HEC Infra Projects Q3 FY26: Strong Revenue Surge Masks Margin Compression Concerns

However, beneath the headline numbers lies a nuanced story of margin compression and elevated interest costs that warrant investor scrutiny. Following the results announcement, the stock responded positively with a 9.03% single-day gain to ₹124.10, though it remains 32.59% below its 52-week high of ₹184.10, reflecting ongoing technical headwinds and investor caution about sustainability.

Financial Performance: Revenue Acceleration Meets Margin Reality

HEC Infra Projects demonstrated exceptional top-line momentum in Q3 FY26, with revenue climbing 41.60% sequentially to ₹57.35 crores from ₹40.50 crores in Q2 FY26. The year-on-year comparison proved even more impressive, with revenue more than doubling from ₹27.54 crores in Q3 FY24—a testament to the company's expanding order book execution and market penetration in the electro-mechanical and solar EPC segments.

Net profit for the quarter reached ₹2.92 crores, representing a healthy 30.94% quarter-on-quarter improvement and a remarkable 104.20% surge year-on-year from ₹1.43 crores. The PAT margin stood at 5.09%, slightly contracting from 5.51% in Q2 FY26 but maintaining parity with the 5.19% recorded in Q3 FY24. This stability in bottom-line margins despite the revenue surge suggests reasonable cost management, though not without challenges.

The nine-month performance for FY26 reveals cumulative revenue of ₹125.76 crores, substantially ahead of the ₹65.60 crores recorded in the corresponding nine-month period of FY25—a growth trajectory that positions the company favourably for exceeding its FY25 full-year revenue of ₹112.00 crores. Nine-month net profit aggregated to ₹6.48 crores compared to ₹3.50 crores in the prior year period, reflecting consistent profitability improvement.

Operational Challenges: Margin Compression and Rising Finance Costs

Whilst revenue growth remains the standout narrative, a closer examination of operational metrics reveals concerning pressure points. The operating margin (excluding other income) compressed to 8.54% in Q3 FY26 from 9.55% in Q3 FY24, representing a 101 basis point deterioration year-on-year. This contraction is particularly notable given that Q4 FY25 recorded an exceptional operating margin of 19.20%, suggesting the company faces challenges in sustaining premium margins as it scales operations.

Interest costs escalated sharply to ₹1.40 crores in Q3 FY26 from ₹0.88 crores in Q2 FY26—a 59.09% sequential jump—and 60.92% higher than the ₹0.87 crores recorded in Q3 FY24. This surge in finance expenses reflects increased working capital requirements to support the aggressive revenue growth, with the interest coverage ratio (EBIT to Interest) averaging a modest 2.24 times over recent periods—a level that provides limited cushion during business downturns.

The company's return on capital employed (ROCE) presents a mixed picture. The half-yearly ROCE reached a record 18.36%, demonstrating improved capital efficiency in the near term. However, the average ROCE over a longer period stands at just 8.44%, whilst the latest annual ROCE of 19.56% suggests recent operational improvements. The average return on equity (ROE) of 8.98% remains below industry benchmarks, though the latest ROE of 18.80% indicates momentum in the right direction.

Balance Sheet Quality: Working Capital Strain Evident

The balance sheet reveals significant working capital pressure accompanying the company's growth phase. Shareholder funds strengthened to ₹53.14 crores as of March 2025 from ₹34.86 crores in March 2024, aided by retained earnings and a modest equity raise. However, long-term debt contracted dramatically to ₹0.32 crores from ₹24.62 crores, whilst current liabilities surged to ₹52.53 crores from ₹19.36 crores—a near tripling that underscores the working capital intensity of the construction business model.

Trade payables increased to ₹11.71 crores from ₹9.64 crores, whilst current assets stood at ₹68.19 crores compared to ₹69.63 crores in the prior year. The cash flow statement for FY25 highlights the strain, with operating cash flow turning negative at ₹-26.00 crores despite positive profit before tax of ₹11.00 crores. This ₹-35.00 crores adverse movement in working capital reflects the capital-intensive nature of project execution and the lag between revenue recognition and cash realisation.

Net debt to equity averaged 0.59, indicating moderate leverage, though the debt to EBITDA ratio of 9.73 times remains elevated by construction sector standards. The company's book value per share stands at ₹49.03, with the current market price of ₹124.10 representing a 2.37 times price-to-book multiple—suggesting investors are pricing in significant growth expectations that must be validated through sustained execution.

Industry Context: Outperforming a Struggling Sector

HEC Infra Projects' performance stands in stark contrast to the broader construction sector's struggles. Over the past year, the company delivered a 3.88% return whilst the construction sector index declined 18.76%—a relative outperformance of 22.64 percentage points. This divergence reflects both the company's operational improvements and the sector's headwinds from delayed project approvals, raw material cost volatility, and margin pressures across the industry.

