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Monday, February 19, 2018
CM RATING 44/100


HG Infra Engineering

Building roads

Orders stood at Rs 3707.81 crore end November 2017, with Maharashtra accounting for 51% and Rajasthan 45%

Incorporated in 2003 and promoted by Harendra Singh, Vijendra Singh, Girish Pal Singh, HG Infra Engineering (HG) is a Rajasthan-based player undertaking infrastructure construction, development and management. The main business includes providing engineering-procurement-and-construction (EPC) services on a fixed-sum turnkey basis and undertaking civil construction and related infrastructure projects. The focus area is road projects, including highways, bridges and flyovers. 

Major clients include National Highways Authority of India (NHAI), Jaipur Development Authority, the Ministry of Road Transport & Highways (Morth), Public Works Department (PWD) and Modern Road Makers (MRM). Projects have been executed or being executed across various states in India covering Rajasthan, Uttar Pradesh, Haryana, Uttarakhand, Maharashtra and Arunachal Pradesh.

The fleet of modern construction equipment of 1,064 assets include crushers, excavators, loaders, dozers, sensor pavers and transportation vehicles from some of the leading suppliers. There is self-sufficiency on requirement of entire EPC work.

Water pipeline projects are also executed. Currently, there are two water supply projects in Rajasthan on a turnkey basis including designing, construction, operation and maintenance.

As many as 13 projects above the contract value of Rs. 40 crore in the roads and highways sector were completed in the last five years. The total contract value was Rs 1674.89 crore, comprising construction, improving, widening, strengthening of two- and four-lane highways; construction of a high-level bridge; and construction of earthen embankment, culverts and cart track underpasses. There were 21 ongoing projects in the roads and highways sector end November 2017. These consisted of construction, improving, widening, and strengthening, up gradation and rehabilitation of two-, four- and six- lane highways; construction of a high-level bridge, and construction of a road network.

The order book was Rs 3707.81 crore end November 2017. It comprised 21 projects in the the roads and highways sector, four civil construction projects and two water supply projects. As much as 67% of the order book comprised contracts from government clients (NHAI, Morth and state PWD) and rest from private clients.

Besides being pre-qualified to bid independently on an annual basis for bids by NHAI and Morth for contract values of up to Rs. 806.66 crore based on technical and financial capacity end March 2017, independent projects have also been executed. Project-specific joint ventures and consortiums have been formed with other infrastructure and construction companies for projects it is not pre-qualified to bid independently or when certain large projects require specific eligibility requirements covering particular types of experience and financial resources.

The aim is to diversify and expand presence in different states to reduce business concentration in limited geography. Bids have been put in for projects in Gujarat, Madhya Pradesh and Punjab. The strategy is to de-risk from a limited number of states.

The thrust will be on EPC work in non-road projects. Diversification will include bidding for construction and maintenance of railways, airport runways, and metros and water and sewerage treatment.  

The Offer and the Objects

The offer comprises an initial public offering of Rs 300 crore. At the lower price band of Rs 263 per share, the size works out to 114.07 lakh equity shares. At the higher price band of Rs 270, the size is 111.11 lakh equity shares. The offer also comprises offer for sale of Rs 60 lakh shares. At the lower price band of Rs 263 per share, the size is Rs 157.80 crore. At the higher price band of Rs 270, the size is Rs 162 crore. The selling shareholders comprise promoters and group Harendra Singh, Vijendra Singh, Girish Pal Singh (each comprising 10 lakh shares) and Hodal Singh (30 lakh shares).

The minimum bid lot is 55 equity shares and in multiples. The issue is being made through the book-building process. It will open on 26 February and will close on 28 February.

The objects of the issue is to repay certain borrowings totalling Rs 115.52 crore and to purchase capital equipment worth Rs 90.03 crore. The balance is for other corporate purposes, apart from the benefits of listing the equity shares on the BSE and the NSE and to enhance its visibility and brand image and provide liquidity to the existing shareholders.

Strengths

The order book was Rs 3707.81 crore end November 2017. It amount to about 3.5 times the fiscal year ended March 2017 (FY 2017) revenues.

Healthy economic growth, increase in government investments, reforms and higher budgetary support, new region-specific initiatives, improved private participation and favourable policy changes are some of the major growth drivers for the road sector.

Cumulative investments by the Central government in the road sector recorded 11% compounded annual growth rate (CAGR) to Rs 580000 crore between FY 2013 and FY 2017. State governments’ investments in the road sector registered 14% CAGR from Rs 48500 crore to Rs 81500 crore.

According to Morth and Crisil Research, despite having the second largest road network of 6.1 million km, India has sub-par quality of roads, with surface roads accounting for as high as 61% of the total road length.

National highway (NH) constitutes a mere 1.7% of the road network but carry about 40% of the total road traffic. There is tremendous opportunity in EPC work in the road sector. Expected investments, based on the budgetary allocation of the Central and state governments, in NH are around Rs 430000 crore in the next five years, up 2.9 times from five years ago,

Weaknesses

Change in Central government and its policy like that in FY 2015 can affect the overall tendering process and order book and execution. Lot of contracts that were tendered out got cancelled in FY 2015. The Union government stopped build-operate-transfer (BOT) mode of tendering orders. Thus, the order book was affected. Revenues declined 22% to Rs 365.08 crore and profit after tax (Pat) slipped 46% to Rs 9.22 crore in FY 2015.

