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Robust order backlog to drive earnings growth

HG reported strong earnings in 1Q25. PAT at INR 1.4bn beats JMFe of INR 1.35bn (consensus: INR 1.25bn) led by lower depreciation expenses. HAM monetization is under progress, with INR 3.1bn received for 3 projects while remaining INR 610mn to be received by Sept-24. Monetization of 4th HAM is underway for which HG is set to receive INR 1.3bn by Oct-24. Also, HG also targets to monetize 5 under construction HAMs in FY26E (equity: INR 7.7bn at fully invested stage). Order backlog stands strong at INR 156bn (2.9x TTM revenues) as on June-24. HG is confident of achieving its order inflow guidance of INR 110-120bn in FY25 given its strong YTD inflows of INR 52bn and robust bid pipeline across verticals. HG has guided for revenue growth of 18-20% with EBITDA margins of 15-16% for FY25E. We have upgraded our FY25/26 earnings by 8%/13% led by increase in revenue backed by strong order intake in YTD. We expect 19% revenue/EPS CAGR over FY24-27E. Maintain BUY with a revised price target of INR 1900 (valuing EPC business at 15x Sept-26 EPS).

* Earnings beat led by lower depreciation expenses: Revenue/EBITDA grew by 18%/19% YoY to INR 15bn/INR 2.4bn (JMFe: INR 14.8bn/INR 2.36bn). EBITDA margin expanded by 10bps YoY to 16.2% (JMFe: 16%). Interest costs grew sharply by 28% YoY to INR 220mn (JMFe: INR 210mn). Depreciation grew by 12% YoY to INR 348mn (JMFe: INR 385mn). Gross debt increased sharply from INR 4.5bn in Mar-24 to INR 6.2bn in June-24. PAT grew by 18% YoY to INR 1.4bn (JMFe: INR 1.35bn).

* Order backlog improves materially led by strong order wins: HG secured inflows of INR 46bn in 1Q25 (YTD: INR 52bn) taking order backlog to INR 156bn (2.9x TTM revenues). Of this, INR 76bn is currently under execution and entire backlog would be under execution by 4Q25. Backlog is well diversified with Railways/Solar accounting for 16%/ 11% share. HG is confident of achieving its order inflow guidance of INR 110-120bn in FY25 given the strong YTD order intake and robust bid pipeline across verticals. HG has guided for revenue growth of 18-20% with EBITDA margins of 15-16% in FY25E.

* Equity commitment significant in FY25/26 for HAM and Solar portfolio; leverage to remain at comfortable levels: HG has won multiple projects for EPC and commissioning of Solar power plants under the KUSUM scheme. EPC value of those orders is c.INR 17bn. HG will be infusing equity of INR 6.9bn over FY25-26E. For its portfolio of 10 HAM projects, total equity requirement is INR 14.6bn of which INR 7.3bn is invested till Jun-24. Pending equity is to be invested over FY25-27E. While debt is expected to inch up to INR 8.5bn in FY27E given the substantial equity investments in HAM and solar projects, Net debt including mobilization advances/ EBITDA would still be comfortable at 0.8x in FY27E.

* Order backlog strengthens; Maintain BUY: We like HG for its robust execution track record, strong growth and lean balance sheet. Monetization proceeds from 4 HAM assets will strengthen the balance sheet. We expect 19% revenue/EPS CAGR over FY24-27E. HG trades at an attractive valuation of 13x/11x FY26/27E EPS (adjusted for value of assets). We value HG’s EPC business at 15x Sept-26 EPS and HAM/Solar assets at INR 281/share (0.7-1x P/B) to arrive at SOTP-based revised price target of INR 1,900. Maintain BUY.

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