The share of machined parts – a segment that enjoys higher realisation in forging – in the company’s total volume has been consistently increasing and it has been able to source raw materials at a lower rate. This helped Happy Forgings enjoy the highest operating margin among peers.
The company has strategically increased capacity without compromising on return ratio, although 33% of its gross value of fixed assets was a result of capex incurred between FY22 and FY23. There is ample room for export growth – exports accounted for 20% of revenue in the first half of FY24 and that was significantly lower than its peers. The company offers an attractive value proposition for overseas customers by offering 15-20% lower prices than the current landed cost. Given these factors, investors may consider the company’s IPO.
Business model
Ludhiana-headquartered Happy Forgings is India’s fourth largest heavy forged and precision-machined components maker. The company has India’s second largest production capacity for high-powered industrial crankshaft. It makes crankshafts of 10-210 kg that are used in diverse application fields.
Sales to commercial-vehicle customers account for 43% of revenue, followed by farm equipment (37%) and off-highway (16%), with the balance coming from industries. Customers include Ashok Leyland, VE Commercial Vehicles, Dana India, JCB India and Mahindra & Mahindra. It exports to nine countries, including Sweden, Turkey and Italy. The company has an installed capacity of 120,000 tonnes of forging and 47,200 tonnes of machining with three plants in Punjab.
Financials
Revenue grew 43% annually between FY21 and FY23 to ₹1,196 crore, while operating profit rose 46% on a CAGR (compound annual growth rate) basis to ₹341 crore, implying a margin of 28.5%. Its operating profit margin expanded 135 basis points in the last two fiscal years. Net profit expanded at 56% CAGR to ₹209 crore between FY21 and FY23. In the first half of FY24, it had revenue of ₹672 crore with an operating margin of 29% and profit of ₹119 crore.
Risks
The company has high exposure to the commercial vehicle sector which is quite cyclical in nature and typically goes through an upcycle of 5-6 years, followed by 2-3 years of a downcycle. A prolonged downcycle in the CV sector may weigh on its financial performance. Also, top-5 customers account for 47% of the total revenue. Any slowdown in the order sourcing of these customers may impact its financials.
Valuation
At the upper end of the price band, the company is demanding a price-earnings multiple of 37 on the trailing 12-month earnings.
Listed peers Bharat Forge (46.7 times), Craftsman Automation (47.2) and Ramkrishna Forgings (49) are trading at higher multiples, according to BSE data.
Happy Forgings’s return on capital employed ( 24.2%) and its Ebitda margin were higher than its counterparts in FY23.