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HG Infra Engineering - Good to Subscribe?

Neerja Agarwal
/ Categories: Mindshare, IPO Analysis
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HG Infra Engineering - Good to Subscribe?

Rating - 52 (Investment recommended)

About the issue 
HG Infra Engineering plans to raise ~Rs.300cr through fresh issue of shares and ~Rs.162 cr. through offer for sale of 60 lakh shares. The offer will open from Feb. 26, 2018 to Feb. 28, 2018. 

Details of the issue are as follows

IPO opens – Feb 26th  

Fresh issue: Rs.300 cr (~111 lakh shares on upper band) 
Offer for sale: 60 lakh shares (on upper band ~Rs.162) 
Minimum Lot size: 55 shares 
Price band – Rs.263-Rs.270
Minimum investment: Rs.14,465 and 14,850
Face value: Rs.10
Book Runners: SBI Capital Markets and HDFC Bank
Listing on: BSE and NSE

About the company
HG Infra Engineering Ltd is engaged in infrastructure construction, development and management and is focused on road projects, including highways, bridges and flyovers. Its main business operations include (i) providing engineering, procurement and construction (“EPC”) services on a fixed-sum turnkey basis and (ii) undertaking civil construction and related infrastructure projects on item rate and lump sum basis, primarily in the roads and highway sector. It was founded in the year 2003 and within a short span has seen growth in its revenue and order book. 

The company has higher presence in western and northern India. As of November 30, 2017, projects in Maharashtra and Rajasthan contributed 51.13% and 44.59% of order book. The rest is contributed by Uttar Pradesh, Haryana, Uttarakhand and Arunachal Pradesh. Road and highway projects dominate the order book which as of Nov 30, 2017 stood at Rs. 3707 cr. Also, the company derives most of its projects from the government and hence the current infrastructure thrust by government is expected to lead to higher growth in orders for the company. It currently has in its kitty 21 road and highway projects, 4 civil construction projects and two water supply projects. Its public sector clients include NHAI, PWD, MES and Jaipur Development Authority. Due to its financial status, the company is pre-qualified to bid for projects by NHAI and MoRTH for contract values of upto Rs. 806 cr. 

Road and highways contribute ~86% of the company's revenue. The company has eventually reduced its dependence on roads and highways by entering into water supply projects and other civil construction. This segment has shown impressive growth in orders at 114% CAGR. Public sector contributed ~66% to the revenues. The company has benefited due to region-specific investment approach by the government. The company has shown its execution capabilities, and as sub-contractor, it has completed few projects in a timely and cost-effective manner. 
  
The company claims to be more adept in using modern construction equipment and technology to meet project timelines. Also, initial feasibility study and technical analysis helps it offer competitive bid for the projects. It is exploring to grow in new geographies where high quality services can be offered without delay. We see
  
The company also intends to diversify into or bid projects related to construction and maintenance of railways,  airport runways, metros and water treatment and sewerage-related projects. 
  
Industry Growth 
Over FY13-17, the cumulative investments in infrastructure projects are pegged at Rs 30.9 trillion, of which government contribution has been 39% and roads comprised of 19%. During this period, investments by state governments grew by 14% while investment in roads grew by 11%. The thrust has been on private-public partnership and HAM models to ensure speedy construction and less requirement of equity while bidding. 

CRISIL expects investment of Rs.4.3 trillion in national highways over FY18-22, a growth of about three-fold compared to last year. The investments in national highways are expected to pick up, as at present, the length of national highways is just 1.71% of the total road length, while national highways contribute 40% to the total traffic.

Use of IPO funds

Company plans to use the funds for 

1. Purchasing capital equipment – Company plans to do capex of Rs.90cr to buy modernized equipment.
2. Repayment/prepayment, in part or in full, of certain indebtedness. The company’s debt as of now stands at Rs.255 cr., which includes short-term borrowing. The long-term borrowing is Rs.113 cr. This has led to higher interest costs for the company. Company plans to repay Rs.115cr of debt which would help company augment its earnings.
3. General corporate purposes – Rest of the amount will be utilised by company for general corporate expenses.

Financial performance

On a standalone basis, the revenue for the company increased by 34.3% over FY13-17 and its PAT grew in tandem at 37% over the same period. 
  
The company’s revenue grew to Rs. 970 cr in FY17 from Rs. 712 cr in FY16. Its EBITDA also grew from Rs 78 cr to Rs 119 cr in FY17. This was also aided by better margins of 12.35% in FY17. However, we see that competitive bidding and higher order intake has been at lower margins in FY16. The net income also showed significant improvement from Rs 35.3 cr in FY16 to Rs 53.3 cr in FY17. The PAT margin also improved to 5.48% in FY17 from 4.95% in FY16. 
  
The company has shown significant improvement in its RoNW from 28% in FY16 to 30.3% in FY17. With growing order book, the company’s working capital cycle has increased to 55 days from 33 days in FY14. The company's D/E currently stands at a healthy 1.24x. 
 
Valuation and outlook
Looking at the company's performance among the set of peers with comparable sales, we see that H.G. Infra has been able to grow its revenue at a faster pace than its peers. Also, PAT growth has been more steeper and the margins are also at decent 12.3% in FY17.  We see that the company has been competitively valued as per the peers.
 

Companies

Revenue 3yr CAGR

PAT 3yr CAGR

EBITDA margin %

Net profit margin %

P/E

H.G. Infra Engineering

29.7%

70%

12.3%

5.5%

33.0x

Ashok Buildcon

13.6%

39.82%

14.23%

11.9%

24.8x

Gayatri Projects

9.8%

Flat

14.4%

Narrowing loss

693.8x

Dilip Buildcon

30%

22.9%

18.5%

8.6%

20.9x

 
However, we see that the new order intake growth has slowed and we expect higher execution of projects on hand and lower order intake growth for FY18. We expect the company to bid more orders on the HAM-based model leading to lower margins and lower need for capital. We expect order growth to pick up in FY19.

Also with the raising of IPO funds and the partial repayment of debt, we expect to see improvement in its capacity to bid further for other projects and provide for working capital needs.

Our view

We urge investors to subscribe to the issue with a perspective of 3-5 years and we assign it a rating of 52, which implies that we recommend investment in the same. This is on back of good execution capabilities, investment in modernized equipment and good order book.

The risk we see are slowing order intake growth, change in government leading to regional shift in infrastructure development and delay in orders due to paucity of funds.

 
*40 or lower – Avoid Investment, 41 to 45 – Risky, 46 to 50 – Invest with limited exposure, 51 to 55 – Investment recommended, 56 & above – Excellent Investment  

To know further on rating click here

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