by Welcome back to Trades Ideology, In this article, we’ll do the Fundamental Analysis of Harsha Engineers where we’ll cover its business profile leadership key strengths competitors, and future growth and then we’ll cover the financials of the company, finally we’ll conclude if SBI cards are fundamentally strong or not.
we have another promising IPO starting 14th of September. It is the IPO of Harsha Engineers International Limited, which is the largest manufacturer of precision bearing cages in terms of revenue, in the organized sector in India, and one of the leading manufacturers of precision bearing cages in the world, and this IPO is looking very promising.
By the way, there are a lot of IPOs coming up, and I only analyze the business of companies that are looking really good and have bright growth prospects, and can generate multi-bagger returns in the future. My goal is to help you understand the business of the company so that you can make an informed investment decision rather than investing simply on the basis of grey market premium. Of course, it is also very important to buy at the right price. Alright, let’s get started.
Introduction
Harsha Engineers International Limited was incorporated in 1986, so the company has nearly 35 years of experience in the industry; as the name suggests, Harsha engineers is a precision engineering company that is mainly into the manufacturing of bearing cages.
Fundamental Analysis of Harsha Engineers International Limited
The fundamental analysis of Harsha Engineers International Limited is as follows:
Business Model
These bearing cages are from one of the five components of a bearing, other elements include your inner ring, outer ring, etc. So bearing cages are a very important component and various machines, where the primary usage is to prevent direct contact between 2 elements that are in relative motion. This in turn helps to prevent the generation of heat & friction.
There are various types of bearing cages available including Brass cages, Steel cages, and Polyamide cages made of high polymer materials.
These cages are available in various sizes and shapes. Now, I don’t want to get into the technicals but just to give you an idea, these bearing cages are used in various industries, including the Railway sector, Aerospace sector, Automobile sector across cars, trucks, bikes, and Agriculture sector including tractors, planting machine, loaders, and Electrical and electronic equipment like compressor, fan, pumps, semiconductor manufacturing, computer fan, etc. As well as in the construction sector and mining sector. So basically, there’s a usage of these bearing cages across various industries.
Revenue Breakdown
If you look at the revenue contribution for bearing products by sector, in FY 21 Automobile contributed 22.5% followed by construction which contributed 13.6%, Mining contributed 11.1% followed by Agriculture, Railway, Aviation, Electrical & electronics, and others. So overall, there is no dependence on a specific sector. I hope that gives you a good understanding of precision products and their usage.
The most important part is that Harsha Engineer is the largest manufacturer of precision beating cages, in terms of revenue in the organized sector in India, and among the leading manufacturer of precision beating cages in the world, and the company commands a market share of nearly 50%-60% in Indian bearing cages market and 6.5% market share in global organized bearing cage market as of FY 21.
Like means, that the company is the leader in India and among the leading player globally. It speaks everything about the quality of their business. Since its incorporation, the company has manufactured more than 7500 types of bearing cages and 295 other products in the automotive and industrial segments. The company has 4 manufacturing facilities, including 2 facilities in Gujarat, 1 in China, and 1 in Romania. And it supplies its products to over 25 countries across the world. It also has warehouses spread across 20 locations in the world.
In addition to manufacturing bearing cages, companies are also involved in EPC(Engineering Procurement and Construction) work in the solar photovoltaic industry and provide operation and maintenance services in the solar sector. The company has nearly 10 years of experience in the solar EPC business. Although the revenue from solar EPC work is limited to the range of 6%-7% and the remaining 93%-94% of revenue is from precision engineering.
The company has a very long-lasting relationship with leading global bearing manufacturers. Actually, this global bearing market is highly concentrated among the few manufacturers with nearly 54% of the market being captured by the top 6 companies. And all these top companies are clients of Harsha Engineers including Schaeffler, SKF, Timken, etc. It itself speaks about the business quality of Harsha Engineering.
Promoters & its Leadership
- If you look at the promoters, its promoter and Chairman is Mr. Rajendra Shah and another promoter & MD is Harish Rangwala, both of them have more than 35 years of experience in the precision engineering and beading cases manufacturing sector.
- Additionally, the company has second-generation promoters including Vishal Rangwala, who is the CEO of the company, and Palak Shah as Chief Operating Officer, and they are also involved in the overall operation strategies and business of the company.
- Overall company has very solid leadership and has a very strong foothold in the bearing case industry with leadership in the sector. So, from a business profile point of view company is looking fundamentally strong.
