Happy Forgings coming with IPO to raise upto Rs 1029.39 crore

Happy Forgings 

• Happy Forgings is coming out with a 100% book building; initial public offering (IPO) of 1,21,10,415 shares of Rs 2 each in a price band Rs 808 -850 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 more 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 December 19, 2023 and will close on December 21, 2023.
• The shares will be listed on BSE as well as NSE.
• The face value of the share is Rs 2 and is priced 404 times of its face value on the lower side and 425 times on the higher side. 
• Book running lead managers to the issue are JM Financial, Axis Capital, Equirus Capital and Motilal Oswal Investment Advisors.
• Compliance Officer for the issue is Bindu Garg. 

Profile of the company

The company is the fourth largest engineering led manufacturer of complex and safety critical, heavy forged and high precision machined components in India as of Fiscal 2023 in terms of forgings capacity. The company, through its vertically integrated operations, is engaged in engineering, process design, testing, manufacturing, and supply of a variety of components that are both margin accretive and value-additive. It primarily caters to domestic and global original equipment manufacturers (OEMs) manufacturing commercial vehicles in the automotive sector, while in the non-automotive sector, it 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.

With over 40 years of experience of manufacturing and supplying quality and complex components according to customers specifications, it has emerged as a leading player in the domestic crankshaft manufacturing industry with the second largest production capacity for commercial vehicle and high horse-power industrial crankshafts in India. Its focus on producing margin accretive value-added products has led to its transition from being a forging led business to a machined components manufacture. It 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.

Proceed is being used for:

• Purchase of equipment, plant and machinery.
• Prepayment of all or a portion of certain outstanding borrowings availed by the company.
• General corporate purposes.

Industry Overview

India a Commercial Vehicle (CV) production registered a growth of 4.5% CAGR from Fiscal 2014 to Fiscal 2023. Rising demand for pickup trucks, owing to the growing e-commerce and logistics sector is responsible for the growth in this period. HCV more than 16 tonnes registered the highest CAGR of 11.6% during Fiscal 2014 to Fiscal 2023 due to increased government expenditure on infrastructure, BS-VI transition and growth in mining and quarrying sector which is about 3% of the GDP. The India CV production market is expected to grow at a CAGR of 7.1% over the period Fiscal 2024 to Fiscal 2029 due to rise in government initiatives such as Make in India campaign and PLI (Production Linked Incentive) scheme which aims to provide financial incentives to boost manufacturing and attract investments in the commercial vehicle value chain. Moreover, Government’s commitment to invest in major infrastructure projects will play an important role in boosting CV demand. An investment of $ 2.5 billion has been announced in 2023 by the National Bank for Financing Infrastructure and Development (NaBFID) to fund infrastructure projects related to energy, urban infrastructure, and airports.

Turnover of India automotive components Industry registered a growth of CAGR 7.7% over the period Fiscal 2014 to Fiscal 2023 with maximum contribution from exports with growth of CAGR 9.4% between Fiscal 2014 to Fiscal 2023 supported by the fact that India has a competitive advantage in categories such as shafts, bearings, and fasteners due to large number of players which is resulting in higher exports. Aftermarket and supply to OEMs also registered a growth of 8.0% and 7.1% CAGR respectively due to cost effective manufacturing base in India which keeps cost lower by 10-25% relative to operations in Europe and Latin America. Additionally, the robust manufacturing ecosystem, the easy availability of skilled labour and key raw materials, and strong government incentive schemes to promote ‘Make in India’ are all contributing to India’s emergence as a global manufacturing hub. Auto component market turnover is expected to show a significant growth of 10.6% CAGR in period Fiscal 2023 to Fiscal 2029 supported by increasing demand and government policies such as allowance of 100% FDI under the automatic route in the sector and Production Linked Incentive scheme for auto and auto components, which is expected to bring a capex of around $ 9.58 billion by Fiscal 2029.

