HG Infra Engineering: Robust growth play, diversification set up pitch for rerating

By The Moneycontrol

More order wins, monetisation of assets to create liquidity buffer and improved execution will help this construction major

Highlights

• Strong infrastructure investments to continue
• Healthy order inflows and orderbook position
• Project wins in non-road segment to reduce concentration risk
• Asset monetisation would be positive
• Stock trading at attractive valuations

Infrastructure investment is key to economic growth.

Central and state governments have been investing heavily in infrastructure.

With several key state elections slated for CY2023, and the general elections towards the end of FY2024, we expect infrastructure spend to remain robust.

The Union Budget is coming up next month and a strong increase in allocation for infrastructure development is widely expected. In this backdrop, construction companies like HG Infra Engineering (HG; CMP: Rs 644; Market cap: Rs 4,194 crore) will be in focus.

The road sector, which forms the bulk of the order book for HG, is a key segment for infrastructure development, contributing about 20 percent to the planned investments under the National Infrastructure Pipeline.

The highway sector was allocated about 25 percent of the total capital investments for infrastructure in the previous Union budget.

As far as HG is concerned, the recent order wins in the metro segment and likely wins in new areas, such as railways and water, would enable the company to tap a wider opportunity in the infrastructure development space, thus reducing concentration risks.

This is a key rerating trigger, in our view.

The softening of commodity prices amidst a global slowdown and ramp-up in project execution, since the monsoon, should lead to a strong earnings growth from H2.

A strong project execution record, focus on balance sheet strength and attractive valuations make HG a perfect investment bet to play the infrastructure theme.

It is among our preferred picks in the construction space.

Healthy order inflow and order book; focus on EPC, HAM road projects

HG has witnessed a strong order inflow this fiscal. Overall, it has won three projects, worth Rs 6,400 crore, in April-December 2022.

With a strong project bid pipeline (bid for projects worth Rs 15,000 crore), HG is targeting additional order wins to the tune of Rs 2,500 crore- Rs 3,000 crore for the remainder of fiscal.

Overall, the company is targeting order inflows of Rs 9,000 crore in FY23.

Also, its order book, as of September 2022, stands at Rs 10,852 crore.

This is three times its FY22 revenues and provides a healthy visibility over the next 2-3 years.

HG has stated that it would continue to focus on the road construction segment, given the huge opportunity.

During April-November 2022, the National Highways Authority of India (NHAI) has awarded road projects for 5,382 km, similar to the levels in the corresponding period last fiscal.

For FY23, NHAI plans to award highway projects for 12,000 km, which is close to the record levels witnessed in FY22.

This indicates a significant pickup in the awarding activity for the remainder of the fiscal (December 2022-March 2023).

HG also stated that it would focus on less-risky EPC (engineering procurement and construction) and HAM (hybrid annuity model) projects, whose cash flows are, more or less, certain.

HG is not bidding for the risky BOT (build, operate and transfer) projects which involve the risks of uncertain toll revenues.

Wins project in non-road space

HG has a strong track record in the road segment.

In order to reduce its dependence on a particular segment (roads), the company has been trying to diversify into newer segments, like railways, metro and water.

HG has bid for projects worth Rs 4,000 crore in the railway and water segments.

Recently, the company secured an order worth Rs 412 crore from the Delhi Metro Rail Corporation.

The work scope involves part-design and construction of elevated viaducts and four elevated stations (excluding architectural finishing work, steel FOB & PEB works of stations).

The construction period is 24 months.

More orders wins in the non-road space would be positive for the company as it would reduce concentration risk.

Working on project monetisation, to maintain healthy balance sheet

HG is in negotiations to monetise four HAM road projects and expects the deal to be concluded by the end of the fiscal.

It is planning to realise about 30-40 percent premium on the equity amount of about Rs 350 crore invested in these projects.

The company would be able to realise the money next fiscal, if the deal concludes.

Funds from the sale of projects would be invested as equity into new projects.

Thus, HG would be able to take on additional projects, without stretching the balance sheet much.

On an overall basis, the company plans to keep the debt-equity ratio around 1x levels.

A healthy balance sheet would enable smooth project execution.

Valuations

At the current market price (CMP), HG is trading at a P/E of about 7 times its FY24 projected earnings.

The valuations are at a discount, compared to the historical averages, and, hence, attractive.

We advise investors to add the stock in the portfolio.

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