HG Infra Engineering is Axis Securities’ ‘pick of the week’ – key reasons why

Following a 10 percent jump in the stock in the previous month January, domestic brokerage house Axis Securities has picked infra stock HG Infra Engineering (HG Infra) as its 'top pick of the week'. This is on the back of attractive valuations, macroeconomic tailwinds, encouraging growth opportunities, and some positive company-specific triggers.

The brokerage has a ‘buy’ call on the stock with a target price of 995, implying a potential upside of 10 percent from its current market price of ₹905 (as on February 23, 2024).

HG Infra Engineering, established in 2003, is an infrastructure company headquartered in Jaipur, Rajasthan. The company specializes in the construction, development, design, and management of various infrastructure projects. Over the past 18 years, the firm has undergone a significant transformation, evolving from a sub-contractor to a prominent road developer. During this period, the company has successfully completed over 35 projects.

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Stock Price Trend

The stock has gained over 24 percent in the last 1 year and around 7 percent in 2024 YTD. It shed almost 3 percent in February so far after a 10 percent jump in January.

Even though the benchmarks have been hitting multiple peaks in 2024, HG Infra has not followed the trend. Currently trading at ₹905, the stock is 12.5 percent away from its record high of ₹1,019, hit on September 6, 2023. Meanwhile, it has advanced over 32 percent from its 52-week low of ₹686.15, hit on February 27, 2023.

Earnings

HG Infra reported a strong performance during the December quarter (Q3FY23). Its standalone revenue was up 22.7 percent YoY to ₹1131.7 crore, aided by execution pick-up across the majority of its project sites. Meanwhile, the EBITDA margin was at an elevated 16.8 percent (up 30 bps YoY) aided by a one-time early completion bonus of ₹14.4 crore. It also reported EBITDA at ₹190 crore, up 25 percent YoY.

At the net level, a strong topline performance coupled with better margins translated into 26 percent YoY growth in PAT to ₹111.9 crore.

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Investment Rationale

Robust order book: As of December 31st, 2023, the company boasts a robust order book totaling ₹9,623 crore. This comprises 51 percent from EPC (Engineering, procurement, and construction) road projects, 37 percent from HAM (Hybrid Annuity Model) road projects, and the remaining 12 percent from Railway & Metro projects, stated Axis. Furthermore, in Q4FY24 alone, the company secured projects worth ₹1,100 crore from Railways. Notably, 73 percent of these projects are from the government of India, with the remaining 27 percent from the private sector, providing revenue visibility for the next 2-3 years, it informed. Based on these factors, Axis anticipates the company to achieve a revenue growth of 17 percent CAGR over FY23-FY25E.

Segment diversification: With the Interim Union Budget for 2024-25 increasing the Capex outlay for the Roads & Railways sector to bolster infrastructure development in the country, significant opportunities are being created for companies like HG Infra, said Axis. To capitalize on these expanded opportunities, the company is diversifying into segments beyond roads such as Railways, Metro, and Solar projects. It anticipates that 20-25 percent of its revenue will come from these non-road segments. The bidding pipeline remains robust, covering Roads, JJM (Jal Jeevan Mission), and railway segments. Management expects an order inflow of ₹5,000-6,000 crore in FY24, with EBITDA margins ranging from 15.5 percent to 16 percent, noted the brokerage.

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Healthy monetization of HAM asset: Axis informed that the company has successfully completed the HAM asset monetization of three Special Purpose Vehicles (SPVs), with the remaining SPV scheduled for completion by Mar’24. This achievement marks a significant milestone for the company, demonstrated by the completion of the first tranche of three SPVs. On November 21st, 2023, the company transferred a 100 percent stake from the company to Highway Infrastructure Trust. The completion of the HAM asset monetization is a positive development for the company, it added.

Outlook & Valuations

Axis maintains a positive outlook on the company, considering its strong execution capability, robust order book position, healthy balance sheet, and high return ratios. It anticipates the company to report revenue/EBITDA/APAT growth of 17 percent/16 percent/15 percent CAGR over FY23-25E. Furthermore, the stock is currently trading at 11x FY25E EPS, a valuation that the brokerage finds attractive.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decision.