Happy Forgings: Forge of Opportunities

Summary

Happy Forgings, a key player in heavy forgings, is set for an IPO from Dec 19 to 21, 2023. In this overview, we delve into financials, strengths, weaknesses, and IPO details. The financial snapshot reveals strong growth, with a P/E ratio below peers. The company, operating since 1979, has a substantial market share in automotive, farm equipment, off-highway vehicles, and industrials. Strengths include long-standing relationships, but weaknesses involve revenue concentration and bargaining power challenges. The IPO details include a total size of ₹1008.59 Cr, with fresh issue and offer for sale components, aiming to utilize proceeds for equipment purchase, debt repayment, and general corporate purposes. The conclusion provides a comprehensive analysis, equipping investors for informed decisions in this transformative phase for Happy Forgings.

Overview

Happy Forgings, a pioneer in heavy forgings and high-precision machined components, is poised for a transformative journey with its Initial Public Offering (IPO) scheduled from December 19 to December 21, 2023. To empower investors with a comprehensive understanding, we delve into the company's financial landscape, strengths, weaknesses, growth prospects, and additional IPO details.

Financial Snapshot

Quality:
- Three-year average ROE: 17.5%
- Three-year average ROCE: 19.9%

Growth (FY21-FY23):
- Annual revenue growth: 43%
- Annual PAT growth: 55%

Valuation:
- P/E Ratio: 37.8
- P/B Ratio: 5.3
- Compared to peers: Below industry median and average

About Happy Forgings

Incorporated in 1979, Happy Forgings has evolved into the fourth-largest player in heavy forgings. Operating across four revenue verticals, it enjoys a substantial market share:

1. Automotive (43.7% of FY23 revenue)
2. Farm equipment (36.8%)
3. Off-highway vehicles (15.9%)
4. Industrials (3.7%)

Strengths

Long-standing Relationships:
- Happy Forgings nurtures enduring relationships with top clients.
- The top 10 clients have been associated with the company for at least a decade.

Clientele:
- Top clients include renowned auto manufacturers like Ashok Leyland, JCB India, and Mahindra & Mahindra.

Weaknesses

Revenue Concentration:
- Top ten clients contribute around 70% of FY23 revenue.
- The largest client accounted for nearly 15% of FY23 revenue.

Bargaining Power:
- Reliance on a limited number of suppliers for raw materials.
- Secured 53% of steel from a single supplier in FY23.

Cyclicality:
- Performance tied to cyclical industries, particularly commercial vehicles, farm equipment, and off-highway vehicles.
- Highly competitive forging industry.

IPO Details

- Total IPO size: ₹1008.59 Cr
- Offer for sale: ₹608.59 Cr
- Fresh Issue: ₹400 Cr
- Price Band: ₹808-850 per share
- Subscription dates: December 19-21, 2023
- Allotment date: December 22, 2023
- Tentative listing date: December 27, 2023

Post-IPO Financials

- Market Cap: ₹8007 Cr
- Net Worth: ₹1503 Cr
- Promoter holding: 78.6%
- P/E Ratio: 37.8
- P/B Ratio: 5.3

Financial Performance (FY21-FY23)

The financial performance of HFL over the last three fiscal years provides a comprehensive overview of its revenue, profitability, and key financial ratios.

In the fiscal year ending March 2021 (FY21), HFL reported a standalone total income of Rs. 509.81 crore and a net profit of Rs. 86.45 crore. Moving forward to FY22, the company's consolidated figures showed significant growth, with a total income of Rs. 866.11 crore and a net profit of Rs. 142.29 crore. The trend continued into FY23, with consolidated numbers reaching Rs. 1202.27 crore in total income and Rs. 208.70 crore in net profit.

However, the financial data includes some intricacies due to the use of the consolidated tag. The management clarified that the inclusion of a Joint Venture (JV) awaiting regulatory approval led to the use of the consolidated tag in FY22 and FY23. The company recommended considering the financial data on a standalone basis until the necessary approvals for the JV are obtained.