The company's specialisation in electro-mechanical systems, solar projects, and ELV (Extra Low Voltage) systems positions it favourably within the renewable energy and infrastructure modernisation themes. With India's renewable energy capacity additions accelerating and smart city projects gaining traction, HEC Infra's niche expertise provides a competitive moat. However, the company's micro-cap status (₹122.00 crores market capitalisation) and limited institutional following (5.48% institutional holdings) constrain liquidity and visibility.

Compared to listed peers, HEC Infra Projects trades at a reasonable P/E multiple of 12.62x—below Tarmat's 34.60x and Oval Projects' 13.99x, but above Kay Cee's 9.73x. However, its ROE of 8.98% lags significantly behind Kay Cee's impressive 26.72%, highlighting the efficiency gap the company must bridge. The elevated P/BV of 2.37x relative to most peers (except Kay Cee's 1.78x) suggests the market is pricing in substantial growth expectations that require consistent delivery.

Valuation Analysis: Fair Value with Growth Premium

At the current market price of ₹124.10, HEC Infra Projects trades at a trailing P/E of 12.62x based on the latest twelve-month earnings. This valuation appears reasonable given the company's 36.27% five-year sales CAGR and 61.06% five-year EBIT CAGR, both of which significantly outpace the construction sector average. The PEG ratio of 0.20 suggests the stock may be undervalued relative to its growth trajectory, though this metric should be interpreted cautiously given the company's small scale and execution risks.

The enterprise value to EBITDA multiple of 9.49x and EV to EBIT of 9.53x position the stock in fair value territory, neither obviously cheap nor expensive. The EV to capital employed ratio of 1.86x indicates the market values the company's assets at nearly double their book value, reflecting confidence in management's ability to generate returns above the cost of capital—a confidence that must be validated through sustained ROCE improvement.

The stock's 51.32% distance from its 52-week low of ₹82.01 and 32.59% gap from its 52-week high of ₹184.10 suggests it trades in the middle of its recent range. The valuation grade history shows volatility, with the stock oscillating between "Attractive" and "Fair" valuations over the past six months, currently assessed as "Fair." This assessment acknowledges the company's growth momentum whilst recognising margin pressures and balance sheet constraints.

Shareholding Pattern: Stable Promoter Base, Limited Institutional Interest

The shareholding structure reveals a stable promoter base with 74.93% holding maintained consistently across the past four quarters. Key promoters include Gaurang Parmanand Shah (52.82%), Rupal Gaurang Shah (11.23%), Rahul Gaurang Shah (6.57%), and Paras Engen India Private Limited (4.31%). Importantly, there is zero promoter pledging, eliminating concerns about forced selling or financial distress at the promoter level.

The most notable change occurred in March 2025, when promoter holding increased from 73.20% to 74.93%—a 1.73 percentage point rise that signals promoter confidence in the company's prospects. Since then, the shareholding pattern has remained static across all categories, suggesting neither significant accumulation nor distribution by any investor class.

The complete absence of foreign institutional investors (FIIs), mutual funds, and insurance companies reflects the stock's micro-cap status and limited liquidity. Other domestic institutional investors (DIIs) hold a modest 5.48%, down slightly from 5.86% in December 2024. The non-institutional shareholding of 19.58% comprises retail and other investors. This shareholding structure implies that any institutional interest could drive significant price appreciation, but also means the stock lacks the stability that broader institutional ownership typically provides.

Stock Performance: Impressive Long-Term Gains, Recent Consolidation

HEC Infra Projects has delivered exceptional long-term returns despite recent volatility. The three-year return of 277.78% dramatically outpaces the Sensex's 38.13% gain, generating alpha of 239.65 percentage points. The four-year return of 211.81% similarly eclipses the Sensex's 42.52%, producing 169.29 percentage points of alpha. These figures underscore the wealth creation potential for early investors who identified the company's turnaround story.

However, near-term performance reveals consolidation and correction. The stock declined 11.02% over three months and 17.91% over six months, underperforming the Sensex by 11.34 and 21.68 percentage points respectively. The one-year return of 3.88% trails the Sensex's 7.07%, marking negative alpha of 3.19 percentage points. This recent underperformance reflects profit-booking after the strong multi-year rally, sector headwinds, and investor concerns about margin sustainability.

