Happy Forgings

Manufacturer of crankshafts

Trusted supplier to several Indian and global OEMs across the automotive and non-automotive sectors

Happy Forgings (HFL), promoted and founded by Paritosh Kumar in 1979, is an engineering led manufacturer of complex and safety critical, heavy forged and high precision machined components in India. The Company manufactures a wide range of heavy forged and machined products (with closed tolerances as low as 0.005 to 0.2 millimetre) 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.

The Company has emerged as a leading player in the domestic crankshaft manufacturing industry with the second largest production capacity for commercial vehicle and high horse-power industrial crankshafts in India. Crankshafts accounted for 45.28% of the revenue from products in FY23 with balance 54.72% came from others.

The company caters to both automotive and non-automotive customers. In the automotive sector, HFL primarily serves domestic and global original equipment manufacturers (OEMs) manufacturing commercial vehicles. Currently, apart from CVs it does not cater to any other segment of automotives such as PV, 2- and 3-wheelers. And 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. In FY2023, about 43.65% of its revenue from products came from sales to the automotive sector, with the non- automotive sector accounting for balance 53.35% [FE accounting for 36.79%, off-highway accounting 15.86%, and industrial 3.7%].

HFL was a supplier to each of the top five Indian OEMs, by market share, in the medium and heavy commercial vehicle industry and four of the top five Indian OEMs in the farm equipment industry by market share, in FY 2023.

Some of HFL’s customers include Ashok Leyland, SML Isuzu, AAM India Manufacturing Corporation, Bonfiglioli Transmissions, Dana India, IBCC Industries (India), International Tractors, JCB India, Liebherr CMCtec India, Mahindra & Mahindra, Meritor HVS AB, Meritor Heavy Vehicle Systems Cameri SPA, Swaraj Engines, Same Deutz Fahr India, Tata Cummins, Watson & Chalin India (Hendrickson India Commercial Vehicle Systems), and Yanmar Engine Manufacturing India.

HFL served customers across nine countries including Brazil, Italy, Japan, Spain, Sweden, Thailand, Turkey, the United Kingdom, and the United States of America as of September 30, 2023. Export revenue from contract with customers increased to 20.75% of total revenue in H1FY2024 from 12.89% in FY2023. Of the export revenue (revenue from contract with customers outside India), about 9.31% was from Brazil, 18.97% from Italy, 15.78% from Spain, 25.01% from Sweden, 19.88% from Turkey, 4.81% from the United Kingdom, and 6.23% from the United States of America.

Over the last 40 years, its engineering capabilities evolved, enabling it to offer quality, complex, high precision, and safety critical components, allowing HFL to cater to a wide array of industries and bespoke customer requirements. The company has capabilities to deliver single cylinder to six-cylinder crankshafts up to a weight of 250 kg. HFL has emerged as a key player in the crankshaft market in India, next to Bharat Forge, with focus on CV, construction equipment, industrials, and farm equipment segments.

HFL’s customer base of the industrial market increased from 19 customers in FY2021 to 24 customers in FY2023.

Its vertically integrated manufacturing facilities are equipped to undertake a variety of processes, including engineering and designing, hammer and press forging, metallurgical testing, heat treatment, machining and dimensional testing among others, enabling HFL to manufacture a wide range of products weighing majorly between 3 kilograms to 250 kilograms.

The company owns and operates three manufacturing facilities, of which two are located at Kanganwal in Ludhiana, Punjab and one is located at Dugri in Ludhiana, Punjab. The company is the second one in India to have a 14,000 tonne or higher forging press as of March 31, 2023, and among the 4 companies in India that possesses an 8,000 tonne or higher forging press as of March 31, 2023.

In-house design capabilities & fungible production lines have led to a diverse product offering and continuous value addition. This strong infrastructure facilitates it to manufacture heavier and complex products with greater precision and accuracy.

The annual aggregate installed capacity for forging and machining stood at 120,000 tonnes and 47,200 tonnes as of September 30, 2023, respectively. In fact, as of FY 2023, the company was the fourth largest engineering-led manufacturer of complex and safety critical, heavy forged and high precision machined components in India in terms of forgings capacity.

HFL’s focus on producing margin accretive value-added products has led to its transition from being a forging led business to a machined components manufacturer. Vertically integrated facility, flexible capacities to support different customers and complex technology has helped HFL continuously offer more value-added products thereby leading to better margins and profit realizations.

The critical application of its products, along with their heavy weight, closed tolerance and stringent quality requirements of OEMs serve as entry barriers for new players to qualify as suppliers or in their ability to replace HFL in supplying precision products that the company manufacture.

In automotive sector, about 70% of the forging companies supply components to 2- and 3-W PVs, where EV penetration is high. Happy Forgings has mitigated its risk by not being one among the many as its major market is CVs, industrials, and the off-highway segments, where the rate of EV penetration is almost negligible and not commercially viable.

HFL believes its focus on the high HP engine segment insulates the company from any potential EV disruption as hydrogen, compressed natural gas (CNG) and liquified natural gas (LNG) combustion engine technologies are expected to become prominent alternate powertrain technologies in this segment and crankshaft as a product is compatible to such combustion engines with minimal or no alterations.

HFL intends to engage with its customers in the commercial vehicle industry to assess the potential transition to alternative engine technologies. In FY2023, it started supplying crankshafts to an Indian automotive manufacturer for its CNG range of vehicles.

