Brokerage house ICICI Direct has picked HG Infra Engineering as a high-conviction idea on the back of its strong performance in recent times.
"Considering its healthy executable order book position and robust execution skill, we expect execution pace to remain robust in the near-to-medium term along with sustained margins amid softened input prices and better project mix. Additionally, strong return ratios, healthy working capital cycle and asset monetisation remain key positive," it explained.
The brokerage has a ‘buy’ call on the stock with a target price of ₹1,150, indicating an upside of over 20 percent from its current market price of ₹953.10, as on August 8.
The stock has surged almost 62 percent in the last 1 year and 54 percent in 2023 YTD, giving positive returns in 6 of the 8 months so far in the current calendar year. It gained the most in April, up 12.5 percent and shed the maximum in June, down 5.5 percent.
The stock recently, on August 1, hit its record high of ₹988. It is now over 79 percent higher than its 52-week low of ₹532, hit in November 2022.
HG Infra Engineering is a Jaipur (Rajasthan) based infrastructure company having a primary focus on roads and allied sectors. It has a presence across 9 states with 53 percent of the order book in the North. Additionally, the company is actively looking to diversify itself by targeting into railways and water infra segment. It has reported a 26 percent revenue CAGR over FY18-23 with an improved operating margin and a PAT CAGR of 38 percent. As of FY23, its order book stood at ₹12,595 crore (2.9x book to TTM revenues), informed the report.
Investment Rationale
Healthy order book: As of FY23, the brokerage noted that HG Infra’s order book stood robust at ₹12,595 crore (2.9x book to TTM revenues). The company is looking for inflows worth ₹8,000-9,000 crore in FY24 driven by a strong order pipeline in the roads segment and growing opportunities in the other infrastructure verticals such as railways, and water supply.
Strong revenue growth likely ahead: On the execution front, the company expects a strong execution pace to continue driven by its robust order book position. With these, the company has guided for 23 percent YoY growth during FY24. Further, it indicated that operating margin is likely to sustain at 15-16 percent going ahead with softening in input prices and better operating efficiencies. Strong order book position, receipt of appointed date in most of its projects, and execution pick-up to translate into 17 percent topline CAGR over FY23-25E to ₹4,419 crore. Also, the current order mix with built-in raw material price variation clauses in most of its contracts provides margin sustainability at 15.5 percent, said the brokerage.
Asset monetisation deal inked: The brokerage informed that HG Infra has executed a Share Purchase Agreement with Highway Infrastructure Trust (sponsored by KKR) for the sale of its 4 HAM (Hybrid Annuity Projects) projects. The Enterprise Value of the transaction is ₹1,394 crore (translating to ₹531 crore equity value). With ₹343 crore of equity investment, the valuation of the deal is done at 1.55x Price to Book. This deal will strengthen the balance sheet of the firm and will help HG to release capital for future growth and drive scalability, explained ICICI Direct.
Debt to decline going ahead: HG Infra’s balance sheet has remained lean over the years backed by its prudent strategy to mainly focus on an asset-light business model and efficiently manage working capital.
At the end of Q4FY23, its gross debt, cash and cash equivalent at the standalone level stood at ₹503.7 crore and ₹179.4 crore, respectively. Despite equity requirements for its HAM projects, its debt is likely to be controlled, aided by healthy operating cash flow generation arising from improved profitability, better cash flow management and monetisation proceeds of HAM assets. The company expects the debt to come down to ₹350 crore in FY24 from ₹504 crore, driven by healthy cash generation, mentioned the brokerage.
Risks: As per the brokerage, key risks for the firm are 1) Slower execution could impact revenues, 2) Any delay in major orders ramp or payment delay, 3) Raw material volatility, and 4) Increase in competitive environment.
