Harsha Engineers International IPO Fundamental Analysis (Subscribe for Listing Gain)

Key Business Highlights

The Issuer offers diversified precision engineering products across geographies and end-user industries. Its business comprises:

(i) Engineering business- It manufactures bearing cages (in brass, steel, and polyamide materials), complex and specialized precision stamped components, welded assemblies, brass castings, and cages & bronze bushings. The Issuer has 50-60% of the market share in the organized segment of the Indian bearing cages market and 6.5% of the market share in the global organized bearing cages market for brass, steel, and polyamide cages in FY 21.

Bearing cages are used in the automotive, railways, aviation & aerospace, construction, mining, agriculture, electrical and electronics, renewables sectors, etc. The company manufactures bearing cages, semi-finished brass castings, specialty stamping components, and bronze castings and bushings.

(ii) Solar EPC business- Under this, it provides comprehensive turnkey solutions to all solar photovoltaic requirements. Revenue from solar EPC business aggregated to ? 82.95 crores (FY22), ? 54.19 crores (FY21), and ? 64.19 crores (FY20) respectively contributing 6.28%, 6.20%, and 7.25% respectively to total revenue from operations. The Issuer has an in-house design, engineering, procurement, project management, and O&M team with a combined experience of installing at least 500 MW and more than 60 MW commissioning experience in the rooftop segment as of March 31, 2022.

The products are supplied to customers in over 25 countries covering five continents i.e., North America, Europe, Asia, South America, and Africa. More than 60% of the revenue is denominated in foreign currencies.
The top 5 customer groups (from the engineering business) contributed 70.55% (FY22), 72.28% (FY21), and 72.54% (FY20) of revenue from operations respectively.
The company has four strategically located manufacturing facilities for engineering business with one of the principal manufacturing facilities at Changodar and one at Moraiya, near Ahmedabad in Gujarat in India, and one manufacturing unit each at Changshu, China, and Ghimbav Brasov in Romania.
The Promoters of the group are Harish Rangwala and Rajendra Shah who have more than 35 years of experience in the precision engineering and bearing cages manufacturing sector.
The company has three wholly owned subsidiaries - Harsha Precision Bearing Components (in China) Co. Ltd, HASPL Americas Corporation (in the US) and Harsha Engineers B.V. (in the Netherlands), Harsha Engineers Europe SRL (in Romania). The Company also has a 50% interest, as a partner, in Clenmax Harsha Solar LLP and a 26% equity interest in Sunstream Green Energy One Private Limited (formerly known as Eirene Naval Systems Private Limited).
For consolidation purposes and to get the benefit of synergies, the corporate reorganization was done, and hence wholly owned Indian Subsidiaries of Harsha Engineering Limited (HEL) i.e., Aastha Tools Private Limited (ATPL) and Harsha Engineers (India) Private Limited (HEIPL) has merged into HEL; and (ii) the merged entity, HEL, and the wholly-owned Indian Subsidiary of the company, Helianthus Solar Power Private Limited. (HSPPL) has further merged into the company.

Financial Profile

The financial profile of Harsha Engineering seems to be strong with a consistent growth in its revenues and profits after taxes. The profitability margins are also adequate and show an increasing trend in the last three fiscals.

The total revenue from operations increased by 51% to Rs 1321.48 crore during FY22 from Rs 873.75 crore for FY21. This was due to increase in sale revenues. PAT also doubled to Rs 91.94 crore in FY22 from Rs 45.44 crore in FY21. For FY21, the revenues had fallen marginally by 1.37% to Rs 873.75 cr due to the pandemic effect. However the PAT increased to Rs 45.44 crore in FY21 from Rs 21.91 crore during FY20.

The profitability margins are reasonable as can be seen from the below table.

The Issuer has a negative free cash flow for FY22 being Rs (25.26 crore). Debt to equity ratio is 0.78x (FY22) which is at a higher side, though the company plans to prepay its debt with IPO proceeds.

