Margin moderated; Future appears promising!
H.G. Infra Engineering Ltd (HG Infra) has presented a mixed performance for Q1FY26, with revenue growing at a healthy pace while margins have fallen below expectations. The management has highlighted that the lower margins are chiefly linked to certain provisions made for the Ganga Expressway project. That being stated, the outlook suggests stability in the margin at ~15-16%. Moreover, it is expected that execution to uphold its strong momentum, supported by a favourable order book position, with management predicting revenues of Rs70bn for FY26 and Rs80bn for FY27. Also, inflows are anticipated to remain healthy, based on the expectation of conversion of a strong project pipeline into orders, alongside ongoing diversification efforts. Nevertheless, the company’s borrowings have remained elevated mainly due to rising working capital needs for newer projects and solar-related initiatives. Ahead, it is anticipated that these borrowings to stabilize by FY26-end with project completions. Furthermore, the monetization process for five HAM projects has commenced, subsequent to the execution of a binding agreement with an investor. Thus, the receipt of the funds to facilitate decline in debt, while the surplus will be utilized as a growth capital. Overall, the outlook is optimistic. Rating remains BUY.
Q1FY26 performance marked by healthy revenue growth, although margins have weakened
Revenue from operations increased by 13.5% YoY to ~Rs17.1bn, primarily supported by improved execution of its comfortable order book position. Key projects such as Ganga Expressway, Khammam-Devarapalle, Raipur-Visakhapatnam and solar-related jobs were instrumental in achieving this growth. However, on a sequential basis, revenue experienced a decline of 13.4% due to seasonal factors.
The gross margin has experienced a decline of 138bps YoY, mainly attributed to a substantial rise in raw material costs. This factor, combined with higher other expenses and increased provision for Ganga Expressway project, hold the key for reduction of the EBITDA margin to 13.8% (down 237bps YoY and 55bps QoQ). As a result, EBITDA has declined by 3.1% YoY and 16.7% QoQ to Rs2.4bn.
On a net basis, the reported PAT has declined by 10.1% YoY and by 40.9% QoQ, to Rs1.3 bn. This decline is mainly due to muted operating performance, a sharp rise in interest expenses (true YoY) and decreased other income. Also, the company had recognized an exceptional item of Rs574mn in Q4 FY25 pertaining to the monetization of a HAM asset. When adjusted for this exceptional item, the decline in PAT gets adjusted to 25.9% sequentially.
Outlook and Valuation: HG Infra is strategically positioned to attain 15.1% revenue CAGR over FY25- 27E, supported by ongoing execution momentum stemming from its healthy existing order book and expectations of better inflows. Further, margins are projected to remain elevated, with our expectation at ~15.3% in FY27. Consequently, EBITDA is expected to rise at a CAGR of 13.6%. Additionally, we foresee a 14.5% (adj.) PAT CAGR over FY25-27E, aided by managed depreciation and finance costs. At the CMP, the stock (excl. investments) is trading at 5.8x FY27E P/E. Based on a SOTP methodology, our target price is set at Rs1,779/share. We continue to recommend a BUY.
HG Infra Engineering Ltd – Q1FY26 Result Update – SMIFS Institutional Research
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