H.G. Infra Engineering Ltd : Paving the Path to Success

Q2 FY24 Concall Notes

Introduction and Current Scenario

• Slow NHAI tendering until September ’23 due to prolonged monsoon.
• Recent acceleration in bidding process and internal changes.
• Anticipation of increased bidding activity in the next 4-5 months.

Diversification Strategy

• Focus on diversifying orders in various sectors.
• Opportunities identified in railways, metro, and water sectors.

Railway Sector Opportunities

• Participation in the Amrit Bharat Railway Station Scheme for station revitalization.
• Bidding for railway projects totaling Rs. 1000 crores, with plans for additional bids in FY23-24.
• Exploration of opportunities in the metro sector, both elevated and underground projects.

Water Sector

• Slow awarding in the water sector during the initial six months.
• Expectation of momentum in the coming months.

Order Book and Presence

• Order book at Rs. 10,678 crores, spanning 11 states.
• EPC segment constitutes 51%, while HAM segment comprises 49% of the total projects.

Operational Highlights – EPC Projects

• Ganga Expressway at 29.3% completion.
• Delhi UER projects at 78.8% financial progress, expected to complete by December ’23.
• Neelmangala-Tumkur NHAI project at 15.6% completion.

HAM Projects Progress

• Raipur-Visakhapatnam packages progressing well, expecting completion by June ’24.
• Khammam-Devarapalle Project at 28.1% completion.
• Rewari Bypass project to be monetized in the second tranche.

Railway and Metro Project Updates

• Progress in DMRC Metro project at 26.6% completion.
• Appointed date received for RVNL Rail Project.
• LOA received for Kanpur Railway Station Project, with machine mobilization completed.

Other Updates for H1 FY24

• PCOD for Mancherial Project received on July 26, ’23.
• Final sanction for Varanasi-Ranchi-Kolkata packages 10 and 13 received from HDFC and Axis.

Strategic Move: Sale of 4 HAM Projects

• Agreement:
  • Signed share purchase agreement with Highway Infrastructures Trust (backed by KKR).
  • Involves the sale of 4 HAM projects, a significant move for the company.
• Transaction Progress:
  • NHAI and lender approval secured for the first tranche of 3 SPVs.
  • All conditions met for successful closure; expected in November ’23.
• Financial Outlook:
  • Confident in achieving expected numbers with a (+20%) revenue upside.
  • Aiming for order inflow with Rs. 5000-6000 crores from road and diversified sectors.
• Future Initiatives:
  • Preparing for new projects, analyzing costs, and engaging with solar and metro sector clients.
  • Focus on operational efficiency and execution capabilities.
• Digital Transformation:
  • Prioritizing digital transformation for automation in operations.
  • Aiming for enhanced financial indicators through a transparent real-time working environment.

Order Inflow Concerns and Projections:

• Initial Projections:
  • Original expectation for the year was around Rs. 9000 crores order inflow.
• Current Outlook:
  • Current projection lowered to Rs. 5000-6000 crores due to slow progress.
  • Factors influencing the decrease include state elections and delayed RFQ results.
• Reasons for Confidence:
  • Anticipated acceleration in NHAI projects, aligning with Gati Shakti initiatives.
  • Optimistic about achieving a minimum of 3000-plus kilometers awarded in the next four months.
• Future Initiatives:
  • Diversification into metro and railway projects bidding with a potential of Rs. 8000 crores.
  • Analysis and engagement in solar and metro sectors for new opportunities.

Compensation and Future Order Inflow:

• Compensation for Shortfall:
  • Confident in compensating for the current year’s shortfall in the next fiscal year.
  • Expected addition of Rs. 10,000-12,000 crores from Quarter 2 onwards in FY25.

Revenue Growth and Segmentation:

• Current Year’s Revenue Growth:
  • Current projection for revenue growth is 20% compared to the initial 25%.
  • On track with the annual report’s revenue target of Rs. 5400 crores for the year.
• Segment-wise Breakdown:
  • Revenue segmentation remains consistent with earlier projections.
  • Major contributions from Ganga Expressway, six HAM projects, and diversified sectors like metro and railways.

Increase in Unbilled Revenue:

• Ganga Expressway Projects:
  • Milestone payments not aligned with physical progress.
  • Unbilled portion around Rs. 150-200 crores due to the 2-3% gap in physical and financial progress.
  • Continuity in unbilled status due to monthly milestone completion.
• NHAI and SPV Projects:
  • NHAI projects, especially in UER, facing similar milestone payment challenges.
  • SPV projects experiencing an increase due to project execution initiation.
  • Unbilled amounts likely to stabilize around Rs. 500 crores by Quarter 3.
  • Old NHAI and MoRTH projects with receivables and claims causing unbilled figures.

Confidence in NHAI Ordering:

• Strong NHAI Bidding Pipeline:
  • NHAI holds a robust bidding pipeline.
  • As of March ’23, approximately Rs. 60,000 crores worth of projects were expected to be awarded.
  • Delayed due to certain reasons, NHAI plans to award Rs. 40,000 crores by the end of the year.
  • Anticipating the awarding of around 2500-3000 kilometers from the current bidding pipeline.

