Retail Research IPO Note
Sector: Industrial (Auto
Price Band (Rs): 808 - 850
Ancillary)
Recommendation: Subscribe for
18th December 2023
Long Term Horizon.
Happy Forgings Limited
Company Overview:
Issue Details
The company is engaged in engineering, process design, testing,
Date of Opening 19th December 23
manufacturing and supply of various components to domestic and global
Date of Closing 21st December 23
commercial vehicles’ Original Equipment Manufacturers (OEM’s),
Price Band (Rs) 808-850
manufacturers of farm equipment, off-highway vehicles and industrial
OFS 71,59,920 equity shares
equipment. As of FY23, the company is the fourth largest manufacturer of Fresh Issue (Rs cr) 400
complex and safety critical, heavy forged and high precision machined Issue Size (Rs cr) 979- 1,009
components in India. The company is a leading player in the domestic No. of shares 1,21,10,415 - 1,18,65,802
crankshaft manufacturing industry with the second largest production Face Value (Rs) 2
capacity for commercial vehicle and high horse-power industrial Post Issue Market Cap
crankshafts. The company’s annual installed capacity for forgings and 7,631 – 8,007
(Rs cr)
machining stood at 120,000 MT and 47,200 MT respectively as of JM Financial, Axis Capital, Equirus
BRLMs
September’23. Capital, Motilal Oswal
Registrar Link Intime India Private Limited
Key Highlights: Bid Lot 17 shares and in multiple thereof
QIB shares 50%
1. Diversified product portfolio: The company manufactures a wide range Retail shares 35%
of heavy forged and machined products such as crankshaft, transmission NIB shares 15%
parts, suspension products and other products for commercial vehicles,
farm equipment, and off-highway vehicles. As per the Ricardo Report, Objects of Issue
Happy Forgings is the second company in India to have a 14,000-ton Estimated utilization from
forging press or higher forging press and among the four companies in net proceeds (Rs cr)
Purchase of equipment, plant and
India that possess a 8,000-ton or higher forging press as of FY23. 171.1*
machinery
2. Complex process and high entry barriers: The forging industry faces Prepayment of all or a portion of
certain outstanding borrowings 152.8
several challenges that create high barriers to entry, including (i) lengthy
availed by the Company.
customer and product approval processes (ii) difficulty in acquiring new
General corporate purposes^ -
customers without existing relationships, (iii) the importance of Total proceeds from fresh issue -
implementing and sustaining quality systems and meeting customer
*This does not include certain portions of the cost borne by the Company
requirements, and (iv) managing customer relationships and logistics.
through internal accruals.
Additionally, precision product manufacturing is a capital-intensive ^ To be finalized upon determination of the Offer Price and updated in the
business that involves complex technology, machinery and systems which Prospectus prior to filing with the RoC. The amount utilized for general
create high entry barriers for competition. corporate purposes shall not exceed 25% of the Gross Proceeds.
3. Robust manufacturing facilities and increased focus on capital Shareholding Pattern
efficiencies: The company operates three manufacturing facilities with two Pre-Issue No. of Shares %
manufacturing facilities located at Kanganwal, Punjab, spread over a built- Promoter & Promoter Group 7,89,70,000 88.2
up area of 184,765.5 sq ft and 439,128.0 sq ft and one located at Dugri, Public & Others 1,05,29,000 11.8
Punjab, spread over a built-up area of 1,771,208.5 sq ft. The manufacturing Total 8,94,99,000 100.0
facilities are located near the inland container depot in Ludhiana, Punjab
and dedicated freight corridor connecting to Mumbai, Maharashtra and Post Issue @Lower Price Band No. of Shares %
Dankuni, West Bengal. As of FY23, the annual aggregate installed capacity Promoter & Promoter Group 7,40,47,555 78.4
for forging and machining was 107,000.0 MT and 46,100.0 MT respectively Public & Others 2,04,01,940 21.6
and the capacity utilization was 63.0% and 79.2%. The company is also
Total 9,44,49,495 100.0
focused on automation and efficiency to continuously improve its
operating margins and is constantly looking for ways to streamline
Post Issue @Upper Price Band No. of Shares %
processes and improve the quality of products.
