Company Overview
With over 40 years of experience in manufacturing and supplying quality and complex components, Happy Forgings Ltd. is an engineering-led manufacturer of complex and safety-critical, heavy forged, and high-precision machined components in India. It is engaged in engineering, process design, testing, manufacturing, and supply of a variety of components that are both margin-accretive and value-additive and also manufactures 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. The company primarily caters to domestic and global original equipment manufacturers (“OEMs”) manufacturing commercial vehicles in the automotive sector, while in the non-automotive sector, the company caters 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. The company is a leading player in the domestic crankshaft manufacturing industry and has the second-largest production capacity for commercial vehicles and high-horsepower industrial crankshafts in India. The company’s extended focus on machining business and improvement in exports along with incremental business occurring every year has led to a steady growth in revenue and profitability of the company over the years. Also, the critical application of the company’s products along with close tolerance and stringent quality requirements of OEMs serve as entry barriers for new players to qualify as suppliers. As EV trends and hydrogen, CNG, and LNG combustion engine technologies become alternate prominent powertrain technologies in the automotive segment, the company’s focus on the high horsepower engine segment insulates the company from any such major changes.
Objects of the issue:
The net proceeds from the fresh issue will be used towards the following purposes:
- Purchase of equipment, plant and machinery;
- Prepayment of all or a portion of certain outstanding borrowings availed by our company; and
- General corporate purposes
Investment Rationale:
Fourth largest engineering-led manufacturer of complex and safety-critical, heavy forged, and high precision machined components in India
Established in 1979 as a forging company specializing in the manufacture of value-added machining products and supplying quality and complex components, the company is well-established within the industries and its customers. Having emerged as the leading player in the domestic crankshaft manufacturing industry and having the second largest production capacity for commercial vehicle and high horsepower industrial crankshafts, the company is the fourth largest engineering-led manufacturer of complex and safety-critical, heavy forged, and high precision machined components in India. The company is focused on developing heavier high-precision critical and value-added products for multiple end-user industries, which typically have extremely closed tolerances.
Diversified business model which is well placed to take advantage of potential alternative engine technologies
The company’s business model is well diversified by end-user industries and customer base. Concerning the automotive sector, the company derives revenues from OEMs of commercial vehicles. Within the non-automotive sector, the company manufactures and supplies a wide range of precision components to OEMs of farm equipment, off-highway vehicles, and industrial machinery and equipment for oil and gas, power generation, railways, and wind turbine industries. The recent trends have shown the adoption of EVs growing in the two-wheeler and passenger vehicle industries. However, the adoption of EVs in the heavy commercial vehicle industry has been insignificant due to high upfront costs, range limitations, and charging infrastructure availability in rural and remote areas. Also, heavy-duty vehicles such as trucks, off-highway vehicles, and tractors require more power and have different operating requirements than PVs, which makes it more difficult to switch to EVs. As a result, many heavy-duty vehicles will continue to use traditional internal combustion engines (“ICE”) or alternative engine technologies that require crankshafts. In recent times, hydrogen, LNG, and CNG combustion engines are among the most promising alternative engine technologies for the commercial vehicle industry. Such technologies also require a crankshaft as a product to operate. With the company engaged in the machining and crankshaft business for heavy horsepower vehicles, any change to combustion engines other than the traditional one will benefit the company over a longer time period.
Valuation and Outlook:
Happy Forgings Ltd. is an engineering-led manufacturer of complex and safety-critical, heavy forged, and high-precision machined components in India. While catering to the global OEMs engaged in the manufacturing of commercial vehicles in the automotive sector and manufacturer of farm equipment and industrial equipment in the non-automotive sector, the company is a leading player in the domestic crankshaft manufacturing industry. Keeping its focus on producing market accretive value-added products and possessing the second-largest production capacity for CVs and high-horsepower industrial crankshafts in India, the company has transitioned from being a forging-led business to a machined component manufacturer. This transition is reflected in the growth of the company over the years and the share the machining component business in the total revenue of the company. The machining component business comprised 70-80% of the total revenue of the company during the fiscal years 2021-2023 which also demonstrates its increased focus on machined products over the years. The company derives 75-80% of its revenue from its top 10 customers. This number is expected to fall to 50% which reflects that the company is building a newer client base and reducing its dependency on the old client base. With the global forging and machining market estimated to grow at a CAGR of 5.2% by 2029 and the Indian crankshaft market for automotive, farm tractors and industrial engines estimated to grow at a CAGR of 8.3% by value between fiscal 2024 and 2029, the company emerges as the one-stop solution to cater to such market demand in the automotive and non-automotive segments. On the financial performance front, the company’s Revenue/EBITDA/PAT grew at a CAGR of 43%/46.6%/55.4% during the FY2021-23 period. On the upper price band, the issue is valued at a P/E of 36.4x based on FY2023 earnings which we feel is fairly valued. We, therefore, recommend a “Subscribe” rating for the issue.
