buy HG Infra Engineering Ltd For Target Rs. 1,760 - Elara Capita
Performance on track; positive outlook
With 9M performance of 17% revenue growth, HG infra Engineering (HGINFRA IN) is among a few companies with superior execution along with healthy margin profile despite diversification. We expect momentum in execution to continue with appointed dates (AD) for new projects already in place (received AD worth INR 19bn project during Q2-Q3) and land availability issues resolved for projects (Maharashtra state road development corporation [MSRDC] Letter of appointment (LoA) by FY25 with settlement agreed for Neelmangala-Tumkur). Leverage is also likely to reduce as talks are underway with investors to monetize five projects with an equity investment of INR 7bn by end-FY26. We reiterate Buy with a lower TP of INR 1,760 on 15x FY27E P/E.
Full-year execution on track: HGINFRA witnessed a minor miss in execution in Q3 with growth of 12% YoY vs our estimates of 18% YoY on account of slower execution in new railway projects due to land availability issues and changes in project design. EBITDA margin was up 70bp YoY to stood at 16.6% vs our estimates of 15.9%. Margin was higher on improved contribution from solar projects which posted a better margin at 18%. PAT was in line with our estimates of INR 1.5bn at INR 1.4bn.
On the balance sheet front, the company saw interim elevation in debt by INR 5bn during Q3, due to delay in disbursement from DISCOM on pending approvals for land procurement and solar modules. Management expects debt to cool off to INR 7bn by FY25 as sanctions received from DISCOM in December and disbursements are likely to commence in February. Also, receipts of INR 1.3bn from Rewari bypass monetization in Q4 would aid in further reduction of debt.
Sustains guidance: Management has retained its targets and believes the slowdown in Q3 execution as a temporary blip. It expects a pickup in Q4, sustaining full-year revenue growth of 17-18% and FY26 growth of 15%+ with most growth likely from solar and railway projects. It expects MSRDC orders to contribute the most in FY27 with limited execution of INR 2.5bn in FY26. Margin is set to be sustained at 15-16%.
Inflows on track with aim to further diversify: The company has received inflows of INR 82bn as on YTD vs FY25 guidance of INR 110-120bn. With total bidded pipeline of INR 170bn and upcoming pipeline of INR 720bn (INR 550bn for highways, INR 180bn for railways, and the rest for solar & battery projects), management is confident of achieving targeted inflows. It is also looking to diversify by foraying into water and transmission projects to avoid increased competition into road projects.
Retain Buy with a lower TP of INR 1,760: Despite a slight miss in Q3 execution, full-year execution is on track and is likely to continue momentum, given the contribution from solar and railway projects in FY26 and MSRDC orders in FY27 with stable margin. We slightly cut our PAT estimates by 4% for FY26E and by 9% for FY27E, leading to a lower TP of INR 1,760 from INR 1,892 based on 15x (unchanged) FY27E P/E and investments in HAM assets at book value. We expect a revenue CAGR of 16%, an EBITDA CAGR of 14% and an adjusted earnings CAGR of 17% during FY24-27E.
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SEBI Registration number is INH000000933