Promoter & Promoter Group 7,40,47,555 78.6
Valuation: The company is valued at FY23A and FY24E annualized PE multiple Public & Others 2,01,57,327 21.4
of 38.4x and 33.6x respectively, at the upper price band on post-issue capital. Total 9,42,04,882 100.0
The company enjoys relatively higher margins than its listed peers due to Source: RHP, SSL Research
higher share of machined products and efficient sourcing of steel which is the
primary raw material for the company. Considering the relatively higher
margins, superior return ratios and attractive valuation, we recommend
investors to subscribe to the issue for long-term investment horizon.
For the list of our branches refer to the website: www.sbisecurities.in
Happy Forgings Limited Industrial (Auto Ancillary)
Key Financials
FY22 FY23 1HFY24
Revenue from operations (Rs cr) 860 1,197 673
EBITDA (Rs cr) 231 341 195
Profit (Rs cr) 142 209 119
EBITDA Margin (%) 26.8 28.5 29.0
PAT Margin (%) 16.5 17.4 17.7
EPS (Rs) 15.9 23.3 13.3*
ROE (%) 18.1 21.1 10.8*
ROCE (%) 19.4 24.2 12.2*
Debt / Equity (x) 0.3 0.2 0.2 *
* Not Annualized
Financials for 1HFY24 reported on a Standalone basis.
Source: RHP, SSL Research
Risk Factors
• Customer concentration risk: The company derives a significant portion of its revenue accounting for 79.2%, 74.6%,
70.1% and 68.5% of its FY21, FY22, FY23 and 1HFY24 revenue respectively from its top 10 customers. The company
relies on blanket purchase orders issued by its customers and does not necessarily sign contracts that set out the price
or quantity of the products to be supplied. The purchase and supply agreements set forth the terms of sales but do not
bind these customers to any specific products, specifications, purchase volumes or duration and can be terminated by
these customers with or without cause and without compensation. The loss of any of these customers could have a
material adverse effect on the business, financial condition, results of operations and cash flows.
• Raw material sourcing risk: The company requires high-quality steel of certain specifications which is supplied by a
limited number of suppliers in the Indian market. The company doesn’t enter into definitive-term agreements with its
suppliers and delay to perform the operations by these suppliers can result in delay of production schedule and
adversely affect output. The cost of steel as a percentage of total cost of materials in FY21, FY22, FY23 and 1HFY24
stood at 112.3%, 100.4%, 94.3% and 103.1% respectively. Interruptions in the supply of steel could adversely affect the
business, financial condition, results of operations and cash flows.
• Debt obligation risk: The company has entered into various financing agreements with various lenders for short-term
and long-term financing facilities including funding for working capital requirements and purchasing capital goods. As
of October’23, the total outstanding borrowings of the company amounted to Rs 259.9 cr and the company’s ability to
fulfill its debt obligations is dependent upon the ability to generate sufficient cash-flows. An inability to comply with
repayment and other covenants in the financing agreements could adversely affect the business, results of operations,
cash flows and financial condition.
• Competition: The company faces significant competitive pressures in the business. Any inability to compete effectively
would have a material adverse effect on the business, prospects, operations and financial results.
Growth Strategy
• Increase the product portfolio: Leverage in-house engineering and product development capabilities to grow its
product portfolio and tap growing business opportunities in the industrial markets.
• Diversify customer base: Increase wallet share and acquire new business by leveraging existing OEM relationships and
adding new customers.
• Manufacturing Facility: Expand capacity at current manufacturing facilities.
• Inorganic growth: Undertake inorganic growth through acquisitions or strategic partnerships and unlock synergies
between target companies and the company in-line with the company’s growth strategy.