Pros and strengths

Fourth largest engineering led manufacturer of complex and safety critical, heavy forged and high precision machined components in India: The company commenced operations in 1979 primarily as a forging company, and has since evolved into a manufacturer specializing in the manufacturing of value added machined products. With over 40 years of experience of manufacturing and supplying quality and complex components, it is well established within the industries and customers it cater to. In terms of forging capacity as of Fiscal 2023, it is the fourth largest engineering led manufacturer of complex and safety critical, heavy forged and high precision machined component in India. Further, it has emerged as a leading player in the domestic crankshaft manufacturing industry with the second largest production capacity for commercial vehicle and high horse-power industrial crankshafts. It is focused on developing heavier high precision critical and value added products for multiple end-use industries, which typically have extremely closed tolerances (i.e., products should meet precise and specific requirements in terms of measurements and tolerances).

Diverse product portfolio with increasing value addition: The company’s journey from manufacturing basic forged and machined components to manufacturing complex and safety critical products with closed tolerances, involved expansion of its capabilities in both light and heavy forging and machining. In the initial years of its operations, it focused on manufacturing components such as forged bicycle pedals, camshaft, bull gears and semi machined transmission parts. As it gained experience and expanded its engineering capabilities, it forayed into products that required higher levels of precision, strength, and durability. It expanded its capabilities to manufacture complex and safety critical parts, resulting in a diverse product portfolio of machined parts such as crankshaft, transmission parts, suspension products and other products for commercial vehicles, farm equipment, and off-highway vehicles. In addition, it also expanded its capabilities to manufacture and supply components with applications in industries including oil and gas, power generation, railways and wind turbines. The company’s diverse range of products and continuous efforts to develop new products, have allowed it to serve a wide range of industries and customers, which has strengthened its ability to attract new customers.

Diversified business model, well placed to take advantage of potential alternative engine technologies: The company’s business model is well diversified by end use industry and customer base. In automotive sector, it derives its revenues from OEMs of commercial vehicles. Within the non-automotive sector, it manufactures and supply 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. It has a diversified customer base and it served 66 customers in Fiscal 2023 and 59 customers in the six months ended September 30, 2023. Its customers span across industries, including manufacturers of light, medium and heavy commercial vehicles in the automotive sector and manufacturers of farm equipment, offhighway vehicles and machinery and equipment for oil and gas, power generation, railways and wind turbine industries in the non-automotive sector. 

Long-standing relationships with customers across industries: The company has, through over 40 years of business operations, established long-standing relationships with several Indian and global customers across industries. It is among the few companies in India that manufacture and supply high precision safety critical components to leading OEMs including manufacturers of commercial vehicles, farm equipment, off-highway vehicles and industrial equipment and machinery for oil and gas, power generation, railways and wind turbine industries. It has a diversified customer base and it has served 66 customers in Fiscal 2023 and 59 customers in the six months ended September 30, 2023. Its focus on quality, providing customised solution to its customers and timely delivery of its product offerings have helped it establish and maintain long term relationships with its customers. During this process, it assisted this manufacturer with converting their cast iron crankshaft into a forged version. Additionally, it recommended the suitable steel that would match the mechanical properties of the casted version. As a result, it became a single source supplier of crankshaft to this manufacturer. 

Risks and concerns

Depend on few suppliers: The company is engaged in manufacturing complex and high precision heavy forged machined components, requiring steel of certain technical specifications. High quality steel that meets its requirements is typically supplied by a limited number of suppliers in the Indian market, hence it relies on a few suppliers to supply steel for its operations. It does not enter into definite-term agreements with its suppliers (who typically supply it through purchase orders) and they may not perform their obligations in a timely manner or at all, resulting in delays to its production schedule and adversely affecting its output. While there has been no instance where any of its supplier did not perform their obligations in a timely manner in the last three Fiscals and six months ended September 30, 2023 which had an adverse impact on the financials of the Company, it cannot assure that no instance will arise in the future where delay in supply of steel would not have an adverse impact on its results of operations, cash flows, financial condition or business.

Business depends on performance of certain industries: In the automotive sector, the company primarily cater to domestic and global original equipment manufacturers which manufacture commercial vehicles. In the non-automotive sector, it caters to manufacturers of farm equipment, offhighway vehicles and industrial equipment and machinery for oil and gas, power generation, railways and wind turbine industries. It is exposed to fluctuations in the performance of these industries. In India, these industries may perform differently and be subject to market and regulatory developments that are dissimilar to such industries in other parts of the world. Its sales are directly dependent on the production level of these industries domestically and globally, and are affected by inventory levels of manufacturers operating in these industries. Further, production and sales of the vehicles for which it supply products are affected by a variety of other factors that are beyond its control, including changes in government policies, changes in consumer demand, product mix shifts favouring other types of vehicles, fuel prices, vehicle electrification, economic conditions, demographic trends, employment and income levels and interest rates, disruptions in these industries’ supply chain, vehicle age, labour relations, regulatory requirements, credit availability and cost of credit and general economic and industry conditions.

