H.G. Infra Engineering – Stepping into the big league
H.G. Infra Engineering (HGI), a newly listed company, is primarily engaged in EPC, civil construction works and related infrastructure projects on item rate and lump sum basis. Roads & Highways segment – which is HGI’s key area of operation – forms a dominant portion of its total order book. While current order book of Rs50.6bn (4.8x FY17 revenue) provides robust growth visibility, HGI is expected to add big chunk of orders to its kitty, led by improvement in financial prequalification and enormous opportunity in Roads & Highway segment. Further, diversification into newer geographies and water segment is likely to propel HGI to sustain growth.
Huge opportunity in Roads & Highways segment:
The visible development in Roads & Highways space along with likely further pick-up in projects awarding across the country and government’s increased allocation for the segment are likely to aid HGI to improve its order book further. Moreover, improvement in financial pre-qualification post the fund raising through IPO is expected to result in higher order book in coming quarters. Notably, budgetary allocation for Roads & Highways increased at a robust 20.9% CAGR through
FY09-FY19. In Union Budget 2018-19, the Government has allocated Rs1.21trln (US$18.7bn) for the Road sector.
Strong order book growth offers high visibility:
Consistent improvement in execution expertise along with improvement in technical and financial pre-qualification criterion enabled HGI to grow its order book exponentially to Rs40bn in FY17 from Rs11bn in FY15 (94% CAGR). Its current order book at Rs50.6bn (4.8x of FY17 revenue) including L1 of Rs13.5bn provides a healthy revenue visibility, in our view. HGI is currently pre-qualified to bid for Roads & Highway projects of NHAI and Ministry of Road Transport & Highways worth up to Rs8bn on in own. We expect HGI to add orders worth Rs25bn and Rs30bn for FY19E and FY20E, respectively, as against the Management’s guidance of Rs30bn and Rs40bn, respectively.
Notably, 44% of HGI’s total order book is fixed price contracts and Rs1bn of orders book (2% of OB) comes from the JV. Further, HGI has recently secured a HAM project (part of L1) worth Rs5.6bn in Rajasthan. While HGI is still pursuing select HAM projects, it expects share of HAM projects in order book to contain within the range of 25%. Considering fund-based limit of Rs4.3bn and non-fund based limit of Rs5.0bn, we believe it should not face any financial constraint to execute the current order book.
Diversification into New Geographies bodes well:
In order to mitigate the risk of excessive dependence on particular geography and exploit the upcoming infrastructure opportunities in other geographies, HGI has been geographically diversifying for last couple of quarters. It currently operates in six states including Uttar Pradesh and it intends to selectively expand its presence in other states. It currently expects that a significant portion of its geographic expansion will be in states i.e. Gujarat, Punjab and Madhya Pradesh, where it has favorable geographic and climatic conditions. Through further diversification of geographical operations, HGI is expected to hedge against concentration and related risks.
Foray into Water Segment to diversify operations:
While HGI has proven its expertise in Roads & Highway segment by successfully executing various projects over the years, it has diversified into water pipeline segment and is currently undertaking 2 water supply projects on turnkey basis in Rajasthan. Renewed thrust of the Government on both the segments offers enormous opportunities for HGI. While the opportunities in Roads & Highways segments are already visible, we may see a robust ordering from irrigation, waterways and development of smart cities, going forward. Hence, any potential up-tick in order inflow from this segment is expected to aid HGI to witness a sustainable growth.
Robust Financial Performance & Financial Strength:
An experienced management team, efficient working capital management, consistent addition of quality orders and prudent bidding strategy aided HGI to report robust numbers over the last 3 years. HGI’s reported revenue and PAT clocked 30% and 42% CAGR, respectively over FY14-FY17. Further, light balance-sheet with efficient working capital management and asset-light business model enabled HGIE to generate better-than-the-industry average return ratios in the range of 30-40% over last 3 years.
We believe that with the possible improvement in order book size with more geographies and segmental diversification and huge imminent opportunities in Roads & Highways and water pipeline projects, HGI is expected to report a consistent healthy growth, going forward. Revenue, EBITDA and PAT are expected to witness 30%, 36% and 45% CAGR, respectively through FY17-FY20E.
Notably, HGI’s EBITDA margin significantly spiked in 1HFY18 due to new accounting standard, as revenue booking is done net off indirect taxes. Further, gradual shift from a prime sub-contractor to a lead contractor also aided margin expansion. We expect the same to remain in the range of 14-15% over the years.
With the strong expected growth in order book, high growth in revenues with superior margins and return rations, we believe HGI can be good bet on India’s strong infrastructure growth story.