HEC Infra Projects Q2 FY26: Strong Revenue Surge Masks Margin Pressure

With a market capitalisation of ₹158.92 crores, HEC Infra's stock has delivered contrasting returns across timeframes—surging 195.63% over two years whilst declining 3.82% in the past twelve months. The company's Q2 FY26 performance showcased impressive top-line expansion, with net sales more than doubling year-on-year, though operating margins contracted from their March 2025 peak, raising questions about the sustainability of profitability amidst aggressive growth.

The quarter's standout feature was the revenue acceleration, with net sales reaching ₹40.50 crores—a 102.10% year-on-year jump from ₹20.04 crores in Q2 FY25 and a 45.11% sequential increase from ₹27.91 crores in Q1 FY26. This growth trajectory suggests robust order book execution and strong demand for the company's specialised electro-mechanical and solar EPC services. However, the profit after tax margin of 5.51% in Q2 FY26, whilst improved from the prior year's 6.14%, remained significantly below the 12.19% achieved in Q4 FY25, indicating margin pressure as the company scales operations.

Financial Performance: Growth Momentum Amidst Margin Volatility

HEC Infra's Q2 FY26 results revealed a company in aggressive expansion mode, with revenue growth significantly outpacing profitability improvements. The ₹40.50 crores in net sales represented the second-highest quarterly revenue in the company's recent history, trailing only Q4 FY25's ₹46.50 crores. On a half-yearly basis for H1 FY26, the company generated ₹68.41 crores in revenue, marking a substantial 79.62% increase compared to H1 FY25's ₹38.06 crores.

Operating profit before depreciation, interest, and tax (excluding other income) stood at ₹3.53 crores in Q2 FY26, translating to an operating margin of 8.72%. Whilst this represented a sequential improvement from Q1 FY26's 9.32%, it remained considerably below the 19.20% achieved in Q4 FY25. The margin compression suggests that the company's rapid revenue growth has come at the cost of operational efficiency, possibly due to competitive pricing pressures or higher execution costs on new projects.

Interest expenses increased to ₹0.88 crores in Q2 FY26 from ₹0.73 crores in the previous quarter, reflecting higher working capital requirements to support the expanding business. The company's profit before tax of ₹3.05 crores represented a 75.29% sequential jump and a remarkable 182.41% year-on-year surge. Tax expenses of ₹0.81 crores resulted in an effective tax rate of 26.56%, normalising from the anomalous rates seen in earlier quarters.

On an annual basis, FY25 showcased HEC Infra's transformation, with net sales of ₹112.00 crores marking a 53.40% increase from FY24's ₹73.00 crores. The company turned profitable with a net profit of ₹9.00 crores in FY25 compared to ₹4.00 crores in FY24, demonstrating improved operational leverage. The operating margin (excluding other income) expanded to 11.60% in FY25 from 6.80% in FY24, suggesting that the recent quarterly margin compression may be temporary rather than structural.

Return on Capital: Improving Efficiency Signals Turnaround

One of the most encouraging aspects of HEC Infra's financial profile is the significant improvement in return on equity (ROE). The latest ROE of 18.18% represents a substantial leap from the historical average of 9.02%, indicating that the company is generating increasingly attractive returns on shareholder capital. This improvement reflects both enhanced profitability and more efficient capital deployment, with the company's net profit growing faster than its equity base.

However, the return on capital employed (ROCE) tells a more cautious story. At 5.89% for the latest period, ROCE remains below the 5.85% average and significantly trails the industry benchmark for healthy construction companies. This metric suggests that whilst the company is improving its equity returns, the overall efficiency of total capital deployment—including debt—remains suboptimal. The modest ROCE reflects the capital-intensive nature of EPC projects and the company's relatively high debt levels.

The balance sheet reveals a company undergoing structural changes. Long-term debt declined dramatically to ₹0.32 crores in FY25 from ₹24.62 crores in FY24, suggesting a significant deleveraging effort. However, current liabilities surged to ₹52.53 crores from ₹19.36 crores, primarily driven by increased trade payables (₹11.71 crores) and other current liabilities. This shift indicates that the company is increasingly relying on vendor credit and working capital management rather than long-term borrowing to fund operations.

Cash Flow Dynamics: Working Capital Strain Evident

The cash flow statement for FY25 reveals significant working capital pressures accompanying HEC Infra's growth trajectory. Operating cash flow turned negative at ₹26.00 crores, driven primarily by adverse working capital changes of ₹35.00 crores. This substantial working capital consumption reflects the typical challenges of EPC businesses, where companies must fund project execution before receiving milestone payments from clients.

