Brokerages are bullish on HG Infra Engineering Ltd (HG Infra) on the back of its strong order book position, strong execution skill, diverse capabilities and income stream, and strong operational performance.
Two brokerages, ICICI Direct Research and Phillip Capital (India) Pvt Ltd, have maintained a 'buy' rating on the stock following their visit to observe the progress of the Ganga Expressway project, the longest expressway in the nation, and the largest engineering, procurement, and construction (EPC) project for the company.
Brokerages reported that the company has made about 8% progress on the Ganga Expressway in the first four months and is optimistic about finishing the project earlier than expected in about 24 months rather than the allotted 27 months; it is aiming for the early completion bonus of about ₹50 crore.
The 594-km-long Ganga Expressway is a six lane, new, access-controlled expressway. The expressway was awarded in four packages by the Uttar Pradesh Expressways Industrial Development Authority (UPEIDA), with Adani Road Transport getting three (464 km) and IRB Infra winning one (130 km).
Adani Road Transport appointed HG Infra as a subcontractor during Q1FY23 for the Ganga Expressway (package-II) project (design length: 151.7 km), which runs from Budaun to Hardoi in Uttar Pradesh. With a bonus clause of ₹50 crore if the project is finished in 24 months, the total order size was ₹4,438 crore to be completed in 27 months. The company secured appointed date on November 3, 2022.
What do brokerages say?
ICICI Direct Research
The brokerage has kept its ‘buy’ recommendation on the stock because it anticipates that a strong order book and a fast execution pace will result in future earnings growth. With a target price of ₹915 for this company, it anticipates a 19% growth in value for the stock at a current market price of ₹769.
Ganga Expressway execution remains on fast lane
The project is a priority for the Adani group, and Adani has already contributed 50% of the necessary upfront equity, according to the brokerage's report. The company reiterated that it anticipates no challenges with receivables. Almost 60% of the amount billed is given to the company within 15 days of raising the bill, with the remaining 40% taking between 15 and 30 days.
Due to the company's effective early mobilization, the project's execution has made some headway. It anticipates revenues of ₹280-300 crore in Q4 thanks to construction activity worth ₹110 crore in February and likely ₹150 crore in March.
"The management had earlier indicated revenue of ₹2,200 crore during FY24 with margins hovering at 15%+ from the project. The company said while aggregate sourcing was done from nearby states, it had built in the logistics costs and thus, remains confident on margins," said the report.
Meets order inflow guidance, strong growth visibility ahead
As of Q3, HG Infra had a sizable order book worth ₹11,064 crore. In total, the company got orders worth nearly ₹9,400 crore in FY23. (in line with guidance).
According to the brokerage report, the company has reiterated its standalone revenues guidance of about ₹4,400-4,500 crore for FY23 and nearly ₹5,500 crore, and 15-20% growth thereafter.
Further, operating margins are likely to sustain at 15.5-16%, going ahead, with softening in input prices and better operating efficiencies.
"Considering its healthy executable order book position and robust execution skill, we expect the execution pace to remain robust in the near-to-medium term. Also, margins are likely to sustain with softened input prices and better project mix. Also, monetisation will provide another lever of scalability ahead," said the brokerage.
Phillip Capital (India)
On the back of strong fundamentals i.e. strong balance sheet, cash generating business and stable margins profile of the company, the brokerage has maintained 'buy' rating with a target price of ₹960. It expects a 25% growth in value for the stock at a current market price of ₹769.
Diversified capabilities and revenue stream
According to the brokerage, the company has a proven track record of completing projects in India's various regions on schedule and to the highest quality and safety standards. From a regional player, it has grown its company to include nine states at this time. It recently entered the railway project market (3QFY23), winning a ₹4 billion DMRC metro award, and has a ₹15.5 billion order book in this sector.
"Further, the company is also actively targeting opportunities in water, ropeways, and multi-modal logistics parks (MMLP). National Ropeway Development Programme is planning to set up 100+ ropeways under Parvatmala Yojana on the HAM model with equity support," added the brokerage.
Strong operational performance
The balance sheet and margins of HG Infrastructure have remained solid. With working capital management and quicker implementation, the management is optimistic that margins of 15% or more can be maintained on the Ganga Expressway project.
" We expect the company to report earnings compound annual growth rate (CAGR) of 19% to ₹5.9bn over FY23-25," said the brokerage.