Revenue Guidance and Inflow:

• Current Fiscal Year (2023-24):
  • FY24 Revenue Guidance: Targeted revenue of Rs. 5,400 crores.
  • FY25 Revenue Expectation: Anticipating revenue in the range of Rs. 6,000 to Rs. 6,200 crores.
• Future Revenue Growth:
  • FY25: Expected to complete existing projects, anticipating revenue from existing order backlog to be around Rs. 5,500 crores.
  • Order Backlog: Rs. 10,600 crores.
  • Targeting to add new orders in the range of Rs. 5,000 to 6,000 crores.

Margin Guidance:

• Expected Margin: 15.5% to 16%.

Impact of Construction Ban in Delhi NCR:

• UER 1 and Metro projects expected to have minimal impact.
• Special permissions anticipated due to the high priority and monitoring by PMO.
• Pollution department likely to grant relaxation for these projects.

Arbitration Claims:

• No significant arbitration claims against NHAI or any government body.
• Small claim of Rs. 10 crores with Agra Development Authority; Rs. 6 crores already provided.
• Consolation in progress for four NHAI projects completed in 2018, amounting to Rs. 22 crores.

Segment-wise Revenue Breakup for Q2 FY24:

1. Ganga Expressway (Adani Project – Mancherial): Rs. 290 crores
2. NHAI EPC: Rs. 188 crores
3. SPVs: Rs. 303 crores
4. Metro and Railway: Approximately Rs. 52 crores

Railway Projects Margins:

• Bidding margin for railway projects is set at approximately 14%.

Competitive Scenario:

• HAM: Moderate competition with 7 to 10 bidders.
• EPC: More aggressive with 20 to 25 bidders.

Diversification Projects Margins:

• Diversified sector projects (e.g., water, metro) margins range from 12% to 15%.

Revenue Composition:

• Targeting at least 10% of total turnover from metro and railway projects this year.
• Aiming for 20% of total order execution by 2025 and 25% by 2026 from diversified sectors.

Depreciation Increase:

• Increase in depreciation due to the addition of new assets, particularly shuttering.
• Expected to continue throughout the year.
• Shuttering depreciates faster, impacting the overall depreciation cost.
• Anticipated depreciation and interest costs to remain similar to the previous year, with a slight increase of about 0.25%.

Execution Timeline:

• Highway Projects: Approximately 24 to 36 months.
• Railway Projects (e.g., Kanpur Railway Station, RVNL): Ranges from 30 to 36 months.
• Metro Projects: Typically completed in about 30 months.
• Water Projects: Execution timeline extends to around 36 months.

PAT Margin Analysis:

• Recent Decline: Standalone PAT margin affected by a rise in interest costs.
• Asset Monetization Impact: Anticipated improvement in PAT margin due to asset monetization of HAM projects.
• Finance Costs: Expected to be in a similar range as previous years, around 1.25% of total turnover.
• Employee Costs: All-time high due to project mobilization, but anticipated to normalize.

Future Outlook:

• PAT Margin Improvement: Confidence in the PAT margin returning to earlier levels, potentially around 8.6%.
• Finance Costs Management: Efforts to maintain finance costs within the historical range.
• Mobilization Impact: Employee costs expected to stabilize as execution catches up.

Ganga Expressway Impact:

• Acknowledgment of the concern regarding the eventual completion of the sizable Ganga Expressway project.
• Capability and Qualification: Successful completion of significant elevated portions in projects like UER at Delhi and Gurgaon Sohna positions the company for bidding on large-sized projects.
• Future Prospects: Exploration of opportunities in high-magnitude projects, including high-speed network corridors for railways and tunnel projects through joint ventures and alliances.

Order Inflows Analysis:

• Bidding Activities: Participation in several bids; however, loss of projects due to unmet margin expectations.
• Expected Momentum: Anticipation of an increase in momentum and order inflows from November onward.
• Market Share Loss Explanation: Loss of projects with unsatisfactory margins; optimistic about the upcoming months.

Bidding Activities Overview:

• Road Sector Bids:
  • Submitted bids for 6 road sector projects.
  • Bidding on the Chambal Expressway project.
• Railway Sector Bids:
  • Expressed interest in railway projects, estimating opportunities worth around 8,000 crores.
  • Shared ongoing bids in the state of Chhattisgarh; results pending.

Diversification Strategy:

• Metro Projects:
  • Qualification for metro projects achieved through recent project completions.
  • Expectations of bidding for metro projects, independent of railway opportunities.
• Tunnel Opportunities:
  • Exploring tunnel opportunities in Northeast states, including Himachal Pradesh, in collaboration with DRO.
• Joint Ventures and Alliances:
  • Existing Orders: Solely secured all current orders without joint ventures.
  • Future Prospects: Consideration of joint ventures for projects where 100% qualification is challenging (e.g., water projects, large-scale metro).