Fundamental Report H.G. Infra Engineering Ltd.

HG Infra Engineering Limited (HG INFRA) is an Indian road infrastructure company which provides EPC services, maintenance, and construction of roads, bridges, flyovers, and other infrastructure projects. Headquartered in Jaipur, Rajasthan, company has a primary focus on roads and allied sectors. However, it is actively seeking to diversify into water infrastructure and railways. It has a presence across 9 states with ~53% of the order book in the North.

Business Overview:

Company’s main business operations include (i) providing Engineering, Procurement and Construction (“EPC”) services and (ii) Hybrid Annuity Model (HAM) projects.

 

(i) EPC Projects: EPC is a project delivery method in which the company is responsible for the entire project, from engineering and design to procurement of materials and construction. The company bears all the risks associated with the project, including construction delays, cost overruns, and defects. As of Q1FY24, company has 53% EPC projects of the total orders.

 

(ii) HAM Projects: HAM is a project delivery method that combines the features of the EPC model and the BOT (Build, Operate, and Transfer) model. Under the HAM model, the government bears the majority of the construction risk, while the company bears the operational risk. The government pays the company an annuity (fixed amount of money paid regularly) for a specified period of time, during which the private sector operates and maintains the project. As of Q1FY24, company has 47% HAM projects out of the total orders and is further foraying into HAM projects to address the growing opportunity.

Industry Overview & Outlook:

Indian economy depends heavily on the infrastructure sector, which propels overall growth and is given top priority by the government. Infrastructure development is essential if we are to reach a $5 trillion economy by 2025. The Government introduced the National Infrastructure Pipeline (NIP) alongside initiatives like ‘Make in India’ and production-linked incentives (PLI) to support this growth.

Road construction is set to accelerate: NHAI’s plans to award road projects under the Bharatmala Pariyojana and the National Infrastructure Pipeline’s support will drive this momentum. Road construction companies stand to benefit significantly from these projects, especially under the EPC and HAM models. The government intends to speed up the construction of roads for the fiscal year 2023–2024 by awarding contracts for new projects that will cover roughly 12,000–12,500 kilometers. Additionally, a focused effort will be made to complete ongoing projects before the general elections in 2024. In the fiscal year 2023–2024, it is projected that this focused effort will significantly increase the rate of project execution. With a strong order book, favorable bidding prospects, and project diversification, the sector’s long-term outlook remains positive.

Financial Overview:

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Outlook:

We are positive on the HG Infra considering its healthy order book of Rs.11,700 crore as of 1QFY24, good execution capabilities, comfortable working capital cycle, geographical diversification and concentration on asset monetization. With the current order book that is 2.5x TTM, the company is well-positioned to take advantage of the expanding prospects in the road infrastructure industry. Hence, we advise investors to buy the company at CMP with the target price of Rs.1150 for one year period.

 

                                   

 

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