Harsha Engineers International IPO oversubscribed on first day

Harsha Engineers International, one of the significant players in the organised sector engaged in manufacturing of precision bearing cages. In terms of revenue, it is one of the largest organised players in India and a leading global manufacturer of precision bearing cages. The company controls 50-60% of the domestic organized Indian bearing cages market and 6.5% of the global organized market.

Harsha Engineers International’s History

The company, which has its headquarters in Ahmedabad, has five manufacturing facilities, with two of them located close to Ahmedabad in Gujarat, India—in Changodar and Moraiya—and one each in Changshu, China, and Ghimbav Braşov, Romania. These facilities give the company access to customers in over 25 different countries. As of March 31, 2022, it had produced over 7,205 bearing cages in addition to more than 295 other items. Additionally, during the last three years, its product development and innovation centre has created over 1,200 products in a variety of bearing kinds.

The company Harsha Engineers International, has recently announced an Initial Public Offering of Rs 755 crores, consisting of fresh issue of equity shares aggregating to Rs 455 crore, and an offer-for-sale of up to Rs 300 crore by existing shareholders.

Harsha Engineers IPO details

It has fixed the price band at Rs 314-330 per share for its Rs 755-crore initial share sale. The public issue will conclude on Friday, September 16, 2022. The IPO of Harsha Engineers got fully subscribed on the first day of subscription on Wednesday i.e., 14^th September 2022. While the issue has been overall subscribed 8.52 times with retail category booked 8.15x, NIIs 20.15x, employee reserved nearly 6x, and QIBs 0.48, BSE data showed on 15^th September evening.

As per market observers, Harsha Engineers shares were available at a premium of Rs 203 in the grey market yesterday.

Harsha Engineers Reason for IPO and its usage

• Proceeds from the fresh issue to the tune of up to Rs 270 crore will be utilised for debt payment
• Up to Rs 76 crore for funding working capital requirements towards purchase of machinery
• Up to Rs 7 crore for infrastructure repairs and renovation of the existing production facilities and for general corporate
• Further they are planning to fund the purchase of machinery through this IPO

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Harsha Engineer Limited IPO’s SWOT analysis

Strength

The company is engaged in the production and sale of bearing, which being a homogeneous product is sold mainly to other businesses. Under its B2B model, the company has a good customer base which is also highlighted through the fact that clients make repeated purchases. On an average their relationship with customers lasts more than a decade, making them much better placed in the market.

One of its prominent strengths is that their business is not easily replicable and is immune to the same. This is because manufacturing bearing cage requires good degree of precision & technical expertise as it cannot be easily substituted or outdated. Thus, it is difficult for new players to enter the market. Lastly, the company has positive free cash flows in last 3 financial years. Even their Net debt-equity is 0.64 which is less than 1.

Promoters holds 74.6% stake in the company even post issue of shares with zero pledge, even the management of company is pretty experienced with no proof of any material litigation against any one of them.

Weakness

Even when the company have its leadership position in the market, they have other bigger competitors and bearing companies with In-house manufacturing. Further, the top 5 customers which constitute 71% of its revenue has power to change design of bearings and to buy at pre-agreed prices, making it difficult for company to counter it and is riskier to rely on such small number of clients.

The company’s three-year average ROE is 12.1% less than 15%, a recommended mark. While the ROCE is 20.1%.

Opportunities

The company’s PE ratio post listing will be 32.7 which is quite less than its peer’s median PE of 47.4. Even their PB ratio is just 3.6 which is less than 10.5 PB ratio of its peers. Further, company’s exports make up to 2/3 of its revenue, therefore giving it an opportunity to explore markets beyond domestic territory and tap their hidden potential.

Threat

It has 2 manufacturing plants which contributes to 27% of the total revenue & several warehouses around the world. Of this, the plant in Romania may face brunt power crisis which can affect its operations. Moreover, company has to face huge competition at global level, especially from company such as NKC, which is world’s largest independent bearing cage manufacturer.

Further, the company’s major competitors in India includes Timken India, SKF India, Rolex Rings & Sundaram Fasteners Limited.

Our view

Non-institutional investors shown vigour from the start, placing bids 24.91 times the allocated quota, while retail buyers purchased shares at a rate of 9.14 times the amount allotted to them, and employees booked at a rate of 6.34 times.

Additionally, it is anticipated that the Indian bearing cages market would expand at a CAGR of 8.3% to $10.3 billion by FY29. And by FY29, the global market for bearings is projected to increase at a CAGR of 6.4% and reach $171.7 billion. This offers a lucrative growth opportunity to the Harsha Engineers.

Harsha Engineers, in the opinion of ACMIIL, is well-positioned to take advantage of domestic and international prospects attributable to its exceptional product mix, long-standing partnerships with top clients, and expanding capacities. A strong driver for the company is the broad application of bearings expanding in several sectors along with significant government initiatives to develop the manufacturing industry.

Broker’s recommendation on Harsha Engineers

Motilal Oswal asked to subscribe for Listing gains, swastika Investmart also had the same rating to subscribe. LKP securities and Angel one also gave subscribe rating. While Religare broking maintained a neutral stance. However, BP Equities, which thinks the company is properly priced in relation to its listed competitors, notes that rising raw material prices continue to be a top issue for the maker.

About the Author

Ketan Sonalkar (SEBI Rgn No INA000011255)

Ketan Sonalkar is a certified SEBI registered investment advisor and head of research at Univest. He is one of the finest financial trainers, with a track record of having trained more than 2000 people in offline and online models. He serves as a consultant advisor to leading fintech and financial data firms. He has over 15 years of working experience in the finance field. He runs Advisory Services for Direct Equities and Personal Finance Transformation.

Note – This channel is for educational and training purpose only & any stock mentioned here should not be taken as a tip/recommendation/advice

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