Recommendation Subscribe BACKGROUND Price Band Rs.263 Rs.270 Incorporated in 2003, HG Infra Engineering Ltd mainly provides Bidding Date Book Running Lead Manager Registrar Sector 26-28 February SBI Capital Markets, HDFC Bank Link Intime India Pvt Ltd Construction Roads Minimum Retail Application- Detail At Cut off Price Number of Shares 55 Minimum Application Money Rs. 14,850 Discount to retail Payment Mode No Discount Consolidated Financials (Rs Cr) FY16 FY17 Total Income 741 1055 Adj EBITDA 78 120 ASBA Adj PAT 30 49 Lower Upper Valuations Band Band Market Cap (Rs Cr) 1460 1760 EPS* 9.0 9.0 P/E Ratio* 29.4 30.0 EV/ EBITDA* 13.0 13.2 Enterprise Value (Rs Cr) 2,072 2,109 *calculated on H1FY18 annualised numbers Post Issue Shareholding Pattern Promoters 73.7% Institutions 13.1% Bodies Corporates & Public 13.1% Offer structure for different categories QIB (Including Mutual Fund) 50% Non-Institutional Investors 15% Retail 35% Post Issue Equity (Rs. in cr) 65.17 Issue Size (Rs in cr) 458-462 Face Value (Rs) 10 Jehan Bhadha (+91 22 6273 8174) Research Analyst jehankersi.bhadha@nirmalbang.com engineering, procurement and construction (EPC) services primarily in the roads and highway industry. Based out of Jaipur, the company s major business activities are in Rajasthan and Maharashtra. Over the years, the company has transformed from a sub contractor to a prime contractor executing projects directly from ordering agencies like NHAI and MoRTH. Over the last five years, the company has completed 13 large projects aggregating to a total value of Rs. 1,675 Cr. Details and Objects of the Issue The public issue consists of i) offer for sale of Rs. 162 Cr by the promoters and ii) fresh issue of Rs. 300 Cr Utilisation of amount raised via fresh issue: i) ~Rs. 115 Cr towards repayment of debt, ii) Rs. 90 Cr towards capex, iii) balance amount towards general corporate purposes. Investment Rationale: Robust execution track record Transformed from a sub contractor to a prime contractor Strong order book provides good earnings visibility Best in class operating metrics Valuation and Recommendation Over the last four years (FY13-17), the company has demonstrated good execution skills with revenues growing at 34% CAGR, one of the highest in the listed space. During this period, the company successfully transformed from being a sub contractor to a prime contractor. The company is now entering the big league with its consistently expanding pre-qualification capability which currently stands at ~Rs. 900 Cr for EPC projects. By sticking to EPC projects historically and avoiding BOT and HAM, the company ensured that it utilizes its capital optimally which is evident from the company s best in class return ratios. With an order book of Rs. 3708 Cr (3.5x FY17 Sales) the company offers strong growth visibility for coming years. At the given upper price band of Rs. 270, HG Infra Engineering is being offered at PE of 35.7x / 30.0x its FY17 / H1FY18 annualised EPS and EV/EBITDA of 16.2x / 13.2x its FY17 / H1FY18 annualised EBITDA. We recommend subscribing to the issue from a long term perspective. Financial Snapshot FY14 FY15 FY16 FY17 H1FY18 Revenues 471 365 741 1055 567 Growth -22% 103% 42% EBIDTA 51 44 78 120 80 EBITDA Margins 10.8% 12.0% 10.5% 11.4% 14.1% PAT 17 9 30 49 29 Growth -46% 227% 63% EV/EBIDTA @ Rs 270 16.2 13.2* P/E @ Rs 270 35.7 30.0* P/BV @ Rs 270 10.0 8.6 Note: * = Annualised Source: Company data, NB Research 1
Investment Rationale Robust execution track record driven by strong promoter background During the past 5 years, when most road infra companies have been grappling with issues of high leverage and slow execution owing to legacy stuck projects, the company has demonstrated robust execution skills and has witnessed its revenues grow from Rs. 324 Cr in FY13 to Rs. 1055 Cr in FY17, a CAGR of 34%, one of the highest among the listed road companies. The management team of the company is well experienced in the construction industry. In particular, Mr. Harendra Singh Choudhary (CMD), Mr. Vijendra Singh Choudhary (W.T.Director) and Mr. Girish Pal