India's Infrastructure Expansion And Renewables Push Will Benefit Construction Sector In Coming Years

Key Takeaways

• Government-backed highway expansion and renewable energy initiatives offer significant revenue growth opportunities for H.G. Infra Engineering.
  
• Diversification into railway projects and monetization of assets enhance future revenue streams and cash flow prospects.
  
• Election delays and NHAI financial challenges may slow revenue growth and project timelines, while increased debt pressures margins if cash flows fall short.

Catalysts

Engages in the engineering, procurement, and construction (EPC) business in India.

• The Indian government's continued focus and financial backing on highway expansion presents significant upcoming contracts expected to boost H.G. Infra's revenue.
• The company's strategic entry into the renewable energy sector, supported by government initiatives and funding, indicates potential for increased revenue from solar projects.
• H.G. Infra's diversification into railway projects, aligned with national connectivity plans, could enhance future revenue streams.
• The anticipated recovery in project awards and bidding activity in FY '25 suggests improved revenue growth prospects.
• The ongoing monetization of HAM projects is expected to improve cash flows and support future earnings growth.

H.G. Infra Engineering Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming H.G. Infra Engineering's revenue will grow by 17.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 9.7% today to 8.6% in 3 years time.
• Analysts expect earnings to reach ₹7.6 billion (and earnings per share of ₹110.93) by about January 2028, up from ₹5.4 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ₹6.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.2x on those 2028 earnings, up from 17.0x today. This future PE is lower than the current PE for the IN Construction industry at 36.4x.
• Analysts expect the number of shares outstanding to grow by 1.65% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.73%, as per the Simply Wall St company report.

H.G. Infra Engineering Future Earnings Per Share Growth

Risks

• The slowdown in project awards due to election delays and NHAI's financial challenges could impact revenue growth and project execution timelines.
  
• The company's increased debt levels due to financing solar projects may pressure net margins and future earnings if project cash flows don't materialize as expected.
  
• Execution challenges in certain projects, like the Neelmangala-Tumkur project facing land availability issues, could delay project completion and affect revenue recognition.
  
• The potential for high competitive intensity in bidding for new contracts, especially in the highways and railway sectors, could pressure future profit margins.
  
• The low margins on railway projects and the impact from related-party transactions in solar projects may lead to unpredictability in earnings if similar issues recur.

Valuation

• The analysts have a consensus price target of ₹1717.4 for H.G. Infra Engineering 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 ₹2100.0, and the most bearish reporting a price target of just ₹1150.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹88.5 billion, earnings will come to ₹7.6 billion, and it would be trading on a PE ratio of 23.2x, assuming you use a discount rate of 14.7%.
  
• Given the current share price of ₹1394.1, the analyst's price target of ₹1717.4 is 18.8% higher.
  
• 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.