Amit Pathak | Sharekhan Education\u00a0<\/strong><\/p>\n

Harsha Engineers International Ltd IPO<\/p>\n

About the Issue:<\/strong><\/p>\n

Issue size: \u20b9 755 Cr<\/p>\n

Price Band:\u00a0\u20b9 314-330<\/p>\n

The issue opens on: Wednesday, 14th Sept 2022<\/p>\n

The issue closes on: Friday, 16th Sept 2022<\/p>\n

Company Overview:<\/strong><\/h5>\n

Harsha Engineers International Ltd. (HEIL) is a leading engineering company engaged in the manufacturing of brass, steel & polyamide cages, and stamped components. The company’s product portfolio includes a wide range of bearing cages from 20 mm to 2,000 mm in diameter.<\/p>\n

Bearing cages find application in the automotive, railways, aviation & aerospace, construction, mining, agriculture, electrical & electronics, and renewable sectors.<\/p>\n

The company enjoys an approximate market share of 50-60% in the Indian bearing cages market and a 6.5% market share in the organized global bearing cages market for brass, steel, and polyamide cages in CY21. Additionally, it also provides complete comprehensive turnkey solutions to all solar photovoltaic requirements.<\/p>\n

Objectives of the Issue: <\/strong><\/h5>\n

The IPO consists of a fresh issue of equity shares aggregating to Rs. 455 crores and an offer for sale (OFS) of up to Rs.300 crores by existing shareholders. The proceeds from the fresh issue would be utilized for funding capital expenditure toward the purchase of machinery and repayment of a portion of the existing borrowings. A minimum application for 45 shares and in multiples thereafter needs to be made to participate in the issue.<\/p>\n

Industry Overview: <\/strong><\/h5>\n

Bearings form an important part of many types of machines and are available in a variety of shapes and sizes. Precision bearing cages are one of the key components of a bearing. It accounts for a small portion of the total cost of bearings. The bearing cage requires the highest lead time and technical & tooling expertise for its manufacturing compared to other components of a bearing. Following the increased outsourcing of bearing cages by global companies, the domestic bearing industry would benefit from shifting production facilities to emerging geographies such as India. The Indian bearing cages market is estimated to post a CAGR of 7.9% during 2021-29. Favorable policy and regulatory framework and growing demand from end users will drive the demand for bearings components including cages going forward.<\/p>\n

Competitive Strengths:\u00a0<\/strong><\/h5>\n

HEIL is a comprehensive solution provider with a diversified suite of precision engineering products across geographies and end-user industries. It manufactures bearing cages, complex and specialized precision stamped components, welded assemblies, and brass castings and bushings. It has recently expanded its product portfolio to introduce sand-casting; bronze bushings, value-added stamping components, etc. to cater to more end-user industries such as wind, mining, and shipping sectors. The long-term relationship with customers assists the company to understand their diverse requirements, including the development of new products. The company has four manufacturing facilities located strategically across three countries in India, China, and Romania. Proximity to the key customer groups gives it a strategic advantage in ensuring greater cost-effectiveness, quicker delivery, and faster turn- around times. Its dual-shore capabilities to carry out the design, engineering, and manufacturing of products at different locations, allows it to service customer requirements from alternate locations.<\/p>\n

HEIL has 10 years of history operating in the solar EPS business. It has an in-house design, engineering, project management, procurement, and O&M team, which has a combined experience of installing at least 500 MW and more than 60 MW commissioning experience in the rooftop segment as of March 31, 2022.<\/p>\n

Key Concerns:\u00a0<\/strong><\/h5>\n

The Company depends on third parties for the supply of raw materials and delivery of products. It depends on suppliers from China for certain key components used in their solar power projects. Any disruption in the supply of raw materials could impact the company\u2019s production and increase costs. The company derives more than 60% of its revenue from exports and hence is exposed to foreign currency exchange rate fluctuations. The company has contingent liabilities worth Rs.900 mn (~10% of the Balance sheet), if they materialize, may adversely affect the financial condition of the firm.<\/p>\n

Financials:<\/strong><\/h5>\n

Company\u2019s Revenue\/ EBITDA\/PAT grew at 22%\/40%\/105% CAGR over FY20-22. It has a low net debt-to-equity ratio of 0.68 as of March 31, 2022. The RoE has improved from 5.8% in FY20 to 17.4% in FY22. On the upper price band of INR 330, the post-issue P\/E works out to 32.7x FY22. The valuation looks reasonable considering the average industry P\/E of 50.9x. Considering the growth opportunities, we are maintaining a positive view of the company.<\/p>\n

Source:<\/strong> SEBI red herring prospectus<\/p>\n

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