HG Infra IPO: Issue opens today; brokerages recommend 'subscribe'
HG Infra Engineering hit primary market on Monday, launching its Rs 462 crore initial public offering (IPO) in a price band of Rs 263-270 per share.
The IPO consists of a fresh issue of shares aggregating up to Rs 300 crore (65 per cent of the issue size) and an offer for sale of Rs 162 crore (35 per cent of the issue size) by the promoters and other existing shareholders.
The issue will close on February 28.
The Jodhpur-based Engineering, procurement and construction (EPC) player on Saturday garnered over Rs 138 crore from anchor investors.
HG Infra will not receive any proceeds from the offer for sale. The money raised through fresh issue will be used for purchasing capital equipment (Rs 90 crore), repayment/prepayment of certain indebtedness (Rs 116 crore) and general corporate purposes.
Here's what brokerages recommend on the issue:
At the higher end of the price band of Rs 270, the issue is priced at P/E of 35.7x (post dilution) on FY17 and 30.1x on H1FY18 (annualized) basis, (vs listed peers like Dilip Buildcon trading at 34.8x its FY17 EPS, PNC Infratech at 35.5x and J Kumar Infraprojects at 23.6x). At this valuation, the issue seems fully priced. The company has witnessed good financial improvement over FY14-17 (CAGR revenue 31 per cent, PAT 42 per cent). The opportunities that are expected to arise given the infrastructure investment plans made by the government are likely to be positive for players like HG Infra. Given the mature valuations, investors can subscribe to the issue from a long term perspective. It must be noted that, owing to the current market volatility and issue being offered at full valuation, it may cap listing gains.
At the upper end of the price band, the P/E multiple works out to be 27x (pre issue equity base) and 33x ( post issue equity base) its FY17 EPS. This post issue valuations is largely in-line with industry average valuations and 10-30 per cent discount from valuation of industry leaders like Dilip Buildcon and KNR construction. However, in view of the limited track record (the company has grown enormously only in the last 2-3 years) and concentrated order book (over 95 per cent of order book concentrated in 2 states), we would like to see more consistent performance from the company in future. Hence, we recommend ‘Neutral’ on the issue.
Motilal Oswal Securities
HG Infra is a strong EPC player in the road sector with an excellent track record. It's strength lies in a) large fleet of in house equipment so as to ensure timely execution of projects, b) one of the leanest working capital profile in the industry of 35 days vs. industry average of ~100 days; c) one of the highest return ratios in the construction space d) superior balance sheet with D/E ratio 0.3x post issue. At the higher end of price band, the issue is valued at 33x FY17 EPS (post dilution), which appears attractively priced considering the above factors. Hence we recommend SUBSCRIBE for long term investment.
At IPO price band of Rs 263-270, stock is available at 23.9-24.6x FY18E rough cut EPS. Its strong execution capabilities along with healthy orderbook & strong opportunities ahead lends us comfort over robust execution, going forward. Hence, we recommend SUBSCRIBE on issue.
India's sovereign debt rating could be downgraded due to various factors, including changes in tax or financial policy or a decrease in India's foreign exchange reserves. India's foreign exchange reserves have grown consistently in the past. However, any decline in foreign exchange reserves could adversely affect the valuation of the Indian Rupee and could result in reduced liquidity and higher interest rates that could adversely affect HG Infra’s future financial performance and the market price of the equity shares and could result in a downgrade of India's debt ratings.
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