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HG Infra Engineering is an emerging pure-play engineering, procurement and construction (EPC) company with a primary focus on roads and allied sectors, such as flyovers and bridges. The company started operations in Rajasthan and has gradually expanded presence across Maharashtra, Uttar Pradesh, Haryana, Uttarakhand and Arunachal Pradesh. Currently, Rajasthan and Maharashtra contribute around 96 per cent to the order book.
Besides roads, HG Infra forayed into executing water pipeline projects in 2013 and is undertaking two water supply projects in Rajasthan on turnkey basis.
The initial public offer (IPO) consists of fresh issue of 11.1 million equity shares and an offer for sale (OFS) from promoters and promoter group of around 6 million shares. At the upper end of the price band (Rs 270), the stock would trade at 35x its FY17 earnings per share (post money) and 10x its FY17 BVPS (book value per share).
The company plans to utilise the amount raised via IPO towards repayment of debt, capital expenditure and general corporate purposes.
So, should you subscribe to the IPO? Here is what leading brokerages suggest:
HG infra is well positioned to gain traction in the infrastructure sector on the back of:
a) Impressive execution track record
b) Comfortable balance sheet with healthy return ratios
c) Healthy order book-to-sales ratio. In our view, given the strong order inflows in FY16-17, the company is expected to grow at a CAGR of 30-38 per cent over FY17-FY20 in revenue/PAT (profit after tax).
Given this, the stock would trade at P/E of 17.5x/12.5x FY19/FY20E earnings based on the upper end of the price band vs its peers, which are trading at 21x/18x FY19/FY20E earnings. We recommend a “subscribe” rating on the IPO.
Over the last four years (FY13-17), the company has demonstrated good execution skills with revenues growing at 34 per cent compound annual growth rate (CAGR), one of the highest in the listed space. During this period, the company successfully transformed from being a subcontractor to a prime contractor. The company is now entering the big league with its consistently expanding pre-qualification capability.
By sticking to EPC projects historically, the company ensured that it utilises its capital optimally and this is evident from the company’s best-in-class return ratios. With an order book of 3.5x FY17 sales, the company offers strong growth visibility for coming years.
At the given upper price band of Rs 270, HG Infra Engineering is being offered at PE of 35.7x / 30x its FY17 / H1FY18 annualised EPS and EV/EBITDA of 16.2x / 13.2x its FY17 / H1FY18 annualised EBITDA. We recommend subscribing to the issue from a long-term perspective.Prabhudas Lilaldher
The outlook in road sector continues to be very healthy with significant uptick in ordering under BHARATMALA and improved focus from state to improve road infrastructure. Our calculation suggests company can deliver ~40% earning CAGR over FY17-20E. At the upper band of issue, post money market cap works out to be ~Rs 17.6 billion. We believe reasonable valuation will leave room for listing gains, however we would prefer to hold players with stabilised track record like Ashoka / Sadbhav / KNR Constructions over the longer term.
Valuation-wise, at higher price band, HG Infra is demanding a P/E valuation of 33x (to its restated FY17 EPS of Rs 8.2) as compared to peer average of 33.8x. Though the issue seems to be fairly priced with respect to FY17 earnings, it looks attractive considering the FY18E and FY19E earnings. (The company is asking a P/E multiple of 19.6x and 12.7x, respectively, for FY18E and FY19E, as compared to peer average of 21.5x and 18.4x). We assign a “subscribe” rating to the issue.