HG has Rs 6,270 crore of order backlog of which Rs 3,200 crore is yet to move into execution (2 hybrid annuity model (HAM) projects and 2 EPC packages).
Rajasthan-based HG Infra Engineering reported a steady set of earnings for the quarter ended September 2019 with double-digit growth across parameters. As a result, the stock of the company gained more than 5 percent on November 11.
The stock was listed on the bourses on March 9, 2018, and rallied up to Rs 355.75 in April, the record high. As of November 11, it had lost 28 percent at Rs 194, from its issue price of Rs 270, but overall it has been rangebound around Rs 200-300 levels in last one year.
In the last four months, the stock corrected 35 percent against 1 percent gains in Sensex and 6 percent correction in the Smallcap index; but it has the potential to return up to 127 percent by next year, suggest brokerages, citing healthy order book which gives strong revenue visibility.
Its current market capitalisation stood at Rs 1,265.62 crore on the closing share price of November 11.
The recent measures taken by the government to improve the economy including a cut in the corporate tax rate, more than Rs 100 lakh crore allocated for infrastructure are likely to be positives for the company.The company reported a 60.4 percent year-on-year growth in its second quarter profit at Rs 40.88 crore driven by operating income as well as lower tax cost.
Revenue during the quarter grew by 11.6 percent YoY to Rs 479.35 crore, impacted by a persistent delay in obtaining appointed dates (ADs) for select projects and extended monsoons, but it was broadly in-line with analyst expectations.
The company's earnings before interest, tax, depreciation and amortisation in Q2 increased 24.3 percent to Rs 77.22 crore and margin expanded by 165bps to 16.11 percent compared to the year-ago period.
HG has Rs 6,270 crore of order backlog, of which, Rs 3,200 crore is yet to move into execution (2 hybrid annuity model (HAM) projects and 2 EPC packages).
All these projects are expected to receive "appointed dates" in Q3FY20 with land acquisition in advance stages. This coupled with a ramp-up in the execution of Hapur Moradabad project may help HG achieve a 25-30 percent revenue growth in FY20, said HDFC Securities which maintained buy call on the stock with a target price of Rs 441, implying 127 percent potential upside from current levels after the company delivered an inline performance during Q2FY20.
Reliance Securities also said despite reducing revenue estimate by 4-6 percent, it still expects earnings to clock 33 percent CAGR in the next 2 years as healthy order book still offers healthy revenue visibility.
It expects HG's growth momentum to pick-up due to the recent commencement of Hapur-Moradabad project and likely start of Delhi-Vadodara and other HAM projects.
The brokerage maintained its buy rating on the stock with a target of Rs 360 (against Rs 385 earlier) implying 86 percent potential upside from current levels. It reduced target multiple to 12x (from 15x earlier) mainly to factor in ambiguity over roads/highway space.
Having witnessed robust order inflow of Rs 3,900 crore in FY19, HG Infra bagged orders worth Rs 950 crore only in FY20YTD, as model code of conduct for the General Elections and funding issues of the NHAI impacted new order awarding.
The company toned down its order inflow guidance for FY20 to Rs 3,000-3,500 crore and expects ordering activities to pick-up from December onwards.
HDFC said HG's EPC bid pipeline is robust (HG hopes to secure EPC orders of around Rs 2,000 crore and HAM orders of around Rs 1,000 crore during second half of FY20).
HG has received financial closure for its 2 HAM projects from 2 leading banks, highlighting the company's ability to secure funding in a market which values infra companies with strong execution capabilities as well as strong financial health, it added.
The company reduced its revenue growth guidance for FY20 from 30-35 percent to 20-25 percent, while FY21 revenue is guided at around Rs 3,000-3,300 crore with an EBITDA margin in the range of more than 15 percent.
HG said Rs 950 crore EPC road project bagged from Adani Road Transport should commence in Q4FY20 and expects to book Rs 50 crore in the current fiscal. 80 percent land of existing project is in hand, while land for Greenfield portion of land (around 20kms) is to be obtained in the next 3-4 months, it added.
With the intention of sustainable growth ahead, it is likely to enter into civil work of railway projects and water supply projects (not water treatment projects) in Rajasthan.
HG opines that these kinds of projects are good in the sense that the retention money is not stuck beyond 6 months or for a longer period, which ensures a decent margin. It will have JV partners in these kinds of projects in the initial period, the company said in a conference call.
According to company, it may start negotiating to divest its all 3 HAM projects from January 2020 to release equities and deploy in other projects, citing ongoing Gurgaon-Soha HAM project is 31 percent completed as of now and 60 percent to be achieved by March 2020. Similarly, other 2 HAM projects would be completed by 10-20 percent by Jan-Feb’20, it feels.
HG reduced its gross debt to Rs 343 crore at the end of September quarter against Rs 350 crore in June quarter and Rs 380 crore in FY19.
The company is expected to reduce to Rs 250-270 crore by FY20-end while it maintained capex for FY20 at Rs 50 crore.
Key risks to the buy recommendation are a delay in appointed dates for the company’s HAM and EPC projects; slowdown in government’s planned spending on infrastructure development; and substantial deterioration in the working capital cycle, said brokerages.
Anand Rathi and Yes Securities also remained bullish on the stock with target at Rs 377 (implying 94 percent potential upside) and Rs 349 (up 80 percent).Disclaimer: The above report is compiled from information available on public platforms. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.Are you happy with your current monthly income? Do you know you can double it without working extra hours or asking for a raise? Rahul Shah, one of the India's leading expert on wealth building, has created a strategy which makes it possible... in just a short few years. You can know his secrets in his FREE video series airing between 12th to 17th December. You can reserve your free seat here.