The stock's high beta of 1.50 (adjusted) classifies it as significantly more volatile than the broader market, with annualised volatility of 51.31% compared to the Sensex's 11.53%. This high-risk profile is characteristic of micro-cap stocks and demands a higher risk tolerance from investors. The risk-adjusted return of 0.08 over one year appears modest compared to the Sensex's 0.61, reflecting the elevated volatility despite positive absolute returns.

Technical Analysis: Mildly Bearish Trend Amid Oversold Conditions

From a technical perspective, HEC Infra Projects currently exhibits a "Mildly Bearish" trend as of February 06, 2026, having transitioned from a "Bearish" classification. The stock trades below all major moving averages—5-day (₹116.02), 20-day (₹113.20), 50-day (₹119.97), 100-day (₹130.11), and 200-day (₹138.01)—a configuration that typically signals sustained downward pressure and lack of buying interest.

The technical indicator summary reveals predominantly bearish signals across timeframes. The MACD shows bearish readings on both weekly and monthly charts, whilst the KST indicator similarly displays bearish to mildly bearish patterns. Bollinger Bands indicate "Mildly Bearish" on the weekly timeframe and "Sideways" on monthly, suggesting consolidation within a downtrend. The On-Balance Volume (OBV) registers as "Mildly Bearish" across both timeframes, indicating that volume patterns do not support a bullish reversal.

However, delivery volume data provides a constructive counterpoint. Delivery volumes surged 215.93% over the trailing one-month period compared to the previous month, with the latest day's delivery percentage at 46.27%. This increase in delivery-based buying suggests accumulation by longer-term investors rather than speculative trading—a potentially positive leading indicator for trend reversal. The immediate support lies at the 52-week low of ₹82.01, whilst resistance clusters around the 20-day moving average at ₹113.20, with stronger resistance at the 100-day (₹130.11) and 200-day (₹138.01) levels.

Investment Thesis: Growth Story with Execution Risks

The investment case for HEC Infra Projects rests on several compelling pillars. The company has demonstrated exceptional revenue growth, with Q3 FY26 revenue more than doubling year-on-year and the nine-month FY26 performance already surpassing FY25 full-year revenue. The five-year sales CAGR of 36.27% and EBIT CAGR of 61.06% rank amongst the strongest in the construction sector, validating management's execution capabilities and market positioning.

The company's specialisation in electro-mechanical systems, solar EPC, and ELV systems aligns with structural growth themes—renewable energy expansion, infrastructure modernisation, and smart city development. With India targeting 500 GW of renewable energy capacity by 2030, HEC Infra's solar project expertise positions it favourably to capture market share. The promoter-driven model with 74.93% holding and zero pledging ensures aligned interests and strategic continuity.

Recent operational improvements are evident in the record half-yearly ROCE of 18.36% and latest annual ROCE of 19.56%, suggesting the company is extracting better returns from its capital base. The fair valuation at 12.62x P/E and PEG ratio of 0.20 implies the market has not fully priced in the growth trajectory, offering potential upside for patient investors.

However, significant concerns temper this optimistic narrative. Operating margin compression from 9.55% to 8.54% year-on-year raises questions about pricing power and cost management as the company scales. The inability to sustain the exceptional 19.20% margin achieved in Q4 FY25 suggests that quarter may have been an anomaly rather than a sustainable level. Rising interest costs (up 60.92% YoY) and elevated debt to EBITDA of 9.73x constrain financial flexibility and increase vulnerability to interest rate movements or business disruptions.

The negative operating cash flow of ₹-26.00 crores in FY25 despite positive profits highlights the working capital intensity and potential cash conversion challenges. The company's micro-cap status, limited institutional ownership (5.48%), and absence of analyst coverage create liquidity constraints and information asymmetry. The high beta of 1.50 and volatility of 51.31% make the stock unsuitable for risk-averse investors or those with short investment horizons.

Outlook: What to Watch in Coming Quarters

The trajectory for HEC Infra Projects over the next 12-18 months will hinge on several critical factors. Investors should closely monitor whether the company can sustain its revenue momentum whilst stabilising or improving operating margins—the acid test of operational excellence. Order book announcements, project execution timelines, and client diversification will provide visibility into revenue sustainability beyond the current fiscal year.

Working capital management and cash flow generation represent perhaps the most critical monitoring points. The company must demonstrate improved cash conversion and reduced working capital intensity to validate the quality of its earnings and reduce dependence on external financing. Any further deterioration in operating cash flows or increase in debt levels would be significant red flags.

Technical factors also warrant attention. A decisive move above the 200-day moving average at ₹138.01 would signal trend reversal and potentially attract momentum-based buying. Conversely, a breach below the 52-week low of ₹82.01 would likely trigger stop-loss selling and further downside. The delivery volume trend, currently showing accumulation, should continue for sustained price appreciation.