Pick of the week: Axis Securities sees 10% upside in HG Infra Engineering; here's why

Despite a 10 percent fall in the stock in the last 2 months, domestic brokerage house Axis Securities has picked HG Infra Engineering as its 'top pick of the week'. This is on the back of its attractive valuations, strong growth opportunities, positive company-specific triggers, and macroeconomic tailwinds.

The brokerage has a ‘buy’ call on the stock with a target price of ₹935, implying a potential upside of 10 percent.

HG Infra Engineering Limited (HGIEL), incorporated in 2003, is a Jaipur (Rajasthan) based infrastructure company engaged in the construction, development, designing, and management of infrastructure projects. Over the last 18 years, the company has successfully transformed itself into a primary road developer from a sub-contractor and has completed over 35 projects during this period.

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Stock Price Trend

The stock has gained 46 percent in the last 1 year and 42 percent in 2023 YTD, giving positive returns in 8 of the 12 months in the current calendar year so far. It gained the most in April, 12.55 percent, and shed the most in October, down over 5 percent.

It has risen almost 2 percent in December so far, snapping losses after 2 months in the red. It lost 10 percent in October and November combined.

Currently trading at ₹866.40, the stock is almost 15 percent away from its record high of ₹1,016.75, hit on September 6, 2023. Meanwhile, it has advanced 61 percent from its 52-week low of ₹537.65, hit on December 23, 2022.

Earnings

HG Infra Engineering's Q2FY24 profit after tax came lower than the Street estimate, as PAT declined 5 percent YoY. The miss comes on the back of higher interest costs and depreciation. Meanwhile, its revenue growth of double digits and EBITDA margin were healthy.

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Its order book stood at ₹10,700 crore for Q2FY24 and the firm had guided order inflow of ₹5,000-6,000 crore for FY24. Earlier the guidance was ₹7,000-8,000 crore but the company had lowered it on the back of slow-paced awarding by NHAI but is expecting better inflow in H2FY24.

Meanwhile, its guidance on revenue is to deliver ₹10,000 crore by the next 5 years and for the current year, it is expecting revenue of ₹5,400 crore, up 20 percent.

Investment Rationale

Robust order book: As of September 30, 2023, the company maintains a robust order book valued at ₹10,678 crore. This comprises 51 percent of Engineering, Procurement, and Construction (EPC) road projects, while the remaining 49 percent is attributed to Hybrid Annuity Model (HAM) road projects. A noteworthy aspect is that 70 percent of the total projects are secured by the government of India, with the remaining 30 percent sourced from the private sector. This distribution suggests a stable revenue outlook for the next 2-3 years, according to Axis.

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In terms of growth projections, Axis anticipates an 18 percent Compound Annual Growth Rate (CAGR) in revenue for the company over the period spanning from FY23 to FY25E. This optimistic outlook is rooted in the company's diverse order book, with a substantial portion coming from government projects, providing a sense of revenue visibility and stability for the foreseeable future.

Segment diversification: In the Union Budget for the fiscal year 2023-24, there was a substantial boost in capital expenditure (Capex) allocations, particularly with a 25% increase for the road sector, a 27 percent increase for the Jal Jeevan Mission (JJM), and a 49 percent increase for railways. This development has opened up significantly larger opportunities for companies operating in these sectors, such as HG Infra. Recognising this potential, the company is strategically diversifying into segments beyond roads to capitalise on the expanded scope, highlighted Axis.

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It further noted that HG Infra aims to achieve a revenue contribution of 20-25 percent from segments other than roads. The bidding pipeline for HG Infra appears promising across various segments, including roads, JJM, and railways. The management anticipates a substantial order inflow of ₹5,000-6,000 crores in the fiscal year 2024. Additionally, the company aims to maintain EBITDA margins in the range of 15.5-16 percent, reflecting a focus on profitability amid its growth initiatives, stated the brokerage.

Healthy monetisation of HAM asset: The monetisation of Hybrid Annuity Model (HAM) assets at 1.5 times the invested equity across four Special Purpose Vehicles (SPVs) is a positive development for the company, according to Axis. This strategic move is anticipated to bring about a favorable impact by injecting capital into potential HAM projects. The progress of this monetisation aligns with expectations, stated Axis, indicating that the company's plans are unfolding as intended.

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Outlook & valuations

The brokerage maintains a positive view of the company, highlighting its strong execution capabilities, favorable order book position, robust balance sheet, and impressive return ratios. It anticipates the company to achieve a noteworthy Compound Annual Growth Rate (CAGR) of 18 percent in revenue, 16 percent in EBITDA, and 18 percent in adjusted profit after tax (APAT) over the period spanning from FY23 to FY25.

The stock is currently trading at 11x and 10x FY24E/FY25E EPS which Axis believes is 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.