H.G. Infra Engineering Ltd : Paving the Path to Success

[Prakhar_Sankrityayan]

Couldn’t find any discussion about HG Infra hence initiating this topic.

• The company has achieved phenomenal growth and diversification in its order book, securing three non-road projects and entering into a share purchase agreement for monetizing four HAM projects.
• The standalone overall revenue for FY23 increased by 22.2% YoY to INR 4,419 crores, and the EBITDA grew by 21.5% to INR 710 crores with a margin of 16.1%.
• The profit after tax for FY23 was INR 422 crores, showing an increase from INR 339 crores in FY22, with a PAT margin of 9.5%.
• The central government plans to accelerate road construction in FY24, awarding new projects of 12,000 to 12,500 kilometers and aiming to build 45 kilometers of roadways each day.
• The railway sector’s capital expenditure is expected to reach INR 2.5 lakh crore in FY23, with a focus on station redevelopment under the Amrit Bharat scheme.
• The government has allocated INR 98,000 crores for the monetization and expansion of airports, aiming to increase the number of airports to 220 by 2025.
• The Jal Jeevan mission provides business opportunities in the water sector, with increased budgetary allocation for safe drinking water in rural households.
• The company’s order book stands at INR 12,595 crores with an order inflow of INR 8,650 crores in the past year, and it aims to grow the order book further.
• Ongoing projects include the Ganga Expressway, Karala-Kanjhawala project, Neelmangala-Tumkur project, Adani-Mancherial project, and more, with varying execution progress.
• The company has monetized four HAM projects through a share purchase agreement with Highway Infrastructure Trust, resulting in an enterprise value of INR 1,394 crores.
• The transaction will be completed in two tranches, strengthening the company’s balance sheet and releasing capital for future growth.

Thesis:

1. Strong Execution Track Record: H.G. Infra Engineering Ltd has demonstrated a consistent track record of executing projects in a timely manner, leading to repeat projects and early-completion bonus payments. This showcases their robust execution capabilities and enhances the potential for timely project delivery.
2. Healthy Order Book and Revenue Visibility: The company boasts a sizeable order book, providing strong medium-term revenue visibility. With a diverse range of projects in the pipeline, including highways, roads, railways, and water infrastructure, H.G. Infra Engineering Ltd is well-positioned to capitalize on the growing infrastructure development opportunities in India.
3. Established Clientele and Government Associations: H.G. Infra Engineering Ltd has fostered long-standing relationships with key clients such as NHAI and MoRTH, along with reputed private road developers. This not only highlights their credibility but also offers a steady stream of project opportunities through government associations and repeat business.
4. Healthy Financial Profile: The company maintains a comfortable financial profile with stable operating margins, low leverage, and robust debt coverage metrics. These factors contribute to the company’s financial stability and reduce the risk associated with debt repayment obligations.

Anti-thesis:

1. Project Concentration and Client Risk: H.G. Infra Engineering Ltd heavily relies on road works, with a significant portion of its order book concentrated in NHAI and ARTL projects. This concentration poses a risk if there are delays or issues in these specific projects or if the company fails to diversify its client base adequately.
2. Liquidity and Equity Commitments: While the company has a healthy project pipeline and equity commitments, the addition of multiple new projects and higher equity requirements may strain liquidity. The ability to manage working capital efficiently and secure timely monetization of HAM assets remains a key monitorable for investors.
3. Refinancing and Debt Structure: H.G. Infra Engineering Ltd faces potential refinancing risk due to cross-default linked debt acceleration clauses. If triggered, it could put pressure on the company’s financial position and hinder its growth prospects.
4. Execution and Operational Risks: While the company has a strong execution track record, there are inherent risks associated with large-scale projects such as the Ganga Expressway. Ensuring timely completion and payment realization from clients like ARTL may pose challenges and impact project profitability.

In terms of valuations, H.G. Infra Engineering Ltd’s valuation appears relatively attractive with a PE of 12 (Industry PE of 34) and PEG of 0.29.

