Started in 2003, HG Infra Engineering (HGIEL), based in Jodhpur, has evolved as a major player in the road construction sector and has a major foothold in Rajasthan, Uttar Pradesh and Maharashtra. HGIEL is pre-qualified to bid independently on an annual basis for bids by NHAI and MoRTH. During the last five years, it has completed 13 projects above the contract value of Rs. 40 cr in the roads and highways sector. Since 2013, the company also expanded its portfolio to sub-contracting of water supply projects.
Strong order book: The company has a strong order book of Rs. 3708 cr, which grew significantly from Rs. 1,068 cr in FY2015. Government contributes 67.7% and private sector forms 32.2% of the order book. Road and highways form 95% of the order book.
Favorable industry trends: HGIEL is in a sweet spot, as investments in the road construction industry is expected to double to Rs. 10,70,000 cr over the next five years. Further, its pre-qualification to bid independently on an annual basis for bids by NHAI and MoRTH of contract value up to Rs. 900 cr would help in exploiting these opportunities.
Risks and concerns:
1) Delays in execution of projects, 2) Inability to win new orders, 3) Rise in raw material and labour cost, 4) >95% order book concentration in 2 states and 5) limited execution record
Outlook & Valuation: At the upper end of the price band, the P/E multiple works out to be 27x (pre issue equity base) and 33x ( post issue equity base) its FY17 EPS. This post issue valuations is largely in line with industry average valuations and 10-30% discount from valuation of industry leaders like Dilip Buildcon and KNR construction. However, in view of the limited track record ( the company has grown enormously only in the last 2-3 years) and concentrated order book (over 95% of order book concentrated in 2 states), we would like to see more consistent performance from the company in future. Hence, we recommend 'Neutral' on the issue.