Significant power and fuel requirements: The company requires substantial power and fuel for its manufacturing facilities. While it has installed solar panels in all its manufacturing facilities, it continues to purchase electricity for its operations from the state electricity board of Punjab. In Fiscal 2023, 2022 and 2021 and six months ended September 30, 2023 and 2022, electricity cost purchased from the state electricity board of Punjab was Rs 591.76 million, Rs 539.66 million, Rs 385.39 million, Rs 402.65 million and Rs 301.86 million, respectively. In case the cost of electricity from state electricity boards is increased significantly and it is not able to pass on such increase to its customers, its cost of production and profitability will be adversely affected. Interruptions of electricity supply can result in production shutdowns, increased costs associated with restarting production and the loss of production in progress. Any significant increase in power price or increased interruptions may require it to add captive power generation capacity which will lead to incremental capital expenditure which may adversely impact its results from operations.

Working capital requirements: The company’s business is capital intensive. It has expanded and upgraded its existing manufacturing facilities in the last three Fiscals. The actual amount and timing of its future capital requirements may differ from estimates as a result of, among other factors, unforeseen events beyond its control, unforeseen delays or cost overruns, unanticipated expenses, regulatory changes, economic conditions, engineering design changes, weather related delays, technological changes and additional market developments and new opportunities in the industries it operate. Its sources of additional capital, where required to meet its capital expenditure plans or funding working capital requirement, may include the incurrence of debt or the issue of equity or debt securities or a combination of both. Further, its budgeted resources may prove insufficient to meet its requirements which could drain its internal accruals or compel it to raise additional capital. If it is required to raise additional funds through the incurrence of debt, its interest and debt repayment obligations will increase, and could have a significant effect on its profitability and cash flows and it may be subject to additional covenants, which could limit its ability to access cash flows from operations. 

Outlook

Incorporated in July 1979, Happy Forgings is an Indian manufacturer specializing in designing and manufacturing heavy forgings and high-precision machined components. The company manufactures, designs and tests various products such as crankshafts, front axle carriers, steering knuckles, differential housings, transmission parts, pinion shafts, suspension products and valve bodies for different industries and customers. It is a supplier to each of the top five Indian OEMs, by market share, in the medium and heavy commercial vehicle industry and four of the top five Indian OEMs in the farm equipment industry by market share. The company has served customers in various regions including Brazil, Italy, Japan, Spain, Sweden, Thailand, Turkey, the United Kingdom and the United States of America. It has three manufacturing facilities, two in Kanganwal and one in Dugri, all located in Ludhiana, Punjab. It is dedicated to continuously investing in machinery and equipment to expand its forging and machining capacity to seize opportunities for growth in the market. On the concern side, the company is subject to counterparty credit risk and a significant delay in receiving payments or non-receipt of large payments from its customers may adversely impact its business, financial condition, cash flows and results of operations. Its operations involve extending credit to its customers in respect of sale of its products and consequently, it faces the risk of the uncertainty regarding the receipt of these outstanding amounts. 

The issue has been offered in a price band of Rs 808- 850 per equity share. The aggregate size of the offer is around Rs 978.52 crore to Rs 1029.39 crore based on lower and upper price band respectively. On performance front, the company’s total income increased by 38.81% from Rs 8,661.05 million in Fiscal 2022 to Rs 12,022.71 million in Fiscal 2023. The company’s restated profit for the year was Rs 1,422.89 million in Fiscal 2022 compared to Rs 2,087.01 million in Fiscal 2023. Meanwhile, by leveraging its existing capabilities, the company intends to diversify its product portfolio by entering into the market of lightweight forging and machined components. Additionally, it intends to explore opportunities in light-weight forging and machining, particularly aluminium forging and machining, to cater to the growing demand for lightweight components in the automotive and other industries such as aerospace and defence.