IPO Analysis: Harsha Engineers – Dalal Street Investment Journal

IPO Rating: Expect a listing and long-term gains

On the subject:

Harsha Engineers International Ltd (HEIL), the largest manufacturer of precision bearing cages, announces its initial public offering (initial public offering) of shares with a par value of Rs 10 per share. The price range of the issue has been set at Rs 314 to Rs 330 per share. The issue size is Rs 755 crore at a higher price range.

The opening date of the IPO is September 14, 2022 and it ends on September 16, 2022. The issue is expected to be listed on the stock exchange on September 26, 2022. The lot size of the IPO market is 45 shares and multiples thereof. A retail investor can apply for up to a maximum of 13 lots (585 shares or Rs 193,050) in the upper price range.

IPO opening date	14 Sep 22
Closing date of the IPO	16 Sep 22
problem type	Book built issue IPO
face value	₹10 per share
IPO price	₹314 to ₹330 per share
marketless	45 shares
Minimum order quantity	45 shares
listing at	BSE, NSE
total spend size	2.28.78.765 shares worth ₹10*
	(accumulated up to ₹755.00 Cr)*
offer for sale	90,90,900 shares worth ₹10 (total up to 300 Cr)*
Offered QIB Shares	No more than 50% of the offer
offered to private investors	Not less than 35% of the offer
Offered NII (HNI) shares	Not less than 15% of the offer
*In the upper price segment

The Company intends to use the net proceeds from the issue to fund the following items:

1. Prepayment or scheduled payment of a portion of existing credit drawn by our company.
2. Rs 77.95 crore to finance Capex for the purchase of machines.
3. Rs 7.12 crore for infrastructure repairs and refurbishment of existing manufacturing facilities including office buildings in India.

The promoter participation before the issuance is 99.70 percent and after the issuance 74.61 percent.

About the company:

Among the leading precision bearing cage manufacturers in the world, Harsha Engineers International Ltd (HEIL) is the largest precision bearing cage manufacturer in India’s economy by revenue. It offers a wide range of precision engineered products for various end-use industries and geographic markets. In addition, it occupies a leading and strong position in its segment worldwide.

The company supplies its products to customers in over 25 countries on five continents ie North America, Europe, Asia, South America and Africa

The business consists of two segments:

Engineering Business – In this segment, the company produces complex and specialized precision stampings, welded assemblies, brass castings, cages and bronze bushings. Bearing cages are also manufactured by the company (made of brass, steel and polyamide). In fiscal year 2021, it held around 50-60 percent market share in organized storage cages market in India and 6.5 percent in organized storage cages market globally. These cages were made of brass, steel and polyamide. In its press conference, the company’s management announced that almost 70 percent of sales come from this segment.

Solar EPC Business: In this line of business, the Company provides complete, all-encompassing, turnkey solutions for all solar PV needs, as well as operation and maintenance services for the solar industry.

The company has five manufacturing bases for engineering business with two manufacturing bases in Changodar and one in Moraiya, near Ahmedabad in Gujarat, and one manufacturing unit each in Changshu, China and Ghimbav Brasov in Romania.

strength of employees

As of March 31, 2022, the company employed a total of 2,198 people, of whom 1,955 worked in the engineering area with specialist and technical expertise and 68 in the solar EPC area.

competitive strength

1. Total solution provider offering a diversified suite of precision engineered products across geographies and end-user industries.
2. Long-standing relationships with leading customers.
3. Strategically located national and international production facilities and warehouses.
4. Expertise in tool making, design development and automation.
5. Consistent track record of growth and financial performance.
6. Strong, experienced and dedicated management team and qualified employees.

Financially

Harsha Engineering has reported (on a consolidated basis) sales and net profit of Rs 899.514 crore and Rs. 21.91 crore respectively for FY20. For FY21 the same figures were Rs 876.73 crore and Rs 45.44 crore. In the past financial year (FY22), the revenue was Rs.1339 crore and the profit was Rs.9194 crore. The company’s net profit doubles every year. For the financial years 2020, 2021 and 2022 the company had total assets of Rs 973.24 crore, Rs 981.07 crore and Rs 1158.25 crore respectively. The company’s net assets have increased from Rs. 433.22 crore in FY21 to Rs. 527.9 crore in FY22. Harsha Engineering has reported average earnings per share of Rs. 8.50 and an average return on net assets of 13.17 percent over the past three financial years. According to its NAV of Rs 68.34 as at 31 March 2022 and its post-IPO NAV of Rs 107.96 per share, the issue will trade at a P/BV of 4.83 or the upper cap).

peer group

According to the bid documents, HEIL has listed Timken India, SKF India, Rolex Rings and Sundram Fasteners as its listed competitors. They are currently trading at P/E ratios of 65.12x, 55.32x, 35.42x and 41.53x (as of September 09, 2022). However, they are not really comparable from apple to apple. If we allocate FY22 earnings to fully diluted post-IPO equity, the asking price is around 32.67x P/E.