According to the management’s guidance, the revenue for FY24 is expected to be around INR 5,400 crores. Considering a profit after tax (PAT) margin of approximately 9.5%, the estimated PAT for FY24 would be around INR 515 crores.

Assuming a conservative price-to-earnings (PE) ratio of 12, the market capitalization in FY24 would be approximately INR 6,180 crores.

PE Ratio	Initial Market Cap (INR)	Final Market Cap (INR)	Return (%)
12	6,019	6,180	2.67
23	6,019	11,845	96.21
34	6,019	17,510	190.79

Seems like the management’s guidance is already baked into the stock price (However the stock currently gets a PE of just 12 vs the industry average of 34).

Disc: Hold a tracking position

[james_kerala]

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This has median PE of 10-11 only since listing history. Why do you think it always commanded low PE?

Recent award of Kanpur railway station redevelopment at 655 crores within 3 years.
cb631094-17d2-4484-b8e9-5f67917e9978.pdf (409.8 KB)

Disc: Tracking position as this came up in screener for high growth in sales and profit for 5, 3 and 1 year

[Prakhar_Sankrityayan]

I’m unsure why this company consistently has a lower PE ratio. Some potential factors could include its capital-intensive nature, heavy dependence on government revenue (84%), and the inherent risks involved in infrastructure projects.

I’m interested in hearing others’ views on why it might be trading at a PE ratio of 12.

[james_kerala]

Order book from Investor Presentation at https://www.hginfra.com/pdf/investor_presentation_q4_n_fy23.pdf

Concall notes summary from Screener.in

Concall Notes - May 2023

Financial Performance:

Standalone overall revenue increased by 22.2% YoY in FY23
EBITDA grew by 21.5% YoY in FY23
Profit before tax for Q2 FY23 grew by 64.8% YoY
Five-year CAGR for revenue, EBITDA, and PAT were 26%, 28%, and 38% respectively
ROCE and ROE increased to 30% and 24% respectively

Order Book:

Order inflow of INR8,650 crores during the year
Anticipates securing orders worth INR8,000 to INR9,000 crores in FY24
Aims to have 20% to 25% of the order book comprising non-road projects within
the next two to three years
Bid for INR8,000-9,000 crores in railways and metro projects and INR1,600 crores
in water projects for FY23
Business development unit created to explore opportunities in railways
and water projects for FY24

HAM Projects:

Monetized four HAM projects for INR1,394 crores with an equity value of INR531 crores
Total requirement of all HAM projects in equity was INR16,120 crores
INR735 crores were invested till March, with a balance requirement of INR440 crores
for FY24, INR359 crores for FY25, and INR76-odd crores for FY26
The company expects inflows from the monetization of projects to be received one
by one with different amounts
The company has secured INR500 crores worth of execution from recently
won HAM projects

New Projects:
Secured three HAM projects and three non-road projects
Central government intends to accelerate the construction of roads in FY24
with the awarding of new projects of 12,000 to 12,500 odd kilometers this year
The company is looking to grow their order book in the financial year, majorly
from roads and highways segment, but they would like to further extend their
presence in other sectors too, including water, railways, and other opportunities
Bid for five water projects in FY23 but couldn’t invest in any of them due to
L4 to L5 range estimation
The company is exploring Ropeways and tunnel projects in addition to
highways, railways, and water projects
NHAI has a pipeline of 2,300km bids to be awarded from June onwards,
and NHO projects offer further opportunities

Margins:

EBITDA and gross margins have shown improvement due to a normal trend,
with OPM increasing
The EBITDA margin guidance for the next few years is tentatively around 16%
The company expects operating margins to be around 15-15.25% for
under-execution projects

Capex:

Capex for the year was INR340 crores, with equipment upgrades
being a strategic focus
The net capex addition for 2024 and 2025 is expected to be around
INR100 crores

Debt and Cash:
The company expects debt level to come down to around INR350 crores
by the end of next financial year
Mobilization advance is INR328 crores, retention and miscellaneous
deposits withheld total INR879 crores in debtors
The company has INR67 crores withheld amount, which is considered
in the debtor balance

Guidance:

The company expects inflow of INR530 crores from
he sale of four projects
this year
The company expects execution growth of close to 23% and does not see
any risk to execution from elections
The company expects to sustain 20% growth in FY25
Q1 earnings are not possible due to delayed NOCs, but arrangements will be
made for Q2 and Q3/Q4
Heavy monsoons affected projects in March and April, but Q2 is expected to have
a 23% YoY increase in earnings
The revenue guidance for FY24 is expected to be around INR5,500 to
INR5,600 crores, which is 23-24% of the total
The company had a successful year and is committed to delivering
better in the future.

