Recommendation from an Infrastructure sector

This column gives you scrip chosen by the research team during the fortnight that is fundamentally strong and expected to give good capital appreciation over a time period of 1 year.

HG INFRA ENGINEERING LTD.: INDIA’S PROGRESS PARTNER

HERE IS WHY
✓   Government focus on infrastructure development
✓   Well-planned diversification into other areas
✓   Good return on equity

The infrastructure sector is a key driver of the Indian economy, highly responsible for propelling India’s overall development. It therefore enjoys intense focus from the government, which has been investing heavily in infrastructure development, including roads, highways and other transportation projects. This investment is expected to boost economic growth and create jobs. In the Interim Budget 2024-25, the government has allotted ₹11.11 lakh crore for infrastructure which is an 11.1 per cent increase in capital investment outlay and 3.4 per cent of the GDP. This investment will help to improve connectivity across the country and boost economic activity.

Keeping India’s development and infrastructure needs in mind, the recommendation for this issue is HG Infra Engineering, an infrastructure construction, development and management company with extensive experience in its focus area of road projects, including highways, bridges and flyovers. The company is one of the fastest-growing infrastructure construction companies in India and has executed or is executing projects across various states in India. The company’s main business operations include providing engineering, procurement and construction (EPC) services on a fixed-sum turnkey basis. The company’s business model works majorly on hybrid annuity model (HAM) projects and EPC projects. In Q3FY24 on a consolidated basis, the revenue of company rose by 15.15 per cent YoY to ₹1,364.53 crore compared to ₹1,184.97 crore from the previous year’s same quarter. On a sequential basis, its revenue increased by 42.95 per cent. The PBIDT excluding other income decreased by 4.20 per centto ₹228.30 crore YoY as compared to ₹238.30 crore from the previous year’s same quarter, while sequentially increasing by 3.67 per cent. The net profit stood at ₹101.98 crore compared to ₹131 crore, a YoY decrease of 21.96 per cent, while sequentially increasing by 6.05 per cent from ₹96.16 crore.

The company had an order book of ₹9,626.3 crore as on December 31, 2023 with business operations across 11 states. In terms of business breakup, the EPC segment comprised 51 per cent, HAM segment constituted 37 per cent and the remaining 12 per cent was from the railways. Recently, HG Infra Engineering has been successful in diversifying its order book beyond just roads. The company has secured contracts for metro and railway projects, which will help to reduce its dependence on any one sector. This diversification will mitigate risks and open new avenues for growth.

Additionally, the company has also forayed into executing water pipeline projects and has undertaken two water supply projects in Rajasthan on a turnkey basis which includes the designing, construction, operation and maintenance of the project. It also has on the cards a diversification plan for the water sector, expecting ₹500 to ₹1,000 crore of projects in Madhya Pradesh and Uttar Pradesh. On the valuation front, the shares of the company are trading at a PE of 15.3 times which is lower than the industry PE of 18.2 times and higher than its three-year median PE of 11.1 times. The company has a three-year average return on equity (ROE) of 28.7 per cent and a return on capital employed (ROCE) of 26.5 per cent. Considering the sector’s growth potential and HG Infra Engineering’s business outlook, we recommend BUY. recommend BUY.