G R Infraprojects is well poised to deliver high quality/sustainable growth, which may lead to a multiyear rerating: HDFC Sec

This is what good looks like

G R Infraprojects Ltd (GRIL) has built a highly capital efficient execution engine, well oiled with strong funding lines, powered by low interest costs and empowered by robust management depth and bandwidth. We believe its long-term growth trajectory would be largely funded by internal accruals and asset monetisation. Diversification will also not be a constraint as the company’s strong balance sheet, low levels of fund/non-fund based utilisation, and strong cash flow generation bode well for growth. The Indian contractor’s ecosystem is developing with a high number of contractors in early growth cycles failing to graduate to the next level due to lack of capital. A wide gap remains between the largest listed peer and the second largest company; we believe GRIL has the right ingredients which would put it on the path of narrowing the gap. It is well poised to deliver high quality/sustainable growth, which may lead to a multiyear rerating. We initiate with a BUY and Sep-23 SOTP of INR 2,372/sh (18x Sep-23E EPS).

 Right ingredients in place: GRIL has built a solid execution engine, which has helped it grow its profit 12.3x in the past 10 years. Its entire growth is funded by internal accruals with dilution accounting for just 2.2% of net worth. In this growth journey, a conservative stance on leverage, hawk-eye focus on cash flow, and prudent selection of projects have enabled GRIL to build a formidable infra execution franchise. Given its conservative stance, it has forged strong partnerships with financial institutions and enjoys among the lowest interest rates for under construction project debt, working capital and non-fund-based limits. This has now extended to completed projects, wherein GRIL is able to raise top-up loans at lowest rates vs. peers.

 Well-diversified order book geographically, segment diversification key: For GRIL, neither scale nor diversification is an issue. In the near to medium term, the focus will remain on central government funded roads and railways projects (including high-speed rail, metro, regional rapid transport system). In the long term, GRIL is open to bidding for new segments, provided the projects are funded by multilateral agencies, central government or state governments (financial closure should be in place) and are not margin or balance sheet dilutive. GRIL may not compromise quality for growth, and we believe that, with slight aggression, it may be able to get a higher market share in the existing segments only.

 Monetisation of HAM portfolio will lead to further rerating: We expect GRIL to grow its equity investments in the HAM portfolio to INR 37bn by FY24E (vs. 1QFY22 – INR 11bn), along with mid-teen equity IRRs. Its likely InvIT/monetisation may lead to substantial cash flow realisation. In the interim, GRIL may take out equity through top-up loans and monetisation will be subject to triggering of desirable valuation thresholds.