[AHI]

Wait, Now it is uncertainty at macro level, so investors are cautious. Once bull run starts, PE will 24 means double the stock price. I am holding since Rupees 200 per share.

[nandan_ganatra]

HGINFRA,

Some info from their annual report…

● Consistent rise in revenue/ PAT since last 4 years.

● Maintaining EBIDTA margin of 15-16%, RoCE of near 30%.
● Maintaining Low gearing ratio

● Net fixed asset turnover at 7.7x

● Company aims to secure orderbook of 8-9k cr.
● Railway metros - expected bidding of 15k cr.,
● NHAI expected bid of 1.1 lac cr.

● Company seeks to grow revenue 20-25%, growing top line to 10k Cr. In 3 years time.

● SAP implementation completed. To improve productivity.

● Company aiming to increase it’s non road orderbook from existing 10% to 25% in next 3 years from railways, metro & Water resources.

● Credit rating of the company improved during this FY.

● Average Cost of debt was 8.28%,
● fresh short term debt at 8.7% one of the lowest in peer group…

● Budget 23-24 - Raising capital investment outlay to 10 lac cr. - Almost 3 times of 2019-20 outlay.
● Road construction between 12k to 15k kms. ( 16-21% higher )

● Budget allocation: 2.7 lac cr. ( 24.6% higher )

Infra outlay

In 2020-21 = 4.39 lakh cr.
In 23-24 = over 10 lakh cr.

Indian rail infrastructure:

● To receive investment of 50 lakh Crore by 2030.
● 5243 km track length in '23 vs 2909 km in '22
● 140367 Cr. - Budget for '23

● NRP focuses on increasing railway model share in freight to 45%

Disc: Invested since early 2021.

[nandan_ganatra]

Another fabulous result from HGINFRA

Mr. Consistent

Topline 23% 1356 vs 1109 Cr. YoY
Profit 36% 150 Cr. Vs 109 Cr.
EPS of 23
Mcap: 6200 Cr.

Ebidta margins have improved as well.
20.8% from 18% YoY, it was 19% last quater.

[nandan_ganatra]

My views on “why it might be trading at low PE?”

1. Their orderbook is not diversified enough. Till last year, it was completely road orders. However, recently they have won 3 rail orders (10-15% of total order book)

2. Their orderbook has a 5k cr. Contract of Ganga express highway from ADANI ( concentrated order )- apart from that order, their orderbook is about 6-7k cr. In my view market wants to see more order inflow from various field.

Their topline this year will be about 5500 Cr. ( as per management guidance ) & orderbook is at 11.5k cr. at present, which translates Order book/ sales of 1.7 ( if we consider 25% topline sales growth ). Which is relatively low as compared to peers.

Having said that, HGINFRA used to trade at single digit PE till early 2021 ( at 6-7 PE ). But due to its exceptional growth performance, high EBIDTA margins ( due to selective order wins of better margins ) and great controls on working capital / Balance sheet in last 3 years, market has rewarded it with double digit PE.

Going forward, their orderbook, their diversification in sectors will be key monitorables. Even today during concall, management reduced their orderbook guidance from 8-9k cr to 7-8k cr.

If they manage to get 8k Cr. order this year ( and diversified too ) then its orderbook/ sales will stand at 2.2 /2.3 ( factoring 20-25% sales growth ) & in that case, market may reward this company even further.

Disc: Invested since 3 years.

