India
NRI
Upcoming IPO for Galaxy Surfactants Ltd
ISSUE HIGHLIGHTS
Incorporated on January 21, 2003, H G Infra Engineering Limited (“H G Infra”) is an Infrastructure Construction, Development and Management Company with extensive experience in the focus area of Road Projects, including Highways, Bridges and Flyovers. Their main business operations include:
Providing Engineering, Procurement and Construction (“EPC”) Services on a fixed-sum turnkey basis
Undertaking Civil Construction and related Infrastructure Projects on item rate and lump sum basis, primarily in the Roads and Highway sector.
H G Infra has also forayed into executing Water Pipeline Projects and is currently undertaking 2 Water Supply Projects in Rajasthan on turnkey basis.
H G Infra is pre-qualified to bid independently on an annual basis for bids by National Highways Authority of India (“NHAI”) and Ministry of Road Transport and Highways (“MoRTH”) for contract values of up to Rs.806.66 crore based on the company’s technical and financial capacity as on March 31, 2017.
The company has executed or is executing projects across various states in India covering Rajasthan, Uttar Pradesh, Haryana, Uttarakhand, Maharashtra and Arunachal Pradesh. During the last 5 years, H G Infra has completed 13 projects above the contract value of Rs.40 crore in the Roads and Highways sector aggregating to a total contract value of Rs.1,674.89 crore.
As of November 30, 2017, H G Infra had a total Order Book of Rs.3,707.81 crore, consisting of 21 projects in the Roads and Highways sector, 4 Civil Construction Projects and 2 Water Supply Projects.
ISSUE DETAIL
• Issue Open: Feb 26, 2018 - Feb 28, 2018
• Issue Type: Book Built Issue IPO
• Issue Size: Rs.457.80~Cr – 462.00^ Cr
• Price Band: Rs.263 – 270
• Bid Lot: 55 Equity Shares and multiple thereof
• Listing At: BSE, NSE
BRIEF FINANCIAL DETAILS
BUSINESS OVERVIEW
H G Infra Engineering Limited (“H G Infra”) is an Infrastructure Construction, Development and Management Company with extensive experience in the focus area of Road Projects, including Highways, Bridges and Flyovers.
Their main business operations include:
Providing Engineering, Procurement and Construction (“EPC”) Services on a fixed-sum turnkey basis and
Undertaking Civil Construction and related Infrastructure Projects on item rate and lump sum basis, primarily in the Roads and Highway sector.
H G Infra has also forayed into executing Water Pipeline Projects and is currently undertaking 2 Water Supply Projects in Rajasthan on turnkey basis which includes the Designing, Construction, Operation and Maintenance of the project.
The company has executed or is executing projects across various states in India covering Rajasthan, Uttar Pradesh
Haryana, Uttarakhand, Maharashtra and Arunachal Pradesh. During the last 5 years, H G Infra has completed 13 projects above the contract value of Rs.40 crore in the Roads and Highways sector aggregating to a total contract value of Rs.1,674.89 crore, which included Construction, Improving, Widening, Strengthening of two and four lane Highways, Construction of High Level Bridge and Construction of Earthen Embankment, Culverts and Cart Track Underpasses.
As on November 30, 2017, H G Infra has 21 ongoing projects in the Roads and Highways sector which includes Construction, Improving, Widening, Strengthening, Upgradation and Rehabilitation of two, four and six lane Highways, construction of High Level Bridge and construction of Road Network. The Order Book for these ongoing projects in the Roads and Highways sector amounted to Rs.3,585.31 crore as on November 30, 2017, accounting for 96.70% of their total Order Book.
As of November 30, 2017, H G Infra had a total Order Book of Rs.3,707.81 crore, consisting of 21 projects in the Roads and Highways sector, 4 Civil Construction Projects and 2 Water Supply Projects.
H G Infra is pre-qualified to bid independently on an annual basis for bids by National Highways Authority of India (“NHAI”) and Ministry of Road Transport and Highways (“MoRTH”) for contract values of up to Rs.806.66 crore based on the company’s technical and financial capacity as on March 31, 2017. While they independently execute the projects where they are pre-qualified to bid on an independent basis, they also form project specific joint ventures and consortiums with other infrastructure and construction companies, in particular, where they are not pre-qualified to bid independently or when a project requires them to meet specific eligibility requirements in relation to certain large projects, including requirements relating to particular types of experience and financial resources.
H G Infra has received a letter of appreciation in the year 2012 from Larsen and Toubro Ltd for being the most quality consciousness sub-contractor. They have also received a bonus from the Chief Engineer, National Highways, PWD Lucknow for early completion of widening and strengthening of NH-96 Faizabad-Allahabad Road (from zero kilometers to 46.470 kilometers) in Uttar Pradesh.
H G Infra has also executed Road Construction contracts as a sub-contractor for their private sector clients such as Tata Projects Ltd and IRB-Modern Road Makers Pvt. Ltd. Their quality of work and project execution skills has allowed them to enhance their relationships with existing clients and to secure projects from new clients. For instance, H G Infra has been recently awarded 7 EPC contracts in Maharashtra for an aggregate contract value of Rs.1,904.59 crore by MoRTH.