Choudhary (Non ED) have 23 years of experience each in the infrastructure development sector, and have been instrumental in driving the company s growth since inception. Infact, the company was formed upon the conversion from a partnership firm run by the promoters itself in 2003. Transformed from a sub contractor to a prime contractor; improving pre-qualification credentials to pave way for bidding large orders The company was traditionally a sub contractor for companies like Tata Projects, L&T, IRB-Modern Road Makers to name a few. The company was recognized by L&T in 2012 as the most quality conscious contractor and received an appreciation letter for the same. Over the last few years, the company has transformed from a sub contractor to a prime contractor executing projects directly from ordering agencies like NHAI and MoRTH. The ratio of sub contracting : prime contracting has reversed from 70:30 in FY13 to 30:70 today. Execution of projects from public sector clients has thus increased to 73% in FY17 from 54% in FY15. Public sector clients include NHAI, PWD, MES and Jaipur Development Authority and together make of for ~68% of the company s outstanding order book. Today, the company is pre-qualified to bid independently on an annual basis for bids by NHAI and MoRTH for contract values of up to ~Rs. 900 Cr for EPC and ~Rs. 700 Cr for HAM. Focus on EPC has enabled company to attain best in class return ratios; Selective bidding for HAM in future to optimize portfolio Given the smaller scale of the company over the last few years and the high financial commitments required in BOT (earlier) and HAM (now), the company stuck to its core competence in EPC and benefitted from the changing government focus towards HAM and EPC from BOT earlier. During FY12 and FY13, 100% of the projects were under BOT, while in FY17 only 8% were under BOT with 38% under EPC and 54% under HAM. Owing to this strategy of focusing on EPC projects, the company has been able to generate one of the highest return ratios in the listed space (Avg. ROCE of 24% over last 4 years). While maintaining focus on EPC, the company will selectively evaluate opportunities under HAM where the risk-reward profile is favourable. Strong sector tailwind for Roads and Highways Between FY18-22, CRISIL Research expects an investment of Rs. 4.30 trillion in national highways, up 2.9 times in the next five years compared with the past five years. Notably, the government will account for more than half of the investment. CRISIL Research expects investment in road projects to double to Rs. 10.70 trillion over next five years. Further, given the current financial crunch being faced by build-operate-transfer (BOT) players, CRISIL Research expects the share of EPC projects to widen. Given the Government s focus on improving infrastructure in India, the roads and highways infrastructure sector has huge potential for growth. 2
Strong order book provides earnings visibility; Geographical Expansion to derisk business As of November 30, 2017, the company s total order book stood at Rs. 3708 Cr comprising of 27 ongoing projects. The company started its operations in Rajasthan and has gradually expanded in other states including UP, Haryana, Uttarakhand, Maharashtra and Arunachal Pradesh. It plans to continue its strategy of diversifying and expanding presence in different states for the growth of business. The company expects a significant portion of its geographic expansion in the states of Gujarat, Punjab and Madhya Pradesh. Through this diversification, the company will protect itself from fluctuations resulting from business concentration in limited geographical areas. Major Ongoing Projects Order Book Value (Rs Cr) Six laning of Gulabpura Chittorgarh Section-2-From Km.138+870 to Km.213.00 (75 Km.) 638 Six laning of Chittorgarh-Udaipur Section of NH-76 Section 1 from design chainage Km. 214.87 to Km. 483 263.87 + Additional 15 Km. top layer & RE wall, Road Furniture, Street Light (Ch. 263.87 to Ch. 278.87) Rehabilitation and Up-gradation of Nagpur-Katol-Warud State Highway From Existing