Table 1 - Financials and Ratios (Amount in Rs Crore)
Particulars	FY2022	FY2021	FY2020
Total Revenue	1338.39	876.73	899.51
Revenue from operations	1321.48	873.75	885.85
Other income	16.91	2.98	13.66
PAT	91.94	45.44	21.91
EBITDA	186.54	124.82	99.63
Total Assets	1158.25	981.07	973.24
Cash flow from operating activities	36.47	121.16	112.91
EBITDA Margin	14.12%	14.29%	11.25%
Net Margin	6.96%	5.20%	2.47%

Valuation and Peer Comparison

The IPO is valued at 20.55 times with earnings of 16.06 (EPS FY22) calculated at the upper price band of Rs 330 per share. Valuations appear to be reasonable when compared to its peers which are operating at an industry average P/E of 50.98 x as per the RHP. The Issue price is 4.83 x its NAV of 63.84 for FY22.

Timken India, SKF India, Rolex Rings, and Sundaram Fasteners are the peers of the Issuer and their key comparatives can be seen in the peer comparison table.

Table 2 - Listed Peer Comparison
Particulars	Timken	SKF India	Rolex Rings	Sundaram Fasteners
Face Value/share	10	10	10	1
Total Income for FY22 (Cr)	2,217.53	3,700.29	1,028.13	4,941.4
EPS (FY22)	43.49	79.9	50.23	21.74
NAV per share	220.28	381.43	200.05	124.75
Return on net worth	19.74%	20.95%	24.21%	17.42%
P/E (12 Sep 22)	65.15	54.41	35.58	36.52
P/B	15.24	12.85	9.88	7.04
Current market value	3,363.2	4,900	1,976.45	883.3

Issue Details

Harsha Engineering IPO (Rs 755crore; fresh issue, Rs 455 crore) opens on 14^th Sept- 16^th Sept 2022 with a price band of 314-330 per share. The retail quota is 35% and investors can apply with a minimum bid of 45 shares (Rs 14,850). Maximum lot size is 585 shares (Rs 1,93,050). The objects of the offer include prepayment of debt (Rs 270 crore), CAPEX (Rs 77.95 crore), and Repairs for existing production facilities (Rs 7.12 crore).

Conclusion

Harsha Engineering has a strong market share in India (60%) and globally (7%) and offers a wide range of products in its engineering vertical. The company has plans to expand in the next two to three years. Its product, the bearing shaft has uses in varying sectors like automobiles, industrial applications, electrical power generation, and machine tool operation thus finding use in sectors like construction, aviation, railways, and many others.

The limiting factor that appears is that there is a revenue concentration risk as the majority of the revenues is contributed by five top customers and relatively high leverage that may come down with prepayment.

The Issuer has a strong business and satisfactory financial profile as seen from its improving financial metrics. Hence, one may subscribe for listing gains. It is worth here to mention that Rolex Rings, Issuer&rsquo's peer engaged in a similar type of business, was listed in the year 2021 at a premium of 39% (listed at Rs 1250 against its issue price of Rs 900) and currently trading at Rs 1976 per share (12th Sept. 2022). This is quoted here just to chalk out a reference.

Reviewer recommends Subscribe for Listing Gain to the issue.

Review By CA Priyanka Choudhary on 22nd Aug 2022

Review Author

About CA Priyanka Choudhary

CA Priyanka Choudhary, a freelance chartered accountant

Priyanka Choudhary Jain is a Chartered Accountant and an experienced credit analyst. She has worked with CRISIL as Senior Credit Analyst on ratings assignments including business and financial analysis in Corporates as well as the Public Finance Sector.

Email: [email protected]

DISCLAIMER: No financial information whatsoever published anywhere here should be construed as an offer to buy or sell securities, or as advice to do so in any way whatsoever. All matter published here is purely for educational and information purposes only and under no circumstances should be used for making investment decisions. Readers must consult a qualified financial advisor prior to making any actual investment decisions, based on information published here. Any reader taking decisions based on any information published here does so entirely at own risk. Investors should bear in mind that any investment in stock markets are subject to unpredictable market related risks. Above information is based on RHP and other documents available as of date coupled with market perception. Author has no plans to invest in this offer.