Article

HG Infra Engineering Ltd- IPO Note

07 Aug 2019 Nikita Bhoota

Untitled Document

Issue Opens: February 26, 2018
Issue Closes: February 28, 2018
Face Value: Rs10
Price Band: Rs263-270
Issue Size: ~Rs462cr
Public Issue: 1.71-1.74 crore shares
Bid Lot: 55 Equity shares       
Issue Type: 100% Book Building

% shareholding

Pre IPO

Post IPO

Promoter

100.0

74.0

Public

0.0

26.0

Source: RHP

Company Background

HG Infra Engineering Ltd (HG Infra), an infrastructure construction, development and management company is present in road projects segment (highways, bridges and flyovers) and provides EPC services (engineering, procurement and construction). As of November 30, 2017, the company’s order book was worth Rs3,708cr. The government contracts accounted for 67.7% and private 32.3% of the order book. Geography wise, Maharashtra accounted for 51.1% and Rajasthan 44.6% of its order book.

Objective of the Offer

The Initial Public Offer consists of an Offer for Sale for 60 lakh equity shares amounting to Rs162cr (on the upper price band) by few of the promoters. The IPO also includes fresh issue of Rs300cr, which comprises of issuance of 1.11cr new shares (on the upper price band). Company proposes to use the fresh issue proceeds to repay debt (Rs115cr), purchase construction equipment (Rs90cr) and the remaining amount for general corporate purpose.

Financials

Consolidated Rs cr.

FY17

FY18E

FY19E

FY20E

Revenue

1,055

1,250

1,500

1,770

EBITDA Margin (%)

11.4

14.1

14.3

14.4

Adj. PAT

53

71

81

95

EPS (Rs)*

8.2

10.8

12.5

14.6

P/E*

32.9

24.9

21.6

18.5

P/BV*

1.5

0.9

0.7

0.6

RONW (%)*

35.7

30.1

24.4

22.5

Source: Company, 5 Paisa Research; *EPS & Ratios at higher end of the price band.

Key Investment Rationale

The traffic growth in India is expected to grow on the back of improvement in freight movement. The structural reforms carried out in the past such as GST and the impending passage of e-way bill will be favorable for the GDP growth going forward. With the economy expected to grow at a healthy pace, per capita income is likely to improve, which will increase demand for two-wheelers and passenger vehicles in the country. Rise in two-wheeler and four-wheeler vehicles, increasing freight traffic and strong trade and tourist flows between states are all set to augment road development.

HG Infra has a good track record in executing projects of different sizes particularly in the roads and highways sector. The company’s order book has reported CAGR of 94% and revenues have reported CAGR of 70% over FY15-17. HG Infra is pre-qualified to bid independently for EPC bids by NHAI and MoRTH annually (for contract value of `900cr). The careful identification of projects and cost optimization has led to improvement in profit margins.

Key Risk

High competition is witnessed in the road sector leading to low cost bidding, which could impact the profit margins going ahead.

Going forward 65-70% of the road projects awarded by the government is expected to be under HAM segment. HG Infra has been involved in executing road projects under the EPC model. The company seeks to selectively explore opportunities of undertaking projects on HAM basis by evaluating the investments required and selecting projects where the risk and reward profile is favorable.

Conclusion

HG Infra has transformed itself from a sub-contractor to a prime contractor in road construction sector. This has aided the improvement in operating margin profile. At the upper price band, its P/E works out to be ~25x FY18 EPS. We recommend SUBSCRIBE from a long-term perspective.

Research Disclaimer

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HG Infra Engineering Ltd- IPO Note

07 Aug 2019 Nikita Bhoota

Untitled Document

Issue Opens: February 26, 2018
Issue Closes: February 28, 2018
Face Value: Rs10
Price Band: Rs263-270
Issue Size: ~Rs462cr
Public Issue: 1.71-1.74 crore shares
Bid Lot: 55 Equity shares       
Issue Type: 100% Book Building

% shareholding

Pre IPO

Post IPO

Promoter

100.0

74.0

Public

0.0

26.0

Source: RHP

Company Background

HG Infra Engineering Ltd (HG Infra), an infrastructure construction, development and management company is present in road projects segment (highways, bridges and flyovers) and provides EPC services (engineering, procurement and construction). As of November 30, 2017, the company’s order book was worth Rs3,708cr. The government contracts accounted for 67.7% and private 32.3% of the order book. Geography wise, Maharashtra accounted for 51.1% and Rajasthan 44.6% of its order book.

Objective of the Offer

The Initial Public Offer consists of an Offer for Sale for 60 lakh equity shares amounting to Rs162cr (on the upper price band) by few of the promoters. The IPO also includes fresh issue of Rs300cr, which comprises of issuance of 1.11cr new shares (on the upper price band). Company proposes to use the fresh issue proceeds to repay debt (Rs115cr), purchase construction equipment (Rs90cr) and the remaining amount for general corporate purpose.

Financials

Consolidated Rs cr.

FY17

FY18E

FY19E

FY20E

Revenue

1,055

1,250

1,500

1,770

EBITDA Margin (%)

11.4

14.1

14.3

14.4

Adj. PAT

53

71

81

95

EPS (Rs)*

8.2

10.8

12.5

14.6

P/E*

32.9

24.9

21.6

18.5

P/BV*

1.5

0.9

0.7

0.6

RONW (%)*

35.7

30.1

24.4

22.5

Source: Company, 5 Paisa Research; *EPS & Ratios at higher end of the price band.

Key Investment Rationale

The traffic growth in India is expected to grow on the back of improvement in freight movement. The structural reforms carried out in the past such as GST and the impending passage of e-way bill will be favorable for the GDP growth going forward. With the economy expected to grow at a healthy pace, per capita income is likely to improve, which will increase demand for two-wheelers and passenger vehicles in the country. Rise in two-wheeler and four-wheeler vehicles, increasing freight traffic and strong trade and tourist flows between states are all set to augment road development.

HG Infra has a good track record in executing projects of different sizes particularly in the roads and highways sector. The company’s order book has reported CAGR of 94% and revenues have reported CAGR of 70% over FY15-17. HG Infra is pre-qualified to bid independently for EPC bids by NHAI and MoRTH annually (for contract value of `900cr). The careful identification of projects and cost optimization has led to improvement in profit margins.

Key Risk

High competition is witnessed in the road sector leading to low cost bidding, which could impact the profit margins going ahead.

Going forward 65-70% of the road projects awarded by the government is expected to be under HAM segment. HG Infra has been involved in executing road projects under the EPC model. The company seeks to selectively explore opportunities of undertaking projects on HAM basis by evaluating the investments required and selecting projects where the risk and reward profile is favorable.

Conclusion

HG Infra has transformed itself from a sub-contractor to a prime contractor in road construction sector. This has aided the improvement in operating margin profile. At the upper price band, its P/E works out to be ~25x FY18 EPS. We recommend SUBSCRIBE from a long-term perspective.

Research Disclaimer