SBI Securities 2
Happy Forgings Limited Industrial (Auto Ancillary)
Revenue from operations – Distribution Channels
FY21* FY22 FY23 1HFY24*
Product-wise
Breakdown Amount in % of Revenue Amount in % of Revenue Amount in % of Revenue Amount in % of Revenue
Rs cr from Rs cr from Rs cr from Rs cr from
Operations Operations Operations Operations
Forged Products 148.5 27.1 193.5 24.6 227.7 21.3 96.7 15.8
Machined
Products 399.2 72.9 592.1 75.4 839.2 78.7 514.4 84.2
Revenue from
Sale of Products 547.7 100.0 785.6 100.0 1,066.9 100.0 611.2 100.0
*Financials for FY21 and 1HFY24 reported on a Standalone basis.
Source: RHP, SSL Research
Revenue from operations – Region wise (India)
FY21* FY22 FY23 1HFY24*
Regional Amount in % of Amount in % of Amount in % of Amount in % of
breakdown Rs cr Domestic Rs cr Domestic Rs cr Domestic Rs cr Domestic
Gross Gross Gross Gross
Product Sales Product Sales Product Sales Product Sales
Automotive
Sector
Commercial
Vehicles 205.4 37.5 335.6 42.7 465.7 43.7 246.8 40.4
Non-Automotive
Sector
Farm Equipment 240.3 43.9 318.0 40.5 392.5 36.8 203.6 33.3
Off-highway
Vehicles 91.0 16.6 116.3 14.8 169.3 15.9 77.1 12.6
Industrial & Others 11.0 2.0 15.8 2.0 39.5 3.7 83.7 13.7
Total Non-
Automotive
Sector 342.3 62.3 450.0 57.3 601.3 56.4 364.3 59.6
Revenue from
Sale of Products 547.7 100.0 785.6 100.0 1,066.9 100.0 611.2 100.0
*Financials for FY21 and 1HFY24 reported on a Standalone basis.
Source: RHP, SSL Research
SBI Securities 3
Happy Forgings Limited Industrial (Auto Ancillary)
Industry Overview – Global Forging and Machining Market
Global Forging Market
The global forging market grew at a CAGR of 3.5% between CY14 – CY22 and is estimated to be valued at USD 71.9 bn in CY23.
The market is expected to grow at CAGR of 5.1% between CY23 – CY29 to reach USD 97.0 bn by CY29.
Global Forging Market Size (USD bn)
97.0
100.0
71.9 4.9
80.0 3.9
38.6
60.0 3.5
2.7
29.0
40.0
49.6
20.0 36.8
0.0
2023E 2029E
Automotive Industrial and Others Farm Equipment Off-highway Vehicles
Source: RHP, SSL Research
Global Machining Market
The global machining market grew at a CAGR of 1.1% between CY17 – CY22 and is estimated to be valued at USD 52.5 bn in
CY23. The market is expected to grow at a CAGR of 5.2% between CY23 – CY29 to reach USD 71.2 bn by CY29.
Global Machining Market Size (USD bn)
80.0 71.2
3.5
52.5
60.0 1.8 12.7
1.3 9.6 2.4
40.0
53.2
20.0 39.2
0.0
2023E 2029E
Automotive Industrial and Others Farm Equipment Off-highway Vehicles
Source: RHP, SSL Research
SBI Securities 4
Happy Forgings Limited Industrial (Auto Ancillary)
Global Crankshaft Market
The global crankshaft market for automotive, farm tractors, off-high vehicles and industrial and others grew at a CAGR of
1.1% between CY17 – CY22 and is estimated to be valued at USD 34.5 bn in CY23. The market is expected to grow at a CAGR
of 5.3% between CY23 – CY29 to reach USD 47.1 bn by CY29. The crankshaft market in India for automotive, farm tractors,
off-high vehicles and industrial and others is estimated to be valued at approximately Rs 5.2 bn in FY24 and is expected to
grow at a CAGR of 8.3% by value between FY24 – FY29. The demand for advanced crankshafts with high strength and fatigue
resistance is increasing due to the growing demand for high-performance vehicles.