HFL remains one of the key players with strong presence in the renewable sector. It can increase its footprint in this space with the present forging capabilities.

HFL continues to leverage in-house engineering and product development capabilities to grow its product portfolio and tap the growing business opportunities in the industrial markets. Additionally, HFL intends to explore opportunities in light-weight forging and machining, particularly aluminium forging and machining, to cater to the growing demand for lightweight components in the automotive and other industries such as aerospace and defence.

The issue & object of the offer

The public offer comprises a fresh issue of equity shares aggregating up to Rs 400 crore by the company and an offer for sale (OFS) of upto 7159920 equity shares by the selling shareholders. OFS comprise sales of 5607700 equity shares by Paritosh Kumar Garg (HUF), a promoter selling shareholder, and 10529000 equity shares by India Business Excellence Fund III, an Investor selling shareholder. India Business Excellence Fund III will hold 8.8% of the post issue equity.

Of the net proceeds from the IPO, the company proposes to utilize Rs 187.034 crore for purchase of equipment, plant, and machinery; Rs 152.760 crore towards prepayment of all or a portion of certain outstanding borrowings availed by the company; and balance towards general corporate purposes.

Total outstanding borrowings as of October 31, 2023, amounted to Rs 259.942 crore.

Strengths

Over 40 years of experience in manufacturing and supplying quality and complex forged and machined components according to customers’ specifications. One among the few companies in India with the capability to manufacture and supply high precision safety critical components to leading OEMs including manufacturers of commercial vehicles, farm equipment, off highway and industrial equipment and machinery for oil and gas, power generation, railways, and wind turbine industries.

HFL runs a vertically integrated operation and is engaged in engineering, process design, testing, manufacturing, and supply of a variety of components that are both margin-accretive and value-additive components.

Trusted supplier for several Indian and global OEMs with long standing relationship. Enjoys more than 10 years of relationship with its top 10 customers. Contribution of customers who have been associated with the company for more than 10 years to total revenue stood at 75.98% in FY2023.

Highest machined product revenue contribution amongst peers, i.e., 78.66%.

Steady rise in better margin exports, the export revenue from contract with customers increased to 20.75% of total revenue in H1FY2024 from 12.89% in FY2023 and 8.77% in FY2021. Opportunity to tap global customers earlier importing from China and Europe.

Well placed to take advantage of potential alternative engine technologies as crankshafts are expected to remain an important component in the heavy-duty automotive industry for the foreseeable future as its compatible for engines run on hydrogen, CNG and LNG with minimal or no alternations.

Only select players are present in the industrial segment, where the necessity of heavy forged components is steep due to developments in the energy sector and growth in power generation from renewable resources. Unlike other forging majors in the country, it gets majority (more than 50%) of its revenue from non-automotive players.

Weakness

Crankshafts are not required for battery powered-EVs. Though CVs or off-highway segment find it difficult to switch to EV and looking at alternate fuel technology such as CNG and hydrogen, any increased adoption of EV in the CV and off-highway segments will reduce the demand for crankshaft and adversely impact the business of the company as it gets a major portion of revenue from crankshafts.

Revenue from the top 1/3/5/10 customers for FY2023 was 14.73%, 33.94%, 47.28% and 70.08%, respectively. For H1FY2024, it was 12.24%, 31.69%, 44.82% and 68.52%, respectively. Thus loss of any of these top customers or reduction in demand for their products could have a material adverse effect on the business of the company. Moreover, the total number of customers, which were on a steady rise from 55 in FY2021 to 57 in FY2022 and to 66 in FY2023 [CV 14, FE 24, Off-highway 4, and Industrial 24] fell to 53 [CV 9, FE 21, Off-highway 4, and Industrial 19] in September 2023.

High quality steel meeting the requirements of the company is typically supplied by a limited number of suppliers in the Indian market. Hence, it relies on a few suppliers to supply steel. Thus, interruptions in the supply of steel as well as volatility in prices of steel could impact the profitability of the company.

Change in import duties or regulations in the export markets of the country as well as demand slowdown for end use industries in the export markets can impact the business of the company.

Statutory auditors of the company have included a disclaimer of opinion in the annexure to their report on the internal financial controls on the standalone financial statements of the company for FY2021.

Valuation

Sales for the fiscal ended March 2023 were higher by 39% to Rs 1196.53 crore. With the operating profit margin expanding by 170 bps to 28.5%, operating profit was up 48% to Rs 340.94 crore. Eventually, net profit was up 47% to Rs 208.70 crore.

For the half year ended September 2023, sales were up by 12% to Rs 672.90 crore. With OPM contracting by 130 bps to 29%, operating profit was up 7% to Rs 195.21 crore, and net profit was up 2% to Rs 119.30 crore.

For the TTM period ended September 2023, sales were Rs 1269.63 crore and net profit Rs 211.60 crore. On post issue equity (on upper price band), the TTM EPS was Rs 22.5, and the PE works out to 37.8 times. The TTM P/BV was 5.3 times.

In comparison, MM Forgings, a forging company in similar revenue bracket, catering to both automotive and industrial, quotes at a PE of 17.1 times its TTM EPS for the period ended September 2023. Similarly, other forging players such as Bharat Forge, Ramakrishna Forgings, Sona BLW Precision, Craftsman Automation and CIE Automation quote at PE of 81 times, 47.4 times, 68.7 times, 37.7 times, and 23.6 times.