Maharashtra accounts for 51% and Rajasthan 45% of the total order book. Any change in policies or other related issues including changes in toll collection in these states can affect prospects.

While the aim is to de-risk the EPC business from roads to other related sectors, a penetration policy has to be adopted. Prequalification eligibility will also be lower. Orders will be won only at lower margins.

While private sector participation is picking up, the business is predominately dependent on Central government (including states) tenders and bidding process. Elections, political uncertainties, availability of funds and such other factors affect the government’s tendering process.

Any delay in construction of projects, cost overruns due to change in the scope of work and claims for damage can affect the execution of projects and, thus, the margins.

Valuation

Consolidated net sales were up 42% to Rs 1054.89 crore and the operating profit margins (OPM) increased 90 basis points to 11.4%, thus resulting in 54% expansion in operating profit (OP) to Rs 120.17 crore in FY 2-17. Other income (OI) increased 54% to Rs 3.69 crore. Interest cost was higher by 21% to Rs 19.27 crore, while depreciation spurted 40% to Rs 25.60 crore. Thus, profit before tax (PBT) surged 71% to Rs 78.99 crore. After paying total tax of Rs 15.83 crore, consolidated profit after tax (Pat) rose 63% to FY 2017.

Net sales stood at Rs 567.34 crore, with OPM of 14.1%, resulting in OP of Rs 79.77 crore in the six months ended September 2017 over a year ago. OI stood at Rs 2.18 crore. Interest cost was at Rs 15.20 crore and depreciation stood at Rs 21.72 crore, leading to PBT of Rs 45.03 crore. After providing for total tax of Rs 15.83 crore, consolidated Pat wast Rs 29.20 crore. Due to seasonality of business, half- year earnings cannot be annualised.

The diluted equity share capital at the upper price band of Rs 270 stands at Rs 65.17 crore of face value of Rs 10. Thus, EPS is Rs 7.6 for FY 2017. The P/E on FY 2017 earnings works out to 35.7.

KNR Construction, PNC Infratech and Dilip Buildcon are some of the listed peers. Consolidated net sales of KNR Construction stood at Rs 1679.59 crore and Pat at Rs 108.28 crore in FY 2017, giving an EPS of Rs 7.7. At the current market price of Rs 313 , the stock trades at P/E of 40.6 times the FY 2017 consolidated earnings.

Consolidated net sales of PNC Infratech stood at Rs 2252.33 crore and Pat at Rs 118.28 crore in FY 2017, giving an EPS of Rs 4.6. At the current market price of Rs 165, the stock trades at P/E of 35.8 times the FY 2017 consolidated earnings.

Consolidated net sales of Dilip Buildcon stood at Rs 5130 crore and Pat at Rs 357.68 crore in FY 2017, giving an EPS of Rs 26.2. At the current market price of Rs 931, the stock trades at P/E of 35.6 times the FY 2017 consolidated earnings.

HG Infra Engineering: Issue highlights

Fresh Issue ( in no of shares in lakhs)  
- On lower price band 114.07
- On upper price band 111.11
Total Issue size for fresh issue ( in Rs crore) 300.00
Offer for sale ( in Rs crore)  
- On lower price band 157.80
- On upper price band 162.00
Total Issue size for fresh issue ( in no of shares in lakhs) 60.00
Price Band (Rs) 263-270
Bid size ( in no of shares) 55.00
Post issue share capital (Rs crore) 65.17
Post-issue Promoter & Group shareholding (%) 73.7%
Issue open date 26-02-2018
Issue closed date 28-02-2018
Listing BSE, NSE
Rating  44/100

 

HG Infra Engineering: Consolidated Financials

  1403(12) 1503(12) 1603(12) 1703(12) 1709(06)
Net Sales 471.05 365.08 740.88 1054.89 567.34
OPM (%) 10.8% 12.0% 10.5% 11.4% 14.1%
OP 50.83 43.96 78.13 120.17 79.77
Other in. 1.91 2.52 2.40 3.69 2.18
PBDIT 52.74 46.48 80.53 123.86 81.95
Interest 13.56 15.82 15.99 19.27 15.20
PBDT 39.18 30.66 64.54 104.59 66.75
Dep. 13.39 17.15 18.34 25.60 21.72
PBT 25.79 13.51 46.20 78.99 45.03
EO 0.00 0.00 0.00 0.00 0.00
PBT after EO 25.79 13.51 46.20 78.99 45.03
Tax (including Deferred Tax) 8.62 4.29 16.02 29.69 15.83
PAT 17.17 9.22 30.18 49.30 29.20
MI 0.00 0.00 0.00 0.00 0.00
PAT after MI 17.17 9.22 30.18 49.30 29.20
EPS* 2.6 1.4 4.6 7.6 #
*EPS is on post issue equity capital of Rs 65.17 crore of face value of Rs 10 each
# EPS not annualised due to seasonality of business
Figures in crore
Source: Capitaline Database