H G Infra Engineering is entering the primary market on Monday 26th February 2018 to raise Rs. 300 crore via a fresh issue of equity shares of Rs.10 each and an offer for sale (OFS) of upto 60 lakh equity shares by the promoter, both in the price band of Rs.263 to Rs. 270 per share. Representing ~26% of the post issue paid-up share capital, total issue size is Rs. 462 crore at the upper end of the price band, of which, OFS portion is approximately 1/3rd at Rs. 162 crore. Issue is closing on Wednesday 28th February and listing is likely on 9th March.
Jaipur headquartered H G Infra Engineering, 100% owned by the Singh family, is an engineering, procurement and construction (EPC) company focused on roads projects. Company’s current order book of Rs. 3,700 crore, split 2/3rd as government and 1/3rd as private contracts, represents 3.5 times FY17 revenues of Rs. 1,055 crore. It is comprised of 21 ongoing projects concentrated in Rajasthan (45% of order book) and Maharashtra (51%), with balance presence in Uttar Pradesh, Uttarakhand, Haryana and Arunachal Pradesh. Company is pre-qualified to independently bid for NHAI contract values upto Rs. 800 crore, on an annual basis.
Financials and Shareholding:
Company’s historic growth rates have been healthy, with 3 year revenue CGAR of 31% between FY14-17, and PAT CAGR of 42% during the same period. For FY17, company reported consolidated revenue of Rs. 1,055 crore, with EBITDA margin of 11.7% and PAT of Rs. 49 crore, leading to an EPS of Rs. 9.87, on current equity of Rs. 54.06 crore, post 2:1 bonus issue in September 2017. For H1FY18, revenue of Rs. 567 crore was clocked with EBITDA margin improving to 14.4% and net profit of Rs. 29 crore, being earned by the company, resulting in an EPS of Rs. 5.42. Its RoE is healthy at close to 30%.
Besides topline growth and margin expansion, company’s working capital management has been good, despite having high share of government contracts (unlike peers), with both inventory and debtors outstanding being less than a month, as of 30-9-17. As of that date, company’s consolidated net worth stood at Rs. 205 crore, translating into BVPS of Rs. 38. Post listing, promoter shareholding, from current 100%, will decline to 74%.
Debt position however is concerning, with gross debt, as of 30-9-17, at Rs. 353 crore. Excluding cash and equivalents of Rs. 3 crore, net debt to equity ratio is quiet high at 1.70:1. Although, post equity infusion via fresh issue of Rs. 300 crore coupled with debt reduction of Rs. 116 crore from issue proceeds, this debt to equity ratio will moderate to 0.46:1, but is still not low, as few peers like J Kumar are actually cash rich EPS players. Balance funds raised in the fresh issue will be used to purchase capital equipment (Rs. 90 crore), meet issue expenses and for general corporate purposes.
At Rs. 270 per share, company’s market cap will be Rs. 1,760 crore while EV will be Rs. 1,994 crore, say Rs. 2,000 crore for simplicity. This discounts FY17 earnings by a PE multiple of 27 times and EV/EBITDA multiple of 16 times. Since H2 is stronger for infrastructure sector due to pick-up in execution closer to year end, based on FY18E, these multiples are seen at 20x and 11x, which makes the issue fully priced. There is nothing left on the table for prospective investors, especially given recent meltdown and the weak market sentiments wherein quality mid-caps are ruling 15-25% off their peak levels.
Roads focused peer such as J Kumar Infra, with larger annual topline of Rs. 1,600 crore and higher EBITDA margin at 19%, is a debt free company ruling at FY18E PE multiple of 22x and EV/EBITDA multiple of 8x. Another peer KNR Constructions, with presence in both EPC and BOT models, annual topline of ~Rs 1,700 crore and stronger EBITDA margin of over 20% is ruling at EV/EBITDA multiple of 12x which is justified, due to its much superior margins. KNR’s PE multiple is also lower at 16x, on comparable debt equity ratio.
While H G Infra is better off than some road EPC players grappling under debt and longer working capital cycles, its pricing is not very attractive. Govt. focus on road sector will benefit the company, but a price band of 220-230 per share would have been a more investor friendly entry point.
Historic growth, good order book offering revenue visibility and Govt’s healthy push to the road sector, all bode well for the stock. However, high debt and geographic concentration in just 2 states coupled with current sentiments of secondary markets, pricing is not viewed to be very attractive. Hence, advice would be to either wait for 12-15% lower levels pots listing or evaluate financial performance over the next few quarters before taking a call on the stock.
Disclosure: No interest.