Government Infrastructure Spend May Create Opportunities, While Margin Pressures Persist

Key Takeaways

• Diversification into highways and non-road sectors, coupled with government infrastructure spending, should propel G R Infraprojects' revenue growth.
  
• Liquidity boost from asset monetization and focus on higher-margin projects may enhance G R Infraprojects' earnings and margin recovery.
  
• Revenue growth and profitability could be challenged by project delays, increased working capital needs, competitive pressures, and transition risks in new sectors.

Catalysts

Through its subsidiaries, provides engineering, procurement, and construction services for roads, bridges, rails, airport runways, metros, and highways in India.

• The Indian government's increased budget allocation for infrastructure, including a 10% rise, and new asset monetization plans are expected to create opportunities for growth in infrastructure projects, potentially boosting G R Infraprojects' future revenue.
  
• The company is targeting an order pipeline of approximately ₹1,35,000 crores, with diversification into sectors like highways, metro, power transmission, and railways, which could support revenue growth and improve margins due to reduced competition in non-road sectors.
  
• G R Infraprojects has received appointed dates for several projects and targets ₹8,000-9,000 crores in new orders, indicating execution is set to ramp up, which should contribute to higher revenues and earnings growth.
  
• The company's plan to monetize operational assets, including transferring HAM assets to InvIT, could increase liquidity and provide additional capital for new investments or reducing debt, potentially impacting net earnings positively.
  
• The expectation of BOT project opportunities potentially resolving competitive pressures and focus on higher-margin sectors like tunnels, metros, and power transmission may support margin recovery to 13-15% in the medium term, improving earnings.

G R Infraprojects Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming G R Infraprojects's revenue will grow by 16.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 15.3% today to 6.9% in 3 years time.
• Analysts expect earnings to reach ₹8.3 billion (and earnings per share of ₹83.88) by about March 2028, down from ₹11.6 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₹10.8 billion in earnings, and the most bearish expecting ₹7.4 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 27.2x on those 2028 earnings, up from 8.5x today. This future PE is greater than the current PE for the IN Construction industry at 19.2x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 15.74%, as per the Simply Wall St company report.

G R Infraprojects Future Earnings Per Share Growth

Risks

• The revenue from operations has decreased significantly, both on a standalone and consolidated basis, due to delays in receipt of appointed dates for projects, which could impact future revenue growth.
  
• The company is dealing with increased working capital days, primarily due to an increase in SPV debtors, which may affect cash flow and net margins.
  
• There is ongoing competitive pressure in the road sector, leading to muted awarding activity and instances of underbidding, potentially affecting future order books and revenue streams.
  
• The company is experiencing delays in project execution approvals, with significant portions of the order book still awaiting appointed dates, impacting revenue realization and net earnings.
  
• The transition to new sectors like transmission and diversified projects carries execution risks and possible margin compression, which can affect overall profitability and earnings.

Valuation

• The analysts have a consensus price target of ₹1520.417 for G R Infraprojects based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹1875.0, and the most bearish reporting a price target of just ₹1090.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹119.7 billion, earnings will come to ₹8.3 billion, and it would be trading on a PE ratio of 27.2x, assuming you use a discount rate of 15.7%.
• Given the current share price of ₹1026.1, the analyst price target of ₹1520.42 is 32.5% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.