Robust Order Book And Renewables Focus Will Strengthen Future Outlook

Key Takeaways

• Strong order book and government infrastructure commitments signal robust future revenue potential and long-term growth opportunities.
  
• Expansion into renewable energy and strategic capital moves aim to optimize margins and enhance operational efficiency.
  
• Delays, receivables, and government dependence could strain cash flows and margins, while increased competition may undermine profitability and revenue growth.

Catalysts

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

• The robust order book of ₹15,080 crores, with a focus on roads, highways, railways, metros, and solar projects, shows strong future revenue potential. Successful execution of these projects will likely drive revenue growth and improve earnings.
  
• The government's commitment to infrastructure development, highlighted by the National Infrastructure Pipeline and increased budget allocations, is expected to provide a continuous pipeline of projects, supporting long-term growth and boosting future revenue.
  
• The expansion into the renewable energy sector with solar and battery energy storage projects aims to capitalize on India's renewable energy capacity goals. This focus on high-growth sectors can improve revenue streams and overall margins.
  
• Monetization of completed HAM projects and strategic capital infusion in new ventures provide opportunities to optimize the balance sheet, enhance cash flow, and potentially boost net margins.
  
• Continued focus on maintaining EBITDA margins between 15% and 16% suggests an emphasis on operational efficiency across projects, which could positively impact future earnings and profitability.

H.G. Infra Engineering Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming H.G. Infra Engineering's revenue will grow by 18.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 10.2% today to 8.5% in 3 years time.
• Analysts expect earnings to reach ₹7.7 billion (and earnings per share of ₹117.64) by about March 2028, up from ₹5.5 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ₹6.1 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 22.1x on those 2028 earnings, up from 12.7x 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 grow by 0.08% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 15.45%, as per the Simply Wall St company report.

H.G. Infra Engineering Future Earnings Per Share Growth

Risks

• Delays in land acquisition and design changes for key projects such as the Kalimandir-Jamshedpur and Neelmangala-Tumkur could impact project timelines and thereby affect revenue realization and cash flows.
  
• The company is experiencing significant capital tied up in receivables from solar and HAM projects, amounting to ₹535 crores and ₹375 crores respectively, which could strain working capital and impact net margins if collection issues persist.
  
• Increased competition in bidding projects could lead to reduced margins as the company may be forced to underbid to secure new projects, thus impacting profitability in the upcoming fiscal years.
  
• The dependence on successful monetization of HAM projects to meet equity infusion requirements poses a risk to cash flows and financial stability if asset sales do not occur as planned or at expected valuations.
  
• The high reliance on government infrastructure projects implies that any delay in government spending or policy changes can adversely impact order inflows and consequently revenue growth prospects.

Valuation

• The analysts have a consensus price target of ₹1696.133 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 ₹1920.0, 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 ₹90.3 billion, earnings will come to ₹7.7 billion, and it would be trading on a PE ratio of 22.1x, assuming you use a discount rate of 15.4%.
• Given the current share price of ₹1065.05, the analyst price target of ₹1696.13 is 37.2% 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.