Harsha Engineers International IPO opens on Sep 14: Should you invest?

Harsha Engineers International Ltd IPO opens for subscription on 14th September. The company is looking to raise up to Rs 755 crore through the public issue. Here are the details:

Harsha Engineers International IPO Details

Harsha Engineers International IPO Date: 14 September - 16 September 2022

Harsha Engineers International IPO Price band: Rs 314 - Rs 330

Harsha Engineers International IPO Issue Size: Rs 755 crore (Fresh Issue of Equity shares aggregating up to Rs 455 crore and Offer for sale of Equity Shares aggregating up to Rs 300 crore)

Reservation: QIB 75%, Retail - 35%, NII 15%

Minimum Investment: Rs 14,850

Post Issue Implied Market Cap: Rs 2,881 crore - Rs 3,005 crore

Bid lot: 45 shares, and in multiples of 45 shares

Harsha Engineers IPO: Objects of the Issue

The net proceeds from the IPO will be utilized for the below purposes:

• Prepayment of a portion of the existing borrowing availed by the company.
• Funding capital expenditure requirements towards the purchase of machinery.
• Infrastructure repairs and renovation of the company's existing production facilities, including Indian office premises.
• General corporate purposes.

Harsha Engineers IPO: About Harsha Engineers International Limited (HEIL)

• The company was incorporated in 2010. Today, they are the largest manufacturer of precision bearing cages in terms of revenue.
• Harsha Engineers supply its products to customers covering 5 continents and 25 countries.
• It manufactures brass, steel, and polyamide cages and stamped components with production facilities located in Asia (India & China) and Europe (Romania).
• HEIL's market share is estimated at approximately 50 to 60% in the bearing cages market.
• The company also provides comprehensive turnkey solutions to all Solar Photovoltaic requirements. 
• Their offering finds application in the automotive, railways, mining, aviation & aerospace, construction, electrical and electronics, agriculture, renewables sectors, etc.
• It has four strategically located 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.

HEIL IPO: Business verticals

The company's business comprises two segments:

• Engineering: Under this segment, the company manufactures bearing cages, complex and specialized precision stamped components, welded assemblies, and brass castings and cages & bronze bushings.
• Solar EPC: They provide complete comprehensive turnkey solutions to all solar photovoltaic requirements.

HEIL IPO: Industry Outlook

• The global bearings market was valued at $85.2 billion in 2015 and grew to $106.1 billion in 2019 at a CAGR of 5.6%. 
• The bearings market contracted in 2020 due to a decline in demand and supply chain constraints on account of Covid-19-induced restrictions. 
• A rebound was seen in 2021, and the market grew at an annual rate of 12% to $104.6 billion in 2021. 
• It is expected to grow at a CAGR of 6% to 8% over the period 2021 to 2029 and is estimated to be valued at $171.7 billion in 2029.

Harsha Engineers International Ltd IPO: Listed Peers

The company has many listed peers and hence faces competition in the market. Its listed peers include companies like Timken India Ltd, SKF India Ltd, recently listed Rolex Rings, and Sundaram Fasteners Ltd.

• If you look at total revenue for FY21, the HEIL is there towards the bottom, while the largest company in terms of revenue is Sundaram Fasteners.
• Earning Per Share (Basic) is the lowest of Harsha Engineers while the highest EPS is reported by SKF India.
• The PE ratio for HEIL is around 32.67, while the average PE for listed peers is approximately 51. Hence the company is fairly priced.
• Return of Net Worth (RoNW) is lowest for HEIL at 17.42%, while the maximum RoWN was reported by Rolex Rings at 24.21%.
• Even the PAT Margins are lowest for Harsha Engineers (6.87%), while most listed peers have PAT Margins in double-digit.

Harsha Engineers International Ltd IPO: Key Financial Details

The company reported revenue from operations of Rs 888.85 crore, Rs 873.75 crore, and Rs 1321.48 crore for FY20, FY21, and FY22, respectively. The revenue has grown at 22.17% in this period.