Km 60+100 (End of Katol bypass) To Km 101+085 (Warud upto joint junction) [Design Km.60+100 To Km. 100+565] 312 From Two lane with paved shoulder in the state of Maharashtra on EPC Mode Rehabilitation and Up-gradation of Nandurbar (Near Kolde)- Prakasha-Sahada-Khetia ( SH-4 &SH-5) State Highway from existing km 50+260 of SH 5,(Kolde) to km 90+220 (Khetia) Design km.50+200 to 298 km.98+800] to Two lane with paved shoulders/4 lane in the State of Maharashtra on Engineering, Procurement and Construction (EPC) Basis Contract Source: Company Data Source: Company Data Risks Geographic concentration in two states - ~96% of the company s order book emanates from Maharashtra & Rajasthan. Any adverse development in these regions could impact the company. Political risk In the event of a change in government at the centre, the development focus on roads and highways as witnessed subsequent to 2014, stands a risk of getting diluted. 3
Valuation and Reccomendation We have compared HG Infra Engineering to companies with a dominant presence in roads and highways. We have used standalone financials for the peer group in order to have a like to like comparison as most of them also have exposure to BOT & HAM projects. Best in class operating metrics FY17 Standalone Figures (Rs Cr) Sales D/E W.C. Cycle Gross Block Turns Total Asset Turns EBITDA Margins ROCE Order Book / Sales EPS KNR Costruction 1541 0.1 33 2.4 1.1 14.9% 19.6% 2.2 14.7 29.5 Dilip Buildcon 5098 1.4 147 2.1 0.9 19.5% 19.4% 2.4 51.1 36.0 PNC Infratech 1689 0.1 108 2.8 0.8 13.1% 13.7% 4.7 8.3 15.9 Sadbhav Engg 3320 1.1 107 4.9 0.9 10.7% 11.2% 2.9 15.1 23.8 Ashoka Buildcon 1975 0.1 167 5.1 0.6 13.2% 13.4% 3.0 12.1 13.6 AVG of all 5 0.5 112 3.5 0.8 14.3% 15.4% 3.0 23.8 AVG - KNR & Dilip 0.7 90 2.3 1.0 17.2% 19.5% 2.3 32.8 HG Infra* 1055 1.2 30 3.5 2.8 11.4% 25.9% 3.5 13.2 35.7 Source: Company Data, Nirmal Bang Research *: Consolidated Nos. for HG Infra as it has JVs executing EPC work Note: Order Book / Sales ratio is as on Q3FY18 Over the last four years (FY13-17), the company has demonstrated good execution skills with revenues growing at 34% CAGR, one of the highest in the listed space. During this period, the company successfully transformed from being a sub contractor to a prime contractor. The company is now entering the big league with its consistently expanding pre-qualification capability which currently stands at ~Rs. 900 Cr for EPC projects. By sticking to EPC projects historically, the company ensured that it utilizes its capital optimally which is evident from the company s best in classes return ratios. With an order book of Rs. 3708 Cr (3.5x FY17 Sales) the company offers strong growth visibility for coming years. On the valuation front, at the given upper price band of Rs. 270, HG Infra Engineering is being offered at PE of 35.7x / 30.0x its FY17 / H1FY18 annualised EPS and EV / EBITDA of 16.2x / 13.2x its FY17 / H1FY18 annualised EBITDA. We recommend subscribing to the issue from a long term perspective. FY17 PE 4
Financials P&L (Rs. Cr) FY14 FY15 FY16 FY17 H1FY18 Balance Sheet (Rs. Cr) FY14 FY15 FY16 FY17 H1FY18 Revenues 471 365 741 1055 567 Share Capital 15.3 15.3 18.0 18.0 54.1 % Growth 46% -22% 103% 42% 8%* Reserve & Surplus 65 69 105 158 151 COGS + Contr. Exp 396 296 617 882 448 Networth 80 84 123 176 205 % of Revenues 84.0% 81.2% 83.2% 83.7% 79.0% Total Loans 72 73 123 204 353 Employee Cost 21 21 30 42 33 Long term provisions 0 0 1 1 1 % of Revenues 4.5% 5.7% 4.0% 3.9% 5.7% Other long term Liab 1 9 9 30 38 Other expenses 3 4 16 11 6 Deffered Tax Liab 1 - - - - % of Revenues 0.7% 1.1% 2.2% 1.0% 1.1% Trade payable 31 29 51 74 121 EBITDA 51 44 78 120 80 Advances fm customers 10 21 59 38 39 EBITDA Margin 10.8% 12.0% 10.5% 11.4% 14.1% Other Current Liab 27 22 33 48 65 % Growth 13% -14% 78% 54% 33%* Short term provisions 0 0 0 1 13 Depreciation 13 17 18 26 22 Total Current Liab. 67 72 144 161 238 Other Income 2 3 2 4 2 Total Equity & Liab. 222 239 398 570 835 Interest 14 16 16 19 15 Fixed Assets & CWIP 86 84 121 205 343 PBT 26 14 46 79 45 Deferred Tax Asset - 0 1 2 2 Tax 