Despite generating ₹11.00 crores in profit before tax, the company's cash position deteriorated from ₹11.00 crores at the start of FY25 to ₹2.00 crores by year-end. This ₹9.00 crores decline in cash reserves underscores the capital intensity of the business and the lag between revenue recognition and cash collection. The company partially offset the operating cash outflow through financing activities, raising ₹16.00 crores during the year, likely through a combination of equity issuance and short-term borrowings.

Industry Context: Construction Sector Headwinds Persist

HEC Infra's performance must be viewed against the broader construction sector backdrop, which has faced significant challenges in recent periods. The construction industry delivered a negative 22.27% return over the past year, making HEC Infra's 3.82% decline appear relatively resilient. The company's 18.45 percentage point outperformance versus its sector peers suggests that its specialised focus on electro-mechanical systems and solar EPC projects may be providing some insulation from broader industry headwinds.

The company's order book execution appears robust, with the consistent quarter-on-quarter revenue growth indicating healthy project pipelines. The EPC sector typically operates on thin margins, and HEC Infra's 8-12% operating margins align with industry norms. However, the volatility in margins across quarters—ranging from 5.84% to 19.20% over the past seven quarters—suggests that project mix and execution efficiency vary considerably, introducing earnings unpredictability.

The renewable energy focus, particularly in solar projects, positions HEC Infra favourably for long-term growth given India's ambitious clean energy targets. However, this segment also faces intense competition and pricing pressures as larger players increasingly enter the solar EPC space. The company's ability to maintain margins whilst scaling operations will be critical to its investment thesis.

Peer Comparison: Premium Valuation Reflects Growth Expectations

HEC Infra commands a notable valuation premium relative to its construction sector peers, trading at a price-to-earnings ratio of 16.69x compared to the peer group average of approximately 13x. More striking is the price-to-book ratio of 3.03x, which stands significantly above peers like RKEC Projects (0.91x) and Udayshivakumar (0.82x). This premium valuation suggests that the market is pricing in expectations of sustained growth and margin expansion.

The company's ROE of 9.02% places it in the middle of the peer pack, trailing Udayshivakumar's 9.44% but ahead of RKEC Projects' 8.86%. However, several peers report zero or negative ROE, making direct comparisons challenging. HEC Infra's debt-to-equity ratio of 0.67 indicates moderate leverage, lower than Mayasheel Ventures (1.46x) but higher than Udayshivakumar (0.23x), suggesting a balanced approach to capital structure.

The valuation premium appears justified by HEC Infra's superior growth trajectory—its 29.90% five-year sales CAGR and 67.90% EBIT growth significantly outpace most peers. However, investors must assess whether this growth can be sustained and whether margins can stabilise at healthy levels to justify the premium multiples. The company's micro-cap status (₹158.92 crores market capitalisation) also introduces liquidity considerations that may contribute to valuation volatility.

Valuation Analysis: Fair Value Despite Growth Premium

At the current price of ₹146.63, HEC Infra trades at a P/E ratio of 16.69x based on trailing twelve-month earnings, representing a reasonable multiple for a company delivering 29.90% sales growth. The price-to-book ratio of 3.03x appears elevated on an absolute basis but becomes more justifiable when considering the improving ROE of 18.18%, which suggests the company is creating value above its book value.

The stock's PEG ratio of 0.26 indicates that the current valuation is attractive relative to growth rates, with the company trading at a significant discount to its growth potential. However, investors should exercise caution with PEG ratios for small-cap companies, as earnings volatility can distort this metric. The EV-to-EBITDA multiple of 12.86x and EV-to-sales of 1.62x align with typical construction sector valuations, neither appearing egregiously expensive nor particularly cheap.

The stock has experienced significant volatility, trading between a 52-week low of ₹82.01 and a high of ₹184.10. At ₹146.63, it sits 20.35% below its peak but 78.80% above its trough, suggesting the market is still determining fair value for this growth story. The valuation grade of "Fair" assigned by proprietary analysis indicates that the stock is reasonably priced at current levels, neither offering a significant margin of safety nor appearing overvalued.

Shareholding Pattern: Stable Promoter Base, Limited Institutional Interest

HEC Infra's shareholding structure reveals a promoter-dominated company with limited institutional participation. Promoter holding has remained stable at 74.93% over the past three quarters (Jun'25 to Sep'25), following a 1.73 percentage point increase in Mar'25 from 73.20%. This stable and substantial promoter stake signals strong alignment between management and minority shareholders, whilst the absence of pledged shares eliminates concerns about financial distress.