For H1 of FY24 (standalone), HFL reported a net profit of Rs. 119.30 crore on a total income of Rs. 675.73 crore. On a consolidated basis for the corresponding period, the net profit was Rs. 116.40 crore on a total income of Rs. 602 crore. The clarification provided by the management underscores the importance of evaluating financial data with a clear understanding of the basis used for consolidation.

Over the last three fiscal years, HFL demonstrated an average Earnings Per Share (EPS) of Rs. 18.57 and an average Return on Net Worth (RoNW) of 18.82%. The issue's pricing, at a Price-to-Book Value (P/BV) of 6.89 based on the NAV of Rs. 123.28 as of September 30, 2023, and 5.33 based on the post-IPO NAV of Rs. 159.58 per share (at the upper cap), suggests a reasonable valuation.

Considering an annualized earnings projection for FY24, the post-IPO fully diluted paid-up equity capital reflects a Price-to-Earnings (P/E) ratio of 33.56, indicating that the IPO is reasonably priced. The Profit After Tax (PAT) margins for reported periods ranged from 14.78% to 17.73%, showcasing consistent profitability. Return on Capital Employed (RoCE) margins varied from 12.21% to 24.24%, indicating a fluctuation in the company's capital efficiency over the reporting periods.

In summary, HFL's financial performance, though marked by complexities in consolidation methodology, reveals a company with consistent profitability, reasonable valuation metrics, and a solid foundation for potential growth. Investors may find the IPO reasonably priced, provided they carefully consider the clarification regarding the standalone and consolidated data.

Company and Business

1. Earnings: Yes. Profit before tax for FY23 was ₹209 Cr.
2. Scale-up Potential: Yes. Growth in infra and automobile industries and the China +1 policy provide opportunities.
3. Client Stickiness: Yes. Top 10 clients have relationships ranging from 10 to 21 years.
4. Credible Moat: No significant moat; faces competition from Indian and international players.

Management

1. Promoter Stake: Post IPO, promoters' stake will be 78.6%.
2. Management Experience: Yes. Top three managers have over 15 years of combined leadership.
3. Trustworthiness: Yes. Transparent disclosures consistent with SEBI guidelines. Stable accounting policy. No promoter pledging.

Financials

1. Return Metrics: Yes. Three-year average ROE and ROCE are above 15% and 18%, respectively.
2. Operating Cash Flow: Yes. Positive cash flows from operations in the last three years.
3. Debt-to-Equity Ratio: Yes. Net debt-to-equity ratio is less than one.
4. Working Capital: No. High working capital requirements; cash conversion cycle at 174 days.
5. Self-Sufficiency: Yes. Positive cash flows, negligible debt, and efficient asset utilization.
6. Contingent Liabilities: No. Contingent liabilities as a percentage of equity are around 0.4%.

Valuations

1. Earnings Yield: No. Operating earnings yield is less than 8% on its enterprise value.
2. P/E Ratio: Yes. Below peers' median level.
3. P/B Ratio: Yes. Below peers' average level.

IPO Specifics

- Issue Size: ₹1008.59 Cr
- Fresh Issue: ₹400 Cr
- Offer for Sale: ₹608.59 Cr
- Price Band: ₹808-850 per share
- Subscription Period: December 19-21, 2023
- Allotment Date: December 22, 2023
- Listing Date: December 27, 2023

Objects of the Issue

The Net Proceeds from the Fresh Issue will be utilized for:

1. Purchase of equipment, plant, and machinery.
2. Prepayment of all or a portion of certain outstanding borrowings.
3. General corporate purposes.

Conclusion

Happy Forgings stands at the crossroads of growth, poised to utilize the IPO proceeds strategically for expansion and debt reduction. Investors navigating this forge of opportunities have access to a holistic analysis, equipping them with the insights needed to make informed decisions in this exciting chapter of Happy Forgings' journey.