9 4 16 30 16 Long term Advances 14 16 19 18 30 Tax rate 33% 32% 35% 38% 35% Other non Curr. assets 8 10 7 6 15 PAT 17 9 30 49 29 Cash & Bank 3 5 4 17 3 Adj. PAT Margin 3.6% 2.5% 4.1% 4.7% 5.2% Inventories 21 22 44 49 64 % Growth 27% -46% 227% 63% 19%* Debtors 29 42 93 113 83 EPS (Post Issue) 2.6 1.4 4.6 7.6 9.0* Short term Advances 31 29 68 99 113 Performance Ratio FY14 FY15 FY16 FY17 H1FY18 Other Current assets 31 31 41 61 182 EBITDA Margin (%) 10.8% 12.0% 10.5% 11.4% 14.1% Total Assets 222 239 398 570 835 PAT Margin (%) 3.6% 2.5% 4.1% 4.7% 5.2% Cash Flow (Rs. Cr) FY14 FY15 FY16 FY17 H1FY18 ROE (%) 22% 11% 25% 28% 29%* EBITDA 51 44 78 120 80 ROCE (%) 26% 19% 25% 26% 22%* Adj. for Restatement (9) (3) 6 8 1 D/E (x) 0.9 0.9 1.0 1.2 1.7 Op. profit before WC 42 41 84 128 81 Sales Growth (%) 46% -22% 103% 42% 8%* Change in WC 6 18 (39) (56) (69) EBITDA Growth (% 13% -14% 78% 54% 33%* Less: Tax (9.5) (24) (15) (7) (9) PAT Growth (%) 27% -46% 227% 63% 19%* CF from operations 38 34 29 64 2 Turnover Ratios FY14 FY15 FY16 FY17 H1FY18 Addition to assets (1) (17) (61) (109) (136) Debtors Days 22 42 46 39 27* Investments (4) (1) (7) (8) (16) Creditors Days 24 29 25 26 39* Interest Income 2 2 2 2 1 Inventory Days 16 22 21 17 21* CF from Investing (3) (17) (66) (114) (151) Asset Turnover (x) 3.1 2.3 3.0 2.8 2.0* Change in share capital 3 Valuation Ratio FY14 FY15 FY16 FY17 H1FY18 Change in borrowings (47) (31) 23 43 121 Price/Earnings (x) 35.7 30.0* Interest paid (14) (16) (16) (19) (14) EV/EBITDA (x) 16.2 13.2* CF from Financing (34) (15) 36 62 135 Price/BV (x) 10.0 8.6* Net Change in cash 1 2 (0) 13 (14) Mkt cap/sales (x) 1.7 1.6* Cash at beginning 2 3 5 4 17 EV/Sales (x) 2.0 1.9* Cash at end 3 5 4 17 3 Source: Company Data, Nirmal Bang Research * Denotes Annualised Figures 5
Disclosure: This Report is published by Nirmal Bang Securities Private Limited (hereinafter referred to as NBSPL ) for private circulation. NBSPL is a registered Research Analyst under SEBI (Research Analyst) Regulations, 2014 having Registration no. INH000001766. NBSPL is also a registered Stock Broker with National Stock Exchange of India Limited and BSE Limited in cash and derivatives segments. It is also a registered Portfolio Manager having registration no as INP000002981. NBSPL has other business divisions with independent research teams separated by Chinese walls, and therefore may, at times, have different or contrary views on stocks and markets. NBSPL or its associates have not been debarred / suspended by SEBI or any other regulatory authority for accessing / dealing in securities Market. NBSPL, its associates or analyst or his relatives do not hold any financial interest in the subject company. NBSPL or its associates or Analyst do not have any conflict or material conflict of interest at the time of publication of the research report with the subject company. NBSPL or its associates or Analyst or his relatives hold / do not hold beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of this research report. NBSPL or its associates / analyst has not received any compensation / managed or co-managed public offering of securities of the company covered by Analyst during the past twelve months. NBSPL or its associates have not received any compensation or other benefits from the company covered by Analyst or third party in connection with the research report. Analyst has not served as an officer, director or employee of Subject Company and NBSPL / analyst has not been engaged in market making activity of the subject company. Analyst Certification: I, Jehan Bhadha, the research analyst and author of this report, hereby certify that the views expressed in this research report accurately reflects my/our personal views about the subject securities, issuers, products, sectors or industries. It is also certified that no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. The analyst(s) principally responsible for the preparation of this research report and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations. 6
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