• For FY22, Europe contributed 37.88%, India contributed 30.41%, China contributed 13.06%, the US contributed 6.23%, and Others contributed 6.13% of total revenue from operations.
• EBITDA for FY20, FY21, and FY22 reported was Rs 100.26 crore, Rs 124.96 crore, and Rs 186.58 crore, respectively. 
• In the same period, the EBITDA margin was 11.29%, 14.30%, and 14.12%, respectively.
• The net profit reported by the company is Rs 21.91 crore, Rs 45.44 crore, and Rs 91.94 crore for FY20, FY21, and FY22, respectively. The PAT has grown at a CAGR of 104.5% during this period.
• For the last three financial years, HEIL reported an average EPS of Rs 8.50 and an average RoNW of 13.17%. 

HEIL's USPs

Diversified engineering products: The company has a diversified product portfolio in terms of the materials used and the dimensions and end-use of the finished products. They have manufactured more than 7,500 types of products in the automotive and industrial segments since incorporation.

Long-standing relationships with clients: HEIL has established a strong relationship with its customers who are leading global bearing manufacturers in various sectors. Their top 10 customers contributed 44.70%, 48.24%, and 47.79% of total revenue from operations for FY22, FY21, and FY20, respectively.

Strategically located production facilities: They have four strategically located manufacturing facilities spread across three countries in India, China, and Romania. Their presence in these locations helps them overcome significant entry barriers in comparison with competitors, allowing them to penetrate these markets more efficiently.

Expertise in tooling, design, and automation: They have decades of experience in precision engineering, expertise in the area of tooling, strategically located production facilities, focus on design and tooling, coupled with technologically advanced and cost-competitive manufacturing technology processes.

Harsha Engineers IPO: Growth Potential

Expanding customer base: They aim to further expand their customer base in China as they are considered a versatile and consistent player in the bearing cages segment in China. Similarly, for Japan, they plan to expand and directly supply to Japanese customers at their locations in Japan.

Strengthen technological leadership: They are a technology-driven company focused on using appropriate cost-effective technologies. They will continue to expand their development, engineering, tool design and manufacturing, process improvements, and lean manufacturing techniques, and automate them to optimize manpower to ensure zero defect products.

Increasing Operational Efficiencies: It intends to use a variety of manufacturing strategies, sourcing strategies, and cost reduction strategies to continue to improve its operational efficiencies.

Opportunistic inorganic acquisitions: They plan to pursue strategic alliances and inorganic growth opportunities, with a particular focus on technologically-innovative acquisitions.

HEIL's Business Risks

Limited customer count: The company is dependent on limited customer groups for a significant part of its revenue from the engineering business. Any loss of its major customer group will severely impact its revenue and business.

Dependency on a network of agents: They are dependent on their network of agents to fulfill the needs of their customers. Their inability to maintain their relationships with them may adversely affect their business.

Foreign currency exchange rate fluctuations: They face foreign exchange rate risk to the extent that their revenue, expenses, assets, or liabilities are denominated in a currency other than the Indian Rupee. 

Harsha Engineers IPO: review

• Robust rise in revenues: Harsha Engineers has seen a robust 22% CAGR rise in revenues between FY20- 22, aided by strong demand for precision bearing cages.  
• Stellar rise in profit: The company net profit has increased 4x from Rs 22 crore in FY20 to Rs 92 crore in FY22, aided by increased operational efficiencies in the company. 
• Increasing margins: The profit margin has improved from 2.5% in FY20 to 7% in FY22. The EBITDA margin has also seen a noticeable improvement from 11.3% to 14.1%. 
• Dominant market share: Harsha Engineers has a 50-60% of the market share in the organised segment of the Indian bearing cages market and 6.5% of the market share in the global organised bearing cages market for brass, steel, and polyamide cages in CY 2021 (Source: CARE Advisory Report)
• Reasonable valuations: At the higher end of the price band, Harsha Engineers IPO is reasonably priced at 32.7 times FY22 earnings (post-issue fully diluted basis). This is lower than listed peers Timken India (63 times), SKF India (54 times) and Sundaram Fasteners (40 times). However, all of these peers have reported better return ratios than Harsha Engineers, and may trade at higher valuations. 
• Harsha Engineers International IPO final recommendation: Given factors such as a robust rise in revenues, improving margins, dominant market share, increasing profits, and good runway for growth but reasonable valuation, analysts have given a ‘positive’ rating on the company’s long-term prospects.