The government’s ambitious infrastructure push, outlined in the Interim Budget for FY25, called for spending over ₹143 trillion on infrastructure between FY24 and FY30. This massive investment has certainly justified the heightened interest of domestic investors in the sector.
What sets these midcap players apart is their exceptional ability to maximize capital efficiency in a capital-intensive sector like infrastructure. While the industry average ROCE hovers around 15%, these companies consistently deliver above-average returns, earning them a spot in institutional investors’ portfolios.
Here’s a closer look at these three champions of capital efficiency.
#1 Ceigall India Ltd
Leading the list is Ceigall India Ltd, an infrastructure construction company specializing in complex structural projects such as elevated roads, flyovers, bridges, railway overpasses, tunnels, highways, expressways, and runways.
With a market capitalization of ₹5,964 crore and a remarkable ROCE of 30%, Ceigall stands out as the top performer in terms of capital efficiency, boasting the highest ROCE among its industry peers.
After a sharp dip in share prices to ₹297 in the second half of November, the stock has shown some recovery, climbing to ₹342 as of 3 December 2024. Despite this recent rebound, the share price remains 17% below its listing price of ₹413.
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This drop in Ceigall India’s share price can likely be attributed to a decline in key financial metrics—sales, Ebitda (earnings before interest, taxes, depreciation, and amortization), and net profit—between the June and September 2024 quarters.
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The slowdown in sales may stem from a combination of factors, including a significant reduction in government spending due to elections, heightened competition in the infrastructure construction sector, and potential delays in project execution.
Despite these challenges, the company has garnered notable interest from institutional investors. ICICI Prudential Life Insurance Co. Ltd acquired a 1.68% stake as an anchor investor at the time of listing in August, while HDFC Small Cap Fund picked up a 1.25% stake in September.
This confidence could be linked to Ceigall’s robust order book, which stood at over ₹12,000 crore as of September, according to its latest investor presentation. Also, from a long-term perspective, the company’s growth trajectory remains impressive.
Over the past three years, sales have grown at a compounded annual growth rate (CAGR) of 51%, rising from ₹873 crore to ₹3,029 crore as of September 2024. Ebitda grew at a CAGR of 26%, climbing from ₹160 crore to ₹518 crore during the same period, while net profits compounded at 38% between FY21 and FY24.
Currently trading at a price-to-earnings (PE) ratio of 20x, Ceigall is undervalued compared to the industry median of 27x, making it one of the most attractively priced stocks in its segment.
Over the last two decades, Ceigall has transformed from a small construction firm into an established engineering, procurement and construction (EPC) player with expertise in designing and executing complex road and highway projects, including specialized structures. With its strong order book and steady financial performance, the growing interest from domestic institutional investors appears well-justified.
#2 H.G. Infra Engineering Ltd
Next on the list is H.G. Infra Engineering Ltd, a road infrastructure company specializing in EPC services, as well as the maintenance of roads, bridges, flyovers, and other infrastructure projects.
With a market capitalization of ₹9,293 crore and a current Return on Capital Employed (ROCE) of 24%, H.G. Infra earns the second spot.
While the quarterly results for March showed strong growth, the subsequent quarters painted a less favourable picture. For the quarter ended September, sales dropped 41% from ₹1,528 crore to ₹902 crore, Ebitda declined 29% from ₹312 crore to ₹220 crore, and net profit halved from ₹163 crore to ₹81 crore compared to the June quarter.
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This decline can likely be attributed to reduced government spending due to elections, challenges in project execution, or cost pressures within the company’s operations. Additionally, the promoter holding decreased by 2.75% in the September quarter—the first such reduction in five years.
These challenges were reflected in the company’s share price, which fell from ₹1,820 at the end of June to ₹1,550 by the end of September. The stock is currently trading at ₹1,426. However, over the long term, the share price has delivered a CAGR of 43% over the last five years, highlighting its resilience and potential for recovery.
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Aditya Birla Sun Life Flexi Cap Fund acquired a 1.13% stake in H.G. Infra Engineering Ltd, as per exchange filings for the quarter ended September.
This decision may have been driven by the company’s strong track record of successful project execution and a robust order book of ₹16,624 crore as of 30 September, according to its latest investor presentation.
For context, H.G. Infra has demonstrated impressive growth over the past five years. Sales have grown at a CAGR of 22%, rising from ₹2,014 crore in FY19 to ₹5,378 crore in FY24. Ebitda increased at a CAGR of 29%, climbing from ₹305 crore to ₹1,064 crore during the same period. Meanwhile, net profits surged from ₹127 crore to ₹539 crore, reflecting a CAGR of 33%.