The complete absence of foreign institutional investor (FII) and mutual fund holdings reflects the company's micro-cap status and limited liquidity, which typically deter larger institutional investors. Other domestic institutional investor (DII) holdings have remained steady at 5.48% for the past three quarters after declining from 8.52% in Sep'24. This modest institutional presence of 5.48% suggests that the stock remains largely undiscovered by professional investors, which could present both opportunity and risk.

Non-institutional holdings of 19.58% represent primarily retail and high-net-worth investors. The stability in this segment over recent quarters indicates neither significant accumulation nor distribution by retail participants. For investors considering HEC Infra, the limited institutional ownership could mean the stock is not yet validated by professional investors, or alternatively, that it represents an undiscovered opportunity before institutional interest develops.

Stock Performance: Exceptional Long-Term Gains, Recent Consolidation

HEC Infra's stock price performance presents a tale of two timeframes. Over longer periods, the stock has delivered extraordinary returns—195.63% over two years, 374.53% over three years, and 266.58% over four years. These spectacular gains significantly outpaced the Sensex, generating alpha of 165.06%, 337.33%, and 226.88% respectively. Such performance places HEC Infra amongst the top performers in the micro-cap construction space.

However, recent performance has been more challenging. The stock declined 3.82% over the past year, underperforming the Sensex by 12.95 percentage points. The three-month return of negative 6.81% contrasts sharply with the Sensex's 5.27% gain, resulting in negative alpha of 12.08%. This recent underperformance suggests that after the multi-year rally, investors are reassessing valuations or awaiting clearer evidence of sustained profitability.

Year-to-date performance of 24.32% demonstrates resilience, outpacing the Sensex by 15.82 percentage points. The six-month return of 33.62% indicates strong momentum in the first half of 2025, though the subsequent three-month decline suggests this momentum has stalled. The stock's high beta of 1.50 indicates it moves 50% more than the market, making it suitable only for investors with higher risk tolerance who can withstand significant volatility.

Technical Analysis: Mildly Bullish Trend Amidst Mixed Signals

From a technical perspective, HEC Infra currently exhibits a "Mildly Bullish" trend that emerged on October 27, 2025, at ₹140.29, transitioning from a sideways pattern. The stock trades at ₹146.63, positioning it above the 5-day moving average (₹141.09) and 20-day moving average (₹139.60), suggesting near-term strength. However, it remains below the longer-term 100-day (₹151.23) and 200-day (₹132.47) moving averages, indicating resistance overhead.

Technical indicators present mixed signals. The weekly MACD shows a mildly bearish reading whilst the monthly MACD turns bullish, suggesting conflicting momentum across timeframes. The Relative Strength Index (RSI) shows no clear signal on either weekly or monthly charts, indicating the stock is neither overbought nor oversold. Bollinger Bands display mildly bearish signals on the weekly chart but bullish on the monthly, reflecting the recent consolidation phase.

Delivery volumes have surged recently, with a 372.45% increase versus the five-day average, suggesting genuine accumulation rather than speculative trading. The trailing one-month delivery percentage of 49.09% indicates that nearly half of all trades involve actual delivery, a healthy sign for a micro-cap stock. The immediate support level sits at the 52-week low of ₹82.01, whilst resistance emerges at ₹151.23 (100-day moving average) and ultimately at the 52-week high of ₹184.10.

Investment Thesis: Growth Story with Execution Risks

HEC Infra Projects presents a compelling growth narrative supported by robust revenue expansion, improving return on equity, and a favourable position in the solar EPC segment. The company's five-year sales CAGR of 29.90% and EBIT growth of 67.90% demonstrate strong operational momentum. The latest ROE of 18.18% signals that the company is creating value for shareholders, whilst the absence of promoter pledging and stable ownership structure provide governance comfort.

However, significant concerns temper the investment case. The company's ROCE of 5.89% remains anaemic, suggesting inefficient capital deployment despite improving equity returns. Working capital intensity is severe, with negative operating cash flow of ₹26.00 crores in FY25 raising questions about cash generation capability. Margin volatility—ranging from 5.84% to 19.20% across recent quarters—introduces earnings unpredictability that makes forecasting challenging.

The micro-cap market capitalisation of ₹158.92 crores limits liquidity and introduces elevated volatility risk, as evidenced by the stock's 47.62% annualised volatility. The complete absence of institutional investors suggests the stock lacks professional validation, which could mean either undiscovered opportunity or fundamental concerns that deter sophisticated investors. The high debt-to-EBITDA ratio of 12.93 and modest interest coverage of 2.44x leave limited financial flexibility for adverse scenarios.

Key Strengths & Risk Factors

Outlook: What Lies Ahead