Global Crankshaft Market (USD bn)
47.1
50.0
1.4
40.0 34.5 1.3
13.4
0.9 0.9
30.0
10.3
20.0
30.1
10.0 22.4
0.0
2023E 2029E
Automotive Industrial and Others Farm Equipment Off-highway Vehicles
Source: RHP, SSL Research
SBI Securities 5
Happy Forgings Limited Industrial (Auto Ancillary)
Financial Snapshot
INCOME STATEMENT
(Rs cr) FY22 FY23
Revenue from Operations 860 1,197
YoY growth (%) - 39.1
Cost Of Revenues (incl Stock Adj) 388 551
Gross Profit 472 645
Gross margins (%) 54.8 53.9
Employee Cost 69 88
Other Operating Expenses 172 217
EBITDA 231 341
EBITDA margins (%) 26.8 28.5
Other Income 6 6
Net Interest Exp. 7 12
Depreciation 38 54
Exceptional Items 0 0
PBT 192 280
Tax 50 71
PAT 142 209
PAT margin (%) 16.5 17.4
EPS 15.9 23.3
BALANCE SHEET
(Rs cr) FY22 FY23
Assets
Net Block 455 677
Capital WIP 212 75
Intangible Assets under development 2 1
Other Non-current Assets 36 84
Current Assets
Inventories 184 170
Trade receivables 222 308
Cash and Bank Balances 1 0
Other Current Assets 17 11
Total Current Assets 425 489
Current Liabilities & Provisions
Trade payables 44 48
Other current liabilities 32 45
Short-term provisions 3 4
Total Current Liabilities 79 96
Net Current Assets 346 393
Total Assets 1,051 1,230
Liabilities
Share Capital 18 18
Reserves and Surplus 770 970
Total Shareholders Funds 788 988
Total Debt 240 219
Net Deferred Tax Liability 23 23
Total Liabilities 1,051 1,230
SBI Securities 6
Happy Forgings Limited Industrial (Auto Ancillary)
Cash Flow (Rs cr) FY22 FY23
Cash flow from Operating Activities 80 209
Cash flow from Investing Activities -166 -172
Cash flow from Financing Activities 83 -37
Free Cash Flow -111 35
RATIOS
FY22 FY23
Profitability
Return on Assets (%) 12.6 15.7
Return on Capital (%) 19.4 24.2
Return on Equity (%) 18.1 21.1
Margin Analysis
Gross Margin (%) 54.8 53.9
EBITDA Margin (%) 26.8 28.5
Net Income Margin (%) 16.5 17.4
Short-Term Liquidity
Current Ratio (x) 1.7 1.9
Quick Ratio (x) 1.0 1.2
Avg. Days Sales Outstanding 94 94
Avg. Days Inventory Outstanding 78 52
Avg. Days Payables 19 15
Fixed asset turnover (x) 1.9 1.8
Debt-service coverage (x) 0.9 1.5
Long-Term Solvency
Total Debt / Equity (x) 0.3 0.2
Interest Coverage Ratio (x) 27.8 23.4
Valuation Ratios
EV/EBITDA (x) 34.0 23.0
P/E (x) 53.5 36.5
P/B (x) 9.7 7.7
Source: RHP, SSL Research
SBI Securities 7
Happy Forgings Limited Industrial (Auto Ancillary)
Peer Comparison
Happy Forgings Bharat Forge Craftsman Ramkrishna Sona BLW Precision
Ltd. Ltd. Automation Ltd. Forgings Ltd. Forgings Ltd.
CMP (Rs) 850.0 1,198.0 5,296.0 760.0 553.0
Sales (Rs cr) 1,196.5 12,190.0 3,183.0 3,193.0 2,676.0
EBITDA (Rs cr) 340.9 1,737.0 684.0 694.0 696.0
Net Profit (Rs cr) 208.7 508.0 251.0 248.0 395.0
M.Cap (Rs cr) 8,007.4 55,754.0 11,190.0 13,746.0 32,436.0
Enterprise Value (Rs cr) 8,225.6 61,978.0 12,653.0 15,243.0 32,630.0
EBITDA Margin (%) 28.5 14.2 21.5 21.7 26.0
Net Margin (%) 17.4 4.2 7.9 7.8 14.8
PE (x) 38.4 105.6 45.0 49.0 81.9
EV/EBITDA (x) 24.1 35.7 18.5 22.0 46.9
RoE (%) 21.1 7.7 19.8 20.6 18.3
RoCE (%) 24.2 6.9 20.6 18.5 22.0
The data is based on FY23 financial data.
