HG Infra IPO Opens On Monday: Here’s All You Need To Know

HG Infra Engineering Ltd.’s three-day initial open offer opens on Feb. 26 as the construction company raises funds to repay debt and buy assets.

It will sell 1.71 crore shares at Rs 263-270 apiece to raise Rs 462 crore. The company will issue new stock to raise up to Rs 300 crore while four promoters will mop up the rest by selling stake.

Business

HG Infra builds and manages highways, bridges and flyovers, besides designing, laying and maintain water pipelines. It had 1,064 units of construction equipment as on Nov. 30, 2017. The company generates most of its revenue from government contracts.

As much as 68 percent of its total order book comprised of orders received from state-run companies. Its public sector clients include the National Highway Authority of India, Public Works Department, Military Engineering Services and Jaipur Development Authority.

It had a total order book of Rs 3,708 crore comprising 21 road and highway projects, four civil construction projects and two water supply projects as of Nov. 30. Only 1.5 percent of its total orders came from water pipe laying projects.

The company generates more than 85 percent of its revenue from is building roads and highways.

It operates in Rajasthan, Uttar Pradesh, Haryana, Uttarakhand, Maharashtra and Arunachal Pradesh. HG Infra recently won seven engineering, procurement and construction contracts in Maharashtra worth Rs 1,905 crore (51 percent of the order book) from the Union Ministry of Road Transport and Highways.

Financial Highlights

• HG Infra’s net worth was close to Rs 205 crore as of Sept. 30, translating into book value of Rs 31.5 per share after issuing new stock.
• Its sales have been growing at an annualised rate of 34.4 percent, while net profit rose at 27.8 percent in five years through March 2017.
• Revenue and net profit stood at Rs 567 crore and Rs 29 crore, respectively, in the first half ended September.
• Earnings before interest, tax and depreciation and amortisation rose at a CAGR of 27.8 percent while EBITDA margins contracted 255 basis points in the last five years to 11.4 percent.
• EBITDA and EBITDA margin was Rs 80 crore and 14.1 percent, respectively, in six months to September.
• Debt stands at close to Rs 354 crore, which is expected to fall after the IPO as the company is looking to repay Rs 116 crore from the proceeds.

Peer Comparison

Dilip Buildcon Ltd. and KNR Constructions Ltd. are among its listed peers. Dilip Buildcon is five-times bigger than HG Infra.

Debt would come down to 1.2 times its equity after listing.

HG Infra has superior return ratios than peers when annualised for 2017-18 financial year.

Valuations

Earnings per share, when annualised for financial year ending March after issuing new shares, comes to Rs 9. At the upper end of the price band, it will trade at 30.1 times is earnings, according to BloombergQuint’s calculations.

Shareholding Pattern

After stake sale by promoters and a fresh issue, public shareholding will be 26 percent.

Angel Broking

• Post-issue valuations are largely in line with industry average.
• In view of the limited track record and concentrated order book, more consistent performance is required from the company.
• ‘Neutral’ recommendation on the issue.

ICICI Direct

• Robust execution expected given its strong capabilities along with a healthy order book and opportunities ahead.
• Recommend ‘Subscribe’ on issue.

IIFL

• After the IPO, amid declining debt, HGI Infra would qualify to bid for larger projects as a single bidder.
• Recommend ‘Subscribe’ considering the strong growth prospects and opportunities.

Motilal Oswal

• A strong EPC player in the road sector with an excellent track record.
• Its strength lies in a large fleet of in-house equipment to ensure timely execution
• It has one of the leanest working capital profile, one of the highest return ratios and superior balance sheet.
• Recommend ‘Subscribe’ on the issue.