While their principal business of civil construction comprises of projects in the Roads and Highways sector, they were engaged in the year 2013 as the sub-contractor to execute 2 water supply projects in Rajasthan on a single responsibility turnkey basis, which includes the responsibility of Designing, Building and maintaining the projects.
COMPETITIVE STRENGTHS
Established Roads and Highways sector focused construction developer
H G Infra has an experience of over 14 years in construction and development of major infrastructure road projects including Highways, Bridges, Flyovers and other related Infrastructure Activities, across various states in India covering Rajasthan, Uttar Pradesh Haryana, Uttarakhand, Maharashtra and Arunachal Pradesh. The revenue from execution of projects in the Roads and Highways sector constituted approximately 86%, 86.02%, 89.57%, 85.95% and 92.89% of their total consolidated revenue in the 6 months ended Septembber 30,2017 and Fiscals 2017, 2016, 2015 and 2014, respectively. Their primary focus on the Roads and Highways sector has helped them in gaining technical expertise of undertaking projects of different sizes and involving varying degree of complexity while simultaneously helping them to also develop quality control systems, acquire a fleet of modern construction equipment and employ manpower to supplement the growth of their construction business.
As on November 30, 2017, their equipment base comprised of 1,064 construction equipment comprising of HMPs, CBPs, crushers, excavators, loaders, dozers, sensor pavers and transportation vehicles from reputed global equipment suppliers. To support their growth and execution strategy, they employed approximately 2,447 employees as of November 30, 2017, which includes 2,130 skilled workers such as qualified engineers, management professionals and 317 unskilled workers.
Efficient business model
Company’s growth is largely attributable to their efficient business model which involves careful identification of their projects and cost optimisation, which is a result of executing their projects with careful planning and strategy. This model has facilitated them in maximising the efficiency and increasing their profit margins. Additionally, their fleet of modern construction equipment ensures better control over execution and timely completion of projects. The company follows a strategic approach during the pre-bidding stage, which involves undertaking technical surveys and feasibility studies and analysing the technical and design parameters and the cost involved in undertaking the project.
Their strategic approach during the pre-bidding stage enables them to bid at competitive prices and helps them to successfully win projects. Once they win a bid, their focus is to ensure high quality of construction during the execution stage of the project, as a result of which, they are able to reduce maintenance and repair costs and therefore realize higher margins during the operation and maintenance stage of the project.
Through their experience of executing projects of varying sizes, H G Infra has developed internal systems and processes which help them in effective execution of their ongoing projects. Their experienced engineering and management teams are responsible for ensuring that they execute the project in a systematic and cost effective manner by monitoring operational costs, administrative costs and finance costs at every stage of the project cycle and applying checks and controls to avoid any cost and time overruns.
Strong project management and execution capabilities
Over the last 5 years, H G Infra has executed 13 projects above the contract value of Rs.40 crore in the Roads and Highways sector. Their focus is to leverage their strong project management and execution capabilities in order to complete their projects in a timely manner while maintaining high quality of construction.
Over the years, they have consistently invested and created a fleet of modern construction equipment to ensure high quality and timely execution of their projects. In the last 3 years, H G Infra has invested Rs.172.74 crore towards procurement of plant and machinery for their projects. They are one of the few players in India to own a large fleet of modern construction equipment including HMPs, CBPs, crushers, excavators, loaders, dozers, sensor pavers and transportation vehicles, which meet most of the requirements for their ongoing projects. With multiple projects in progress at any given time, ready access to such equipment is essential to execute their ongoing projects efficiently along with timely completion of projects and profitably and to bid for additional complex and challenging projects.
Visible growth through their growing Order Book and improved pre-qualification credentials
The Order Book as of a particular date consists of estimated revenue from unexecuted or uncompleted portions of their ongoing projects, i.e., the total contract value of such ongoing projects as reduced by the value of construction work billed until such date.
Company’s growth strategy has been focused on selecting quality projects with potentially higher margins. By expanding their operations in different geographical regions, they are able to pursue a broader range of project tenders and therefore maximize their business volume and contract profit margins. The order book has grown significantly over the last three years, from Rs.1,067.70 crore as of March 31, 2015, to Rs.1,446.27 crore as of March 31, 2016 and Rs.4,019.09 crore as of March 31, 2017, respectively. As of November 30, 2017, the total order book was Rs.3,707.81 crore, with government contracts accounting for 67.71% and private contracts accounting for 32.29% of the Order Book.
H G Infra has pre-qualified to bid independently on an annual basis for bids by NHAI and MoRTH of contract value up to Rs.806.66 crore based on their technical and financial capacity. They also form project specific joint ventures and consortiums with other infrastructure and construction companies, in particular, where they are not pre-qualified to bid independently or when a project requires them to meet specific eligibility requirements in relation to certain large projects, including requirements relating to particular types of experience and financial resources.