For Happy Forgings Limited the Market cap, PE(x), and EV/EBITDA (x) are calculated on post-issue equity share capital based on the upper price band.
CMP as on 15th December’23.
Source: RHP, SSL Research
SBI Securities 8
Happy Forgings Limited Industrial (Auto Ancillary)
SBICAP Securities Limited
(CIN): U65999MH2005PLC155485 I Research Analyst Registration No INH000000602
SEBI Registration No.: Stock Broker: INZ000200032 | CDSL: IN-DP-314-2017 | NSDL: IN-DP-NSDL-369-2014 | Research Analyst: INH000000602
Portfolio Manager: INP000004912 | IRDA/RW/IR2/2015/081 | IRDA/RW/IR1/2016/041 | IRDA: CA0103
Registered & Corporate Office: Marathon Futurex, A Wing, 12th Floor, N. M. Joshi Marg, Lower Parel, Mumbai-400013.
For any information contact us:
022-6854 5555
E-mail: [email protected] I Web: www.sbisecurities.in
DISCLOSURES & DISCLAIMERS:
Analyst Certification: The views expressed in this research report ("Report") accurately reflect the personal views of the research analysts ("Analysts") employed by SBICAP
Securities Limited (SSL) about any and all of the subject issuer(s) or company(ies) or securities. This report has been prepared based upon information available to the public
and sources, believed to be reliable. I/We also certify that no part of my/our compensation was, is, or will be directly or indirectly related to the specific recommendation(s)
or view(s) in this report.
The Analysts engaged in preparation of this Report or his/her relative:-
(a) do not have any financial interests in the subject company mentioned in this Report; (b) do not own 1% or more of the equity securities of the subject company
mentioned in the report as of the last day of the month preceding the publication of the research report; (c) do not have any material conflict of interest at the
time of publication of the Report.
The Analysts engaged in preparation of this Report:-
(a) have not received any compensation from the subject company in the past twelve months; (b) have not managed or co-managed public offering of securities for the subject
company in the past twelve months; (c)have not received any compensation for investment banking or merchant banking or brokerage services from the subject company in
the past twelve months; (d) have not received any compensation for products or services other than investment banking or merchant banking or brokerage services from the
subject company in the past twelve months; (e) has not received any compensation or other benefits from the subject company or third party in connection with the Report;
(f) has not served as an officer, director or employee of the subject company; (g) is not engaged in market making activity for the subject company.
Name Qualification Designation
Sudeep Shah MMS-Finance DVP- Technical & Derivative Research
Sunny Agrawal B.E, MBA (Finance) DVP - Fundamental Research
Rajesh Gupta PGDBM (Finance), MA (Bus. Eco) AVP - Fundamental Research
Monica Chauhan C.A. Research Analyst - Equity Fundamentals
Harsh Vasa CA Research Analyst - Equity Fundamentals
Sumeet Shah B.E., CFA Research Analyst - Equity Fundamentals
Sweta Padhi MBA (Finance) Research Analyst - Equity Fundamentals
Uday Chandgothia B-Tech, MBA (Finance) Research Associate - Equity Fundamentals
Gautam Updhyaya MBA (Finance) Research Analyst - Equity Derivatives
Vinayak Gangule BE (IT) Research Analyst - Equity Technicals
Pratik Patni BSc (Biotech Entire) Research Analyst- Equity Derivatives
Ghanshyam Gupta MBA (Finance) Research Analyst- Currency Derivative
Sagar Peswani B.Tech (ECE) Research Associate - Equity Technicals
Kalpesh Mangade B.Com MIS Analyst - Retail Research
For other Disclosures please visit: https://bit.ly/R_disclaimer02
SBI Securities 9