[james_kerala]

30f58f77ec4a91691276bd056543b6f485d5c4b61ce58a7ccdd1945666828f94.pdf (577.5 KB)

Research report by Geojit.

Disc: tracking, not invested

[Prakhar_Sankrityayan]

What Is the Hybrid Annuity Model?

The Hybrid Annuity Model combines two infrastructure construction models, namely the BOT-Annuity and the EPC. The EPC model comprises 40% of this combination, while the rest, 60%, is BOT-Annuity.

The EPC Model

• The EPC (Engineering, Procurement, and Construction) model denotes a process of infrastructure construction in which the government pays private parties to build roads.
• The responsibility of the private players ends with road construction.
• They are not involved in road maintenance, toll collection, or road ownership. The government remains responsible for these things.

The BOT-Annuity Model

• In the BOT (Build, Operate, Transfer) model of infrastructure construction, the private players are involved for an extended period.
• They deal with constructing, operating, and maintaining the roads for a specific period, suppose 10 to 15 years.
• The roads are then handed back to the government.
• Under the BOT model, the private players have to arrange funds for the project.
• The private players are paid a pre-fixed amount as an annuity for building and maintaining the roads. This annuity fee is known as BOT-Annuity.
• The government bears the risk of toll revenue.

The Hybrid Annuity Model [HAM]

• Under the Hybrid Annuity Model, the National Highways Authority of India (NHAI) pays 40% of the total project expenditure.
• This payment is released in ten equal instalments based on the completion of targeted project milestones.
• The remaining 60% amount has to be arranged by the road developer.
• The developer finances around 20 to 25% of the total project cost. The remaining amount of money is raised as debt.

Source: Hybrid Annuity Model - Meaning, Major Features, Significance

[RajeevJ]

HG Infra looks like an interesting investment opportunity but I am still trying to better understand the sector as whole. Is the high consolidated operating margins of about 20% the industry norm? The Consolidated operating margins of about 20% are higher than the stand alone margins of about 16-17%. Is it correct to presume that margins under HAM business are considerably higher than EPC?

The valuations appear to be low, when one considers that it is a two decade old company, with high promoter holding of about 75% and decent institutional names holding a good amount of the balance. With the ongoing Govt. thrust on the infrastructure sector, there ought to be plenty of opportunities for the Co., so a trailing PE of 11 at the CMP of about 913 seems rather attractive.

I also gather that one of the risks for infrastructure companies is that State govts are at times tardy in making payments, but that should not be the case here as most of the projects are with NHAI or with the private sector. Also, the revenues in the sector are back ended with 60-65% of the business coming in during the second half of the year.

Still in the conviction building stage here and any further inputs would be appreciated.

[Pranshinv]

National Highway Authority of India (NHAI) is the apex body of the country for the development, maintenance and management of national highways and for matter connected therewith or incidental thereto. Due to slow down of investment in road infrastructure space due to financial constraints of industry players and problem related to land acquisitions, in-ordinate delay in receipt of the payments, NHAI has come up a new scheme for construction of road projects to provide impetus to the construction of roads. Under the new scheme, the NHAI would pay off the entire amount to the concessionaire (constructor) over the period of 15 years post construction of the road assets ie 40% amount would be paid during construction period (730 days) from the appointed date and the balance 60 % would be paid over a period of 15 years on a semi-annual basis with an interest of 3% over and above the bank rate.

Under HAM Model , EPC Margins remained same as normal construction work.
Reason for higher margins will be the Difference of interest income from NHAI and interest paid to Lenders for 60% of Annuity amount.

[Prakhar_Sankrityayan]

My notes of 1st August 2023 concall

1. Revenue Guidance:

• Revenue for the year is maintained between INR 5,500 crores and INR 5,600 crores.
• Margins are expected to be around 16%.
• Order inflow guidance is revised to INR 7,000 crores to INR 8,000 crores due to project award delays
• Approximately INR 2,000 crores are expected from sectors other than highways, such as railways and metros.and a reduced order guidance.
• The goal of achieving INR 10,000 crores revenue over the next 3 years.