Experienced management team
Company’s management team is well qualified and experienced in the construction industry and has been in many ways responsible for the growth of their operations. In particular, their Promoters and Directors, Girish Pal Choudhary, Vijendra Singh Choudhary and Harendra Singh Choudhary have about 20 years of experience in the infrastructure development sector, and have been instrumental in driving their growth since inception of their business. Their motivated team of management and key managerial personnel along with their internal systems and processes complement each other to enable them to deliver high levels of client satisfaction.
STRATEGIES
Continue focusing on the EPC business in the Roads and Highways sector and enhancing execution efficiency
Company’s primary focus is to strengthen their market position in India in developing and executing EPC projects in the Roads and Highways sector. Over the next few years, they will continue to focus on the operation, maintenance and development of their existing projects while seeking opportunities to expand their EPC projects in the Roads and Highways sector. They intend to capitalize on their experience and project execution expertise and continue to selectively pursue EPC projects in the Roads and Highways sector, both independently and in partnership with other players.
CRISIL Research expects investment in road projects to double to Rs.10.70 trillion over next 5 years. Further, given the current financial crunch being faced by build-operate-transfer (BOT) players, CRISIL Research expects the share of Engineering, Procurement, Construction (EPC)/ Cash Contract projects to widen, especially in low-traffic-volume projects under NHDP-Phase IV, over the next 5 years (CRISIL Research, Roads Sector in India, January, 2018). Given the Government’s focus on improving infrastructure in India, the Roads and Highways infrastructure sector has high potential for growth and their experience and track record in the construction business provides them with a competitive advantage in pursuing future opportunities.
To focus on efficient project execution by adopting industry best practices and advanced technologies to deliver quality projects.
To continue to invest in modern construction equipment to ensure continuous and timely availability of equipment critical to their business.
To attract, train and retain qualified personnel and skilled laborers and further strengthen the workforce.
To offer their engineering and technical personnel a wide range of work experience, in-house training and learning opportunities.
To continue focusing on improving their internal systems and processes and upgrade the IT systems.
To utilize advanced technologies, designs, engineering and project management tools to increase productivity and maximize asset utilization in construction activities.
Selectively expand the geographical footprint
The company continues their strategy of diversifying and expanding their presence in different states for the growth of their business. They are selective when they expand in a new location and typically look to geographies where they can deliver high-quality services without experiencing significant delays and interruptions on account of adverse climatic conditions or regulatory delays.
Their strategy of selective expansion helps them in mitigating diversification related risks. They currently expect that a significant portion of their geographic expansion will be in states such as Gujarat, Punjab and Madhya Pradesh, which have favourable geographic and climatic conditions. Through further diversification of their operations geographically, they hope to hedge against risks in specific areas or projects and protect them from fluctuations resulting from business concentration in limited geographical areas.
Selectively explore hybrid annuity based model to optimize the project portfolio
The company undertake majority of their projects on the EPC basis and while their focus primarily is to grow their EPC business, they also seek to evaluate opportunities of undertaking projects on the newly introduced hybrid annuity model (“HAM”) by the government. This model aims to lower the financial burden on the concessionaire during project implementation phase. In projects undertaken on HAM basis, the developer is responsible to meet only 60% of the total project cost but undertakes the entire risk of operations and maintenance, while the government bears 40% of the total project cost and undertakes the entire toll collection risk.
The introduction of the HAM model in India provides opportunities for private developers to participate in the annuity based model but, unlike the “Build Operate Transfer” model, does not expose the developers to bear the entire financial risk and the revenue risk. CRISIL Research expects that out of the total Rs.4.30 trillion expected to be invested in national highways upto Fiscal 2022, about Rs.1.40 trillion will be through HAM mode (CRISIL Research, Roads Sector in India, January, 2018).
The company seeks to selectively explore opportunities of undertaking projects on HAM basis by evaluating the investments required and selecting projects where the risk and reward profile is favourable.
Diversify beyond projects in the Roads and Highways sector by leveraging existing capabilities
While company’s primary focus is on development and execution of EPC projects in the Roads and Highways sector, as part of their business growth strategy, they have also diversified in executing water supply projects and the company is currently undertaking 2 water supply projects on turnkey basis in Rajasthan. Due to the increasing levels of the Government’s focus and investment in infrastructure in India, certain segments such as Irrigation, Airport Runways, Waterways and Development of Smart Cities provide them with exciting opportunities to further develop their business and achieve higher profitability
For instance, the government introduced the Smart Cities Mission in June 2015 for the development of 100 smart cities over 5 years (Fiscal 2017 onwards) to meet the infrastructure and services expectations of citizens. 60 cities have received funding by May 2017. The total estimated cost of projects is Rs.13.20 billion (CRISIL Research, Roads Sector in India, January, 2018).
As part of their business growth strategy, they intend to diversify into, and shall consider bidding for, projects related to construction and maintenance of airport runways, projects related to railways and metros including earthwork and water treatment and sewerage related projects.
In order to mitigate the risk of over-diversification, the company seek to expand in businesses that require execution skills that are similar to their Roads and Highways construction business and allow them to leverage their past experience and maximize the use of their manpower, equipment and new materials in their expansion and avoid additional investment in new equipment wherever possible.