Future Growth Prospects
If you look at the future growth prospect, the global bearing market standard 104$ billion in FY 21, and is expected to reach 171$ billion by FY 29, growing between 6% to 8% CAGR. So overall the total addressable market size for Harsha engineers is huge, although the overall growth rate of this sector is on the lower side.
Some of the key growth drivers would be, of course, the global economic growth that increases demand for customer bearing, the need for high-performance bearing as well as advancements in technology. One of the biggest advantages for Harsha Engineers is the growing outsourcing trend.
As per a key report, due to the critical functions of a bearing cage and the resulting quality requirement, global gearing companies have steadily increased outsourcing for the manufacturing of bearing cages, and the business from these bearing companies has gotten concentrated to a few bearing cage manufacturers including Harsh Engineers. Moreover, there is going to be high demand in the solar sector for EPC work. So overall the future prospects look promising.
Key Risk
Now before you invest in Harsha Engineers, you should be aware of 2 key risks for the company.
1. Volatile prices for raw material
- First, Risk is volatile prices for raw materials, obviously, the company has a dependence on metals like brass, steel, etc.
- As raw materials to manufacture precision engineering products and any fluctuation in raw material prices would directly impact the profitability of the company.
2. Increasing penetration of electric vehicles
- The second risk is the increasing penetration of electric vehicles. Now, you would be wondering, how can EV vehicle penetration is a risk for the company.
- Try to understand this, the number of components required in electric vehicles is significantly lower than the traditional electric combustion engine vehicle.
- As we move towards electric vehicles, the demand for the total number of bearings would reduce as compared to traditional vehicles. It means the increasing EV penetration would negatively impact the bearing sector growth. Although the demand for bearings would not stop, it would only reduce, hope you understand this.
- By the way, electric vehicles would require the development of customized bearings and those customers’ bearings would likely command a premium price in the market. So this premium price would partially compensate for the impact of the slowdown in order demand in the bearing sector due to EV penetration.
- I remember that automobiles constitute around 22%-23% of the total bearing market. So it is not that overnight, the demand would slow down. That wouldn’t be an impact, but it would be nominal.
2. Concentrated client base with nearly 70% business from its top 5 client
The third risk is that it has a concentrated client base with nearly 70% business from its top 5 clients and the loss of business from top clients can impact the revenue of the company.
As far as competitors are concerned, the global bearing cage market is quite fragmented. As I mentioned, Harsha engineers are the leader in India which 50%-60% market share, and globally it has a 6.5% market share.
Harsha Engineers’ IPO details
- Harsha Engineers’ IPO window is between 14th December to 16th September 2022, the IPO price band is between Rs 314-320, the shares are available at a face value of Rs 10, and the lot size is 45 shares.
- The total investment for one lot would be Rs 14,850, the issue size is Rs 755 Crore, out of this there is fresh equity of Rs 455 crore and the remaining Rs 300 crore is Offered for Sale.
- The money raised from the IPO would be utilized for repayment of some borrowing, funding the CAPEX for machinery, Repair & renovation of the existing facilities, and General corporate expenses.
Financials
If you look at the financials,
Revenue
- If you will look at the revenue, it jumped from 889 Cr in FY 20 to 1339 Cr in FY 22.
Profit
- If you will look at the profit after tax, it was in profit in FY 20 to 92 Cr in FY 22 Cr. So, the earning growth is very good.
ROCE & ROE
- If you look at the profitability, the company’s latest ROCE stood at 25% and ROE stood at 19%, again profitability is good.
Debt to Equity Ratio
- Its debt to equity in FY 22, stood at 0.7 which is reasonable and for the company would reduce the debt from the money raised by the IPO.
Valuation
At a high IPO price band of 330, the company would command a market cap of around 3000 Cr rupees. It’s basically a small-cap company. After the IPO promoter’s holding in the company would reduce to 75%.
As far as valuation is concerned, at a higher price band company would command a PE ratio of 32.7 based on FY 22 earnings, which looks reasonable as compared to other listed peers like Timken India which commands a P E ratio of 64, SKF India which commands PE ratio of 53, Schaeffler India which commands a PE ratio of 73 and Rolex Rings which commands a PE ratio of 36.
Conclusion
Overall, we can conclude that Harsha Engineers is a fundamentally strong company and the IPO price is also looking reasonable. The future prospects are bright due to the leadership of the company in the space and strong demand for outsourcing bearing cages and global MNCs preferring Indian companies for manufacturing.
Moreover, there will also be a growing demand within the Indian market itself. Hence this IPO is worth applying for both short-term listings as well as for long-term wealth creation. I hope you find this Fundamental Analysis of Harsha Engineers useful.
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