Currently, the company’s shares trade at a PE ratio of 17.8x, compared to an industry median of 26.8x. Over the past decade, the company’s median PE stood at 10.8x, while the industry’s median was 17.8x, indicating potential undervaluation.
In the FY24 annual report, chief financial officer Rajiv Mishra outlined the company’s growth vision. He said that H.G. Infra aims to achieve 15% to 20% revenue growth in the coming years while maintaining steady margins of 15% to 16%. He also highlighted the company’s entry into the solar segment, along with its focus on digital transformation, automation, and strategic capital expenditures, as key drivers for sustainable growth.
#3 G. R. Infraprojects Ltd
Rounding out the list is G.R. Infraprojects Ltd, a company that has designed and constructed over 100 road projects spanning 16 states across India. An integrated EPC company, G. R. Infraprojects boasts extensive expertise in designing and executing various road and highway projects.
With a market capitalization of ₹15,681 crore and a current ROCE of 17%, the company secures its spot in our rankings.
However, recent quarters have shown signs of strain. For the quarter ended September, sales dropped 31% to ₹1,394 crore from ₹2,030 crore in the previous quarter. Ebitda also saw a marginal decline of 4%, slipping from ₹368 crore to ₹353 crore over the same period.
This significant downturn can likely be attributed to reduced revenues from the company’s Build, Operate, and Transfer (BOT)/annuity projects and EPC segments, which impacted overall project execution and profitability. The slowdown in government spending ahead of elections also contributed to the decline.
As a result, the company’s stock price took a hit. From trading at around ₹1,840 in June, it fell to ₹1,490 in August before recovering slightly to ₹1,630 as of 3 December.
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However, SBI Nifty Smallcap 250 Index Fund acquired an 8.81% stake, and the HDFC Manufacturing Fund picked up a 2.45% stake in G R Infraprojects Ltd, as per exchange filings for the quarter ending September 2024.
A key factor driving investor interest is the company’s robust order book, which stood at ₹14,640 crore as of September 2024.
Looking at long-term performance provides further perspective. Over the past five years, G R Infraprojects has achieved steady growth. Sales have grown at a CAGR of 11%, rising from ₹5,283 crore in FY19 to ₹8,980 crore in FY24. Ebitda also increased at a CAGR of 11%, climbing from ₹1,284 crore to ₹2,122 crore during the same period. Net profit grew from ₹717 crore to ₹1,323 crore, reflecting a CAGR of 9%.
The company’s stock is currently trading at a PE ratio of 17x, significantly below the industry median of 26.8x. Over the past decade, the company’s median PE stood at 12.8x, compared to the industry median of 17.8x, suggesting potential undervaluation.
In the FY24 annual report, managing director Ajendra Kumar Agarwal outlined ambitious plans for FY25, targeting order inflows of ₹15,000 crore to ₹20,000 crore. The company aims to focus on road, rail, metro, and power transmission projects while exploring opportunities in the water and building segments. Agarwal emphasized that diversification into non-road sectors could help boost margins as the company develops its expertise in these areas.
Build wealth with infrastructure?
The growing interest of mutual funds in the three midcap infrastructure stocks listed above is notable, particularly since these investments come at a time when all three companies have reported challenging quarters. A key factor behind this temporary dip appears to be the recent slowdown in government capital expenditure due to elections.
Despite this, the robust order books of these companies, coupled with government initiatives and investments aimed at giving infrastructure a significant boost, seem to have instilled confidence among domestic investors.
What’s more, these firms have demonstrated their prowess in efficiently managing capital and maximizing returns, setting themselves apart in a capital-intensive sector.
For more such analysis, read Profit Pulse.
How these strategic bets by mutual funds will unfold remains an interesting narrative to follow.
Note: This article relies on data from www.Screener.in, www.Trendlyne.com, and www.Tijorifinance.com. In cases where data from these sources was unavailable, alternative but widely accepted sources have been used.
The purpose of this article is to share interesting charts, data points, and thought-provoking opinions. It is not a recommendation. Readers are strongly advised to consult their financial advisor before making any investment decisions. This article is strictly for educational purposes only.
About the author: Suhel Khan has been a passionate follower of the markets for over a decade. During this time, he served as the Head of Sales & Marketing at a leading equity research organization in Mumbai. Currently, he dedicates his time to analyzing the investments and strategies of India’s top investors.
Disclosure: The writer and his dependents do not hold any of the stocks discussed in this article.
