Harsha Engineers International

Global supplier of bearing cages

Of its FY22 engineering business revenue about 32.4%, 40.4%, 13.9%, 6.7% and 6.5% is accounted for by India, Europe, China, America and others

Harsha Engineers International, promoted by Harish Rangwala and Rajendra Shah, is engaged in engineering business and solar EPC business. Under its engineering business it manufactures bearing cages (in brass, steel and polyamide materials), complex and specialized precision stamped components, welded assemblies and brass castings and cages & bronze bushings. It offers a wide range of bearing cages starting from 20 mm to 2,000 mm in diameter. It supplies its products to leading bearing manufacturers across the world, who in turn sell the final bearing to their automotive, railways, renewable energy and industrial customers across the world. It also manufactures complex and specialized precision stamped components, welded assemblies, brass castings and cages & bronze castings and bushings.

Its Solar EPC business provides EPC service in the solar photovoltaic industry and also provides operations and maintenance services in the solar sector. This business is broadly classified into (i) Ground mount projects; (ii) Roof top projects; and (iii) Operations and maintenance of ground mount and rooftop projects. As of March 31, 2022, its total ground mount project installation is above 342 MW and rooftop mount project installation is above 60 MW. It currently has more than 202 MW of solar PV projects managed by its operations and maintenance team.

Bearing cages are critical parts of a bearings and it requires high precision technology to manufacture them. The company has the expertise to design and develop advance tooling in-house which enables it to manufacture precision bearing cages and complex and specialised precision stamped components. Its ability to develop products suited to its customers’ requirements has fostered strong and long term customer relationship which in turn has helped it gain higher margins for its products and better navigate competition.

Given the critical function of a bearing cage, and the resultant quality requirements, global bearing companies have steadily increased outsourcing for manufacturing of bearing cages and the business from these bearing companies has got concentrated to a few bearing cage manufacturers including the company. The company continues to diversify and expand its business operations in accordance with the evolving needs of its customers and the industry.

The company has five strategically located manufacturing facilities with two of its 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 combined bearing cages capacity of all its manufacturing units is 1,097.87 million pieces per annum as on March 31, 2022. This helps it to penetrate global markets more efficiently and in a cost effective manner and allow access to its customers in over 25 countries covering five continents i.e., North America, Europe, Asia, South America and Africa.

All its manufacturing facilities offer fungibility within the product groups, which the company manufactures, allowing flexibility to move the production on the basis of the market demand, subject to consent of the customers and such production quantities being within the capacity limits available under respective approvals.

Recently the company completed Corporate Reorganisation by which, the engineering business of the Harsha Group (to which the company is part of) housed in Aastha Tools Private Limited, Harsha Engineers India (Private) Limited and Harsha Engineers Limited was amalgamated into the Company effective from appointed rate of April 01, 2020 so as to bring synergies.

The Issue and its objects

The offer consists of a fresh issue of equity shares aggregating to Rs 455 crore, and an offer for sale of up to Rs 300 crore by existing shareholders. The selling shareholders under offer for sale are Harish Rangwala (promoters) raising Rs 75 crore; Rajendra Shah (promoter) raising Rs 66.75 crore, Pilak Shah (promoter) raising Rs 16.50 crore, Charusheela Rangwala (promoter group) raising Rs 75 crore and Nirmala Shah (promoter group) raising Rs 66.75 crore. Post issue, the holding of selling shareholders together will stand at 55.76% down from 76.29% pre-issue.

Of the proceeds from fresh issue net of issue expenses, about Rs 270 crore will be used for pre-payment/ repayment of a portion of the existing borrowings of the company, Rs 77.954 crore towards funding capital expenditure requirements for purchase of machinery and Rs 7.116 crore towards infrastructure repairs and renovation of its existing production facilities including office premises in India.

