Happy Forgings Limited (Subscribe)

Highlights

Happy Forgings Limited (HFL) incorporated in 1979, is the 4^th largest engineering led manufacturer of complex and safety critical, heavy forged and high precision machined components in India as of Fiscal 2023 in terms of forgings capacity. Its vertically integrated operations are engaged in (i) engineering, (ii)process design, (iii) testing, (iv) manufacturing, and (V) supply of a variety of components that are both margin accretive and value-additive.

They manufacture a wide range of heavy forged and machined products which include crankshafts, front axle beams, steering knuckles, differential cases, transmission parts, pinion shafts, suspension products and valve bodies across industries for a diversified base of customers.

HFL primarily caters to domestic and global original equipment manufacturers (OEMs) manufacturing commercial vehicles in the automotive sector, while in the non-automotive sector, they cater to manufacturers of farm equipment, off-highway vehicles and manufacturers of industrial equipment and machinery for oil and gas, power generation, railways and wind turbine industries.

With 40 years of experience, the company has emerged as a leading player in the domestic crankshaft manufacturing industry with the 2^nd largest production capacity for commercial vehicle and high horse-power industrial crankshafts in India. Their focus on producing margin accretive value-added products has led to their transition from being a forging led business to a machined components manufacturer.

Through over 40 years of business operations, established long-standing relationships with several Indian and global customers across industries. They have a diversified customer base and they have served 66 customers in FY23 and 59 customers in the six months ended September 30, 2023. Their clientele includes Ashok Leyland, SML ISUZU, Dana, JCB etc.

Out of the total proceeds of Rs. 10,085 mn, Rs. 1,870 mn would go towards purchase of equipment, plant and machinery Rs. 1,527 mn would go towards prepayment of all or a portion of certain outstanding borrowings availed by the Company and Rs. 6,085 mn would go towards existing selling shareholders.

Key Highlights

• The global forging and machining markets are estimated to be valued at approx. USD 71.9 bn and USD 52.5 bn, respectively, in 2023 and is expected to grow at a CAGR of 5.1 pct and 5.2 pct to reach USD 97 bn and USD 71.2 bn, respectively, by 2029. Further, the forging and machining markets in India are estimated to be valued at approx. USD 7.3 bn and USD 5.4 bn, in FY24 and is expected to grow at a CAGR of 7.1 pct and 8.4 pct to reach USD 10.2 bn and USD 8.0 bn, by FY29.
• The company is dedicated to continuously investing in machinery and equipment to expand their forging and machining capacity to seize opportunities for growth in the market. As of March 31, 2023, they are only the 2^nd company in India to have a 14,000-tonne forging press or higher forging press and are among the 4 companies in India that possess a 8,000 tonne forging press or higher forging press.
• HFL are also among the few players in the Indian forging industry that have a forging capacity of about 107,000 MT as of March 31, 2023. Around 39.13 pct of their gross block as of March 31, 2023, was a result of their capital expenditure made between FY22 and FY23. HFL’s significant manufacturing capacities act as an entry barrier for other manufacturers and OEMs that do not have such in-house engineering capabilities and production facilities.
• The company’s future strategy includes (i) Leverage in-house engineering and product development capabilities to grow product portfolio and tap growing business opportunities in the industrial markets (ii) Foray into lightweight forging and machining with introduction of aluminium components (iii) Increase wallet share and acquire new business by OEM relationships and adding new customers (iv) Capitalise on increasing demand from international markets to grow exports (v) Expand capacity at existing manufacturing facilities(vi) Continue to reduce operating costs and improve operational efficiencies (vii) Grow inorganically through strategic acquisitions and alliance.
• HFL revenue from sale of machined products has increased from Rs 3,992.02 mn in FY21 (representing 72.88 pct of their revenue from sale of products) to Rs. 8,392.33 mn in Fiscal 2023 (representing 78.66 pct of their revenue from sale of products), at a CAGR of 44.99 pct which demonstrates their increased focus on machined products.
• Sales of the company has grown by 43 pct CAGR during the period FY21-23 while EBITDA and profit grew 46.55 pct CAGR and 55.38 pct over the same period respectively. During FY23, company reported sales of Rs. 11,965 mn which increased by 39 pct YoY while EBITDA rise by 47 pct YoY to Rs. 3,409 mn as EBITDA margin significantly improved from 26.85 pct in FY22 to 28.49 pct in FY23. Profit in the FY23 stood at Rs. 2087 mn, which increased by 46 pct YoY. The sales/EBITDA/profit of the company in H1FY24 has grown by 12 pct/7.3 pct/2.49 pct YoY.

Key Risk

• Their business largely depends upon top 10 customers. As of FY23 top 10 customers contributes 70 pct of sales.
• HFL business and profitability is substantially dependent on the availability and cost of steel, primary raw material, and any disruption to the timely and adequate supply of steel, or volatility in the prices of Steel can impact business.

Valuation

Happy Forgings is one of the leading and largest engineering led manufacturer of complex and precision machined components in India.  At the upper end of the price band, the issue is quoting at PE of 33.6x its FY24E annualized earnings, which appears to be reasonable. One may Subscribe from a longer-term perspective.

Also read : Best tax saving investment options in Section 80C

Disclaimer: The views expressed in the blog are purely based on our research and personal opinion. Although we do not condone misinformation, we do not intend to be regarded as a source of advice or guarantee. Kindly consult an expert before making any decision based on the insights we have provided.