2. Revenue Breakdown:

• Ganga Expressway project contributed around INR 475 crores in Q1 FY '24.
• Existing HAM projects contributed approximately INR 500 crores in the same period.
• Clear focus on contributions from the Ganga Expressway project, SPVs, and NHAI EPC projects.

3. Revenue Composition for Future:

• Projected contributions from HAM projects and non-road sector projects remain largely the same.

4. Monetized Asset Approvals and Inflow:

• Approvals for the monetized assets with KKR are in progress.
• Two projects with CODs are already with the finance department for in-principle approval, with the third project expected to follow soon.
• The finance department typically takes around 7 to 10 days for in-principle approval.
• Despite a recent delay due to NHAI organizational changes, the inflow is expected by October or November.

5. Project Pipeline and Awards:

• The company aims to achieve around INR 4,000 crores to INR 5,000 crores of project awards from NHAI.
• Awards from MSRDC and other sectors will contribute to the remaining projects.
• Specific mention of participation in the Pune Ring Road tender and expectations of award by October or November.

6. Railway Opportunities and Capabilities:

• The company is actively participating in railway projects, including permanent track linking works.
• Opportunities are seen in Maharashtra, Gujarat, and Uttar Pradesh.
• Collaborative ventures and MOUs are being explored for railway projects.
• Railway station redevelopment projects are also considered for bidding and participation.

7. Equity Requirements and Bid Pipeline Overview:

• Equity requirement for next 3 years: FY '24 - INR 407.4 crores, FY '25 - INR 268 crores, FY '26 - INR 158 crores.
• Bid pipeline: Strong pipeline for MSRDC projects (INR 30,000+ crores qualified), NHAI projects (INR 45,000+ crores active), railways, and metro.

8. Working Capital:

• Working capital increased temporarily due to delayed payments from SPVs and clients, but expected to return to usual levels.

9. Asset Monetization and Debt Reduction:

• Expected reduction in debt by INR 200-odd crores by year-end.
• New capex may add INR 60-70 crores to debt during the year.
• Projected debt range: INR 425 crores to INR 450 crores by year-end (excluding asset monetization).

10. Order Inflow Guidance and Bid Pipeline

• The company aims for INR 7,000-8,000 crores order inflow this fiscal year.
• Limited order inflow received in H1 with challenging Q4 ahead.
• Around INR 5,500 crores outstanding bids expected to open soon.
• Estimated INR 1,000-2,000 crores potential from ongoing bids.
• Bid pipeline includes INR 1,50,000 crores projects.
• Targeting to bid for INR 90,000 crores projects.
• Historical bid strike ratio of 7-8% gives confidence in achieving target.
• Bids to be completed in Q2-Q4 for substantial future opportunities.

11. Operational Efficiency and Equipment Utilization:

• The company has strategically invested in construction equipment, contributing to operational efficiency and margin improvement.
• The new equipment has led to reduced dependence on external vendors, translating into better control over operational costs.
• The equipment utilization rate has been decent, and the benefits of internal strategic investments are being realized.

12. Margin Expectations and Revenue Breakup

• The company has guided for 20% to 25% revenue contribution from the non-road sector in the annual report.
• There is a cautious approach in bidding for projects outside the highway sector, with a gradual expansion plan over three years.
• The aim is to be selective and avoid desperate bidding, which is intended to help maintain similar margins.
• There is confidence that maintaining margins will not be a significant challenge even as the non-road order book increases.

13. Competition Intensity and Project Mix

• The competitive landscape in the industry has seen a correction in recent months, with a decrease in the number of bidders for projects.
• The number of bidders in EPC projects is still high, ranging from 35 to 40, while in HAM projects, it’s around 7 to 8.
• There is a cautious approach to bidding, with an emphasis on avoiding margin shrinkage and compromising on profitability.
• Despite the competitive environment, there is confidence that the company can target the goal of adding around INR 5,000 crores worth of highway projects without compromising on margins.
• The target for road inflow is expected to be a mix of around INR 2,000 crores from EPC projects and the remaining from HAM projects.

Project statuses: