Harsha Engineers International
Harsha Engineers International is coming out with a 100% book building; initial public offering (IPO) of 2,40,53,265 shares of Rs 10 each in a price band Rs 314-330 per equity share.
Not more than 50% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not less than 15% of the issue will be available for the non-institutional bidders and the remaining 35% for the retail investors.
The issue will open for subscription on September 14, 2022 and will close on September 16, 2022.
The shares will be listed on BSE as well as NSE.
The face value of the share is Rs 10 and is priced 31.40 times of its face value on the lower side and 33 times on the higher side.
Book running lead managers to the issue are Axis Capital, Equirus Capital and JM Financial.
Compliance Officer for the issue is Kiran Mohanty.
Profile of the company
The company is the largest manufacturer of precision bearing cages, in terms of revenue, in organised sector in India, and amongst the leading manufacturers of precision bearing cages in the world. It offers diversified suite of precision engineering products across geographies and end-user industries. Its business comprises: (i) engineering business, under which it manufactures bearing cages (in brass, steel and polyamide materials), complex and specialised precision stamped components, welded assemblies and brass castings and cages & bronze bushings; and (ii) solar EPC business, under which it provides complete comprehensive turnkey solutions to all solar photovoltaic requirements. The company has approximately 50-60% of the market share in the organised segment of the Indian bearing cages market and 6.5% of the market share in the global organised bearing cages market for brass, steel and polyamide cages in CY 2021. It offers a wide range of bearing cages starting from 20 mm to 2,000 mm in diameter and its bearing cages find its application in the automotive, railways, aviation & aerospace, construction, mining, agriculture, electrical and electronics, renewables sectors etc.
The company is a technology driven company with a strong focus on quality, design and tool development, which has allowed it to develop products suited to its customers’ requirements. It has the expertise to design and develop advance tooling in-house which enables it to manufacture precision bearing cages and complex and specialised precision stamped components. Bearing cages are critical parts of a bearings and it requires high precision technology to manufacture them. The company, which housed a team of 253 qualified engineers (including solar EPC business) as of March 31, 2022, along with its decades of experience in bearing cages engineering, enables it to develop specialized products and solutions. Its ability to develop products suited to its customers’ requirements has fostered strong and long term customer relationship which in turn has helped it gain higher margins for its products and better navigate competition. Further, it has been successful in diversifying its product portfolio and improves its current processes in different types of bearing cages mainly due to its design, development and technological capabilities. The company is also an EPC service provider in the solar photovoltaic industry and also provides operations and maintenance services in the solar sector. It has over 10 years of operating history in the solar EPC business. It has an in-house design, engineering, procurement, project management and O&M team which has a combined experience of installing at least 500 MW and more than 60 MW commissioning experience in roof top segment as of March 31, 2022.
Proceed is being used for:
Pre-payment or scheduled repayment of a portion of the existing borrowing availed by company.
Funding capital expenditure requirements towards purchase of machinery.
Infrastructure repairs and renovation of existing production facilities including office premises in India.
General corporate purposes.
Industry overview
In terms of revenue, bearings market in India accounted for a share of about 5.2% in the global bearings market in 2021. Meanwhile, within Asia Pacific region, the revenues for bearings market in India accounted for a share of about 12.5% of the Asia Pacific region’s revenues. The Indian bearings market grew at a CAGR of 7.2% from 2015 to 2019. The global outbreak of Covid-19 and subsequent imposition of restrictions led to fall in demand for bearings from end user industries and bottlenecks in supply chain networks of manufacturers. This in turn led to contraction of domestic bearings market in 2020. High and volatile commodity prices poised significant risks to the global economy and the effects were felt on both inflation and growth, and will fall unevenly across countries. There was a rebound seen in 2021 led by growth in the Asia-Pacific region, including India which showed expected growth in usage of bearings in several applications such as mining, automotive, infrastructure development and construction. Sharp growth in commodity prices also augured well for the overall growth in 2021.
The domestic automotive bearings market accounted for the highest share at 22.3% of the total domestic bearing market in 2021. It stood at $0.9 billion in 2015 and grew at a CAGR of 6.7% during 2015 to 2019. The demand for automotive bearing is being driven by increasing demand for automobile. The commercial vehicle sector is witnessing a structural uptick. The domestic automotive bearings market is expected to grow to $2.2 billion in 2029 at a CAGR of 7.8% during 2021 to 2029. The domestic aviation & aerospace bearings market accounted for a share of 19.7% of the total domestic bearing market in 2021. It stood at $0.7 billion in 2015 and grew at a CAGR of 7% during 2015 to 2019. Increasing investments in defense and growing demand for high performance bearings in aviation and aerospace is likely to positively affect the aviation and aerospace bearings industry in the country. It is expected to grow to $2 billion in 2029 at a CAGR of 8.1% during 2021 to 2029. The domestic railways bearings market accounted for a share of 17.8% of the total domestic bearing market in 2021. It stood at $0.6 billion in 2015 and grew at a CAGR of 7.8% during 2015 to 2019. Growing investments in railways and thrust provided by the government on infrastructure included railways bodes well for bearings industry. The domestic railways bearings market is expected to grow to $1.9 billion in 2029 at a CAGR of 8.9% during 2021 to 2029.
Pros and strengths
Diversified product portfolio: The company has a diversified product portfolio in terms of the materials used as well as the dimensions and end-use of the finished products. It primarily manufactures bearing cages in the range of 20 mm to 2,000 mm in diameter. It has been successful in improving its current processes of manufacturing and new product development for different types of bearing cages mainly due to its designing and tooling development and technological capabilities. Within its diversified product portfolio, it manufacture bearing cages (including cylindrical roller cages, spherical roller cages, deep grove cages, angular contact cages, thrust roller cages and taper roller cages), complex and specialised precision stamped components, welded assemblies and brass castings and bushings. Since its incorporation, it has manufactured more than 7,500 types of products in the automotive and industrial segments. It manufactures bearing cages in brass, steel and polyamide which represents 6.5% of the global organized outsourced bearing (brass, steel & polyamide) cages market in CY 2021.
Long standing relationships with leading clientele: The company has established strong relationship with its customers who are leading global bearing manufacturers in the automotive, railways, aviation & aerospace, construction, mining, agriculture, electrical and electronics, renewables sectors. The bearing cages market globally is concentrated among a few global bearing manufacturers with top six global bearing manufacturers contributing to 54% of the market share in Fiscal 2022. As of March 31, 2022, it supply to each of the top six global bearing manufacturers. Its top 10 customers contributed to 44.70%, 48.24%, and 47.79% of its total revenue from operations for Fiscal 2022, Fiscal 2021 and Fiscal 2020, respectively. The average age of its relationship with its top five customer groups spans more than a decade. Its long term relationships with customers is indicative of its quality consciousness and its designing and tooling capabilities.
Strategically located domestic and international production facilities and warehouses: The company has four strategically located manufacturing facilities spread across three countries in India, China, and Romania. As on March 31, 2022, its aggregate installed capacity across these manufacturing facilities was 4,596 metric tonne per annum for castings and 1,097.87 million pieces per annum for bearing cages. Its presence in these locations helps it overcome significant entry barriers in comparison with its competitors, allowing it to penetrate these markets more efficiently and becoming a local supplier to leading key global bearing players. Its presence in these strategic locations help it penetrate global markets more efficiently and in a cost effective manner. It also gives it the ability to cater to the needs of its customers from multiple locations, at times designing products at one location while manufacturing them at another. Its dual-shore capabilities, which is its ability to carry out design, engineering and manufacturing of products at different locations allow it to service customer requirements from alternate locations, giving the customer the benefit of regular supply and cost-competitive manufacturing operations.
Expertise in tooling, design development and automation: The company’s decades of experience in precision engineering, expertise in area of tooling, strategically located production facilities, focus on design and tooling, coupled with technologically advanced and cost competitive manufacturing technology processes has enabled it to meet its customers’ bespoke and stringent requirements. It has full-service capabilities across the product cycle including product design and development, material sourcing, designing and manufacture of complex tooling components, testing and measurement infrastructure, all under one roof for meeting the requirement of its global customers. It employs machining as well as stamping processes in its manufacturing process. Its machines are equipped for both individual and diversified processes, and their fungibility enables it to employ them in the most optimum manner to suit the customer’s preferences. Its tool room at the Indian production facilities are equipped with tool design software like Pro Engineer for 3D modelling and detailing, Numerically Controlled Tool Path, Auto Cad Station, Sheet Metal Formability Simulation, Hyperworks, that allow it to eliminate any defects in the designing process.
Risks and concerns
Dependent upon network of agents: The company is depends on its network of agents for, inter alia, business development in certain jurisdictions, cargo handling, transportation, warehousing and delivery at the destination and load port for export cargo and import cargo respectively. For this purpose, it enters into memoranda and agreements with such agents, and such arrangements are generally for a specific period and generally renewable pursuant to mutual consent. It cannot provide assurance that such arrangements as aforesaid will continue to be successful or be renewed after expiry of the stipulated term. Any alteration to or termination of its current agreements with agents, any failure to enter into new and similar agreements on commercially favourable terms or at all, could materially adversely affect its business, financial condition, prospects or results of operations. It has limited control over the operations and businesses of such agents in the event any such agents treat its competitors’ more favourably than it. Its competitors may also provide greater incentives to its agents, consequent to which its agents may choose to act only on behalf of its competitors instead of it.
Geographical concentration: The company substantially operates its engineering business, including its manufacturing processes, out of and around principal production units that are located at Changodar and Moraiya near Ahmedabad in Gujarat in India. It has further expanded its manufacturing process by establishing a production unit at Changshu in China and acquiring production units at Suzhou in China (currently part of the unit at Changshu in China) and Ghimbav Brasov in Romania. If the company’s existing units at Ahmedabad, China and Romania are harmed or rendered inoperable by factors such as increased competition as more players enter into these geographies, general economic conditions, laws and regulations, both Indian and international, and other natural or man-made disasters, including earthquakes, fire, floods, acts of terrorism, pandemic and power outages, it may render it difficult or impossible for it to efficiently operate its business for some time, or require it to shut major part of its operations, which may adversely affect its business, financial condition, result of operations and cash flows.
Depend on suppliers from China for solar PV modules: The company is dependent on suppliers from China for solar PV modules, which is a key component required for setting up of its solar power projects. It is dependent primarily on a limited number of suppliers in China, which cannot be replaced easily. If the available supply of such key component is insufficient to meet the needs of its solar EPC business or if there is an interruption in supply from its Chinese suppliers, including due to any unanticipated outage, shutdown and/or suspension of production at their units, change in political relationship between India and China or implementation of laws and policies impacting its relationship with its Chinese suppliers, its ability to set up solar projects could be adversely impacted which will have an adverse impact on its solar EPC business and results of operations.
Business operations may be disrupted by interruption in power supply: The company’s units and operations require constant power supply and any disruption in the supply of power may disrupt its operations, which may interfere with manufacturing process requiring it to either stop its operations or repeat activities which may involve additional time and increase its costs. For instance, it had a power supply outage at its manufacturing plant in China, resulting in temporary closure of the unit or being operated at reduced capacity depending on the power availability. As per its Restated Consolidated Financial Statements, its cost of power constituted 3.40%, 3.79% and 3.49% of its total expenses, respectively, for Fiscals 2022, 2021 and 2020. While it has stand by power supply in the form of DG set and solar roof top plants, this may not be adequate if the disruption in the supply of the power is for a longer period. Additionally, such standby power supply may not be sufficient to enable it to operate its units at full capacity and any such disruption in the primary power supply available at its production units could materially and adversely affect its business, financial condition and results of operations.
Outlook
Since its inception in 1986, Harsha Engineers International is the largest manufacturer of precision bearing cages in organized sector in India in terms of capacity and operations and amongst the leading manufacturers of precision bearing cages in the world with a market share of approximately 5% to 6% in the organized segment of the global brass, steel, polyamide bearing cages in terms of revenue. It is a technology driven company with a strong focus on research and development, which has allowed it to develop products suited to its customers’ requirements. It has the expertise to design and develop advance tooling in-house which enables it to manufacture complex products. Its principal production facilities are at Changodar and Moraiya, near Ahmedabad in Gujarat in India. It also has production facility through subsidiary in Changshu, China and step down subsidiary in Ghimbav Brasov in Romania. On the concern side, the company could face liabilities or otherwise suffer losses should any unforeseen incident such as fire, flood, and accidents affecting its warehouses or in the regions/areas where it operate from. It maintains appropriate insurance coverage, commensurate with industry standards, in relation to property, stock and money for its warehouses, transit insurance, and product liability. Besides, the company’s manufacturing activities are labour intensive and expose it to the risk of various labour related issues. Whilst it has not faced any strike by its workforce, it cannot assure that it will not be subject to work stoppages, strikes, lockouts or other types of conflicts with its employees or contract workers in the future.
The issue has been offered in a price band of Rs 314-330 per equity share. The aggregate size of the offer is Rs 755.27 crore to Rs 793.76 crore based on lower and upper price band respectively. On performance front, the company’s revenue from operations increased by 51.24% to Rs 13,214.81 million for Fiscal 2022 from Rs 8,737.54 million for Fiscal 2021. The company’s profit after tax has increased by 102.35% to Rs 919.44 million for Fiscal 2022 from Rs 454.39 million for Fiscal 2021, primarily due to increase in the revenue from operations from the engineering business and reduction in the operating loss of solar EPC business as well as gain on account of exchange rates. Meanwhile, the company aims at further expanding its customer base in China as it is considered a versatile and consistent player in the bearing cages segment in China. It also intends to further expand into the Japanese bearing market by supplying directly to its Japanese customers at their locations in Japan. It plans to continue expanding its development, engineering, tool design and manufacturing, process improvements, lean manufacturing techniques, and automate them to optimize man-power to ensure zero defect products.