Strengths

It manufactures diversified product portfolio in terms of the materials used as well as the dimensions and end-use of the finished products. It offers a wide range of bearing cages starting from 20 mm to 2,000 mm in diameter. It manufacture bearing cages (including cylindrical roller cages, spherical roller cages, deep grove cages, angular contact cages, thrust roller cages and taper roller cages), complex and specialised precision stamped components, welded assemblies and brass castings and bushings. Its bearing cages ultimately find application in the automotive, railways, aviation & aerospace, construction, mining, agriculture, electrical and electronics, renewables sectors etc. It has recently expanded its product portfolio to introduce sand casting, value added stamping components, bronze bushings etc. to cater to more end user industries such as wind, mining and shipping sectors.

Enjoys leadership position in organised segment of Indian bearing cage market with a market share of approximately 50-60% and 6.5% of the market share in the global organized bearing cages market for brass, steel and polyamide cages in CY 2020.

Supplies to all leading bearing manufacturers across the world. Each of its top five customer groups (excluding customers’ contributing to revenue from scrap sales) have been its customers for over a decade.

Its multinational presence facilitates geographical revenue diversification. It supplies products to customers in over 25 countries covering five continents i.e., North America, Europe, Asia, South America and Africa. Of its engineering business revenue in FY22, about 32.4% came from India and 67.6% from outside India. Of its FY22 engineering business revenue about 40.4%, 13.9%, 6.7% and 6.5% is accounted for by Europe, China, America and others. Manufacturing plants in India and overseas help it to penetrate global markets more efficiently and in a cost effective manner. Additionally inventory stocking at its 20 warehouses spread across 20 locations globally including Europe, US, China and South America helps it to meet ‘Just in Time’ requirement of its customers.

Impact of automotive industry shifting towards electric on the business of the company will be limited as the company is not manufacturing needle bearings cages (which are engine components). Needle bearings and small cage bearings used in 2/3 wheelers are the one that will be impacted most due to increase in EV penetration.

Over 10 years of operating history in Solar EPC as well as O&M segment with successful installation of over 402 MW of solar power capacity and across ground mounted solar project and roof top solar project and over 200 MW of solar capacity under O&M. In FY22 about 6.28% of revenue of the company came from Solar EPC business.

With capacity utilisation of about 61.74% for bearing cages, the company has enough surplus capacity to take advantage of demand recovery in auto sector in the country.

In recent years the manufacture of bearing components outsourcing to low cost manufacturing locations such as China, India has increased, compared to earlier trend of in-house manufacturing by bearing players. Trending China Plus policy of most global players will benefit Indian suppliers.

Weaknesses

Demand for its engineering products is dependent on cyclical automobile industry and industrial/infra capex.

Solar EPC operations expose it to execution risk i.e. time delay, cost escalation etc. Solar business is reporting losses at EBITDA level. The company has incurred additional cost primarily due to execution of solar EPC orders amounting Rs 0.61 crore, Rs 0.372 crore and Rs 2.281 crore respectively in FY22, FY21 and FY20. In its efforts to turnaround the business, it has turned its focus on roof top solar projects and O&M compared to the riskier ground mounted solar projects.

Change in government policy (both Central & State) governing solar sector including reduction/modification/elimination of incentives, wheeling and transmission charges, cross subsidy charges, change in metering policy, size of roof top solar power projects etc may have a negative impact on the demand for solar projects which in turn could have an adverse impact on Solar EPC business operations of the company.

The company depends on suppliers from China for certain key components used in its solar power projects. A disruption in the supply of these key components or failure of its suppliers to meet their obligations could impact the ability of the company to set up solar power projects.

About 40% of its engineering business revenue comes from Europe, which will face strong headwinds in the foreseeable future as the European economy goes through double whammy of high inflation and recession.

Valuation

Sales for FY 2022 were up 51% to Rs 1321.48 crore. But with the operating profit margin contracting by 110 bps to 12.8%, the growth at operating profit was 39% to Rs 169.02 crore. After accounting for higher other income, lower interest and higher depreciation, the PBT jumped 109% to Rs 126.62 crore. With taxation standing higher by 127% to Rs 34.68 crore, the growth at PAT was 102% to Rs 91.94 crore.

The EPS for FY2022 on post issue equity of Rs 91.04 (at upper price band) was Rs 10.1 and the PE works out to about 32.7 times. The nearest comparable peer Rolex Rings, which is a global supplier of bearing rings, quotes at 40.6 times its FY2022 EPS.