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Largest manufacturer of precision bearing cage: Harsha Engineers International Ltd (HEIL) is the largest manufacturer of precision bearing cages in India (brass/steel/polyamide) with 50-60% market share in the organized market. It is also one of the leading players globally with market share of 6.5% for brass, steel and polyamide cages in CY21 (forming 75% of global bearing cage requirement). It caters to each of the top six global bearing companies and derives 75% revenue from this segment.

Steady growth expected for Bearing cage market: Bearing cage has wide usage across fast growing end user industries viz. Auto, Aviation, Railways, Construction, Mining, Electronics, Agriculture. Global/ domestic industry is expected to grow at 6.4%/8.3% CAGR over CY21-29E, with increasing outsourcing by bearing companies. HEIL, manufacturing upto 2000mm diameter cages, has expanded into large diameter brass/steel cages, which is largely manufactured in-house by bearing companies.

Diversification into specialized precision components to drive growth: HEIL has recently diversified into production of bronze bushings, sand casting and specialized stamped components to cater to end-user industries like wind, mining and shipping. It plans to scale up this low volume, high value segment over next 3-5 years.Financials: HEIL’s revenue grew by 51% in FY22 (though flat in FY21) as many new orders won over FY20-21 started reflecting in FY22. Revenue/ EBITDA/PAT grew at 22%/40%/105% CAGR over FY20-22. EBITDA margin expanded to 13.9% in FY21, led by high value and margin accretive orders but dropped to 12.8% in FY22 led by raw material inflation. Return ratios have improved with RoE/RoCE expanding to 13.1%/11.7% (post dilution).

Issue Size: INR7.6bn IPO consists of fresh issue of INR4.6bn and OFS of INR3bn by promoters, which would result in latter’s stake reducing to 74.6% post-IPO. The market cap post listing would stand at INR30.1bn. Funds raised would be used to repay INR2.7bn debt, fund INR0.8bn capex while balance would be utilized towards general corporate purpose.

Valuation & View: HEIL with its dominant position is well placed to capture the growing bearing cage demand across industries. We like its increasing focus on other specialized precision components and on the growing EV segment which could boost its EBITDA margins. It is valued at 32.7x FY22 P/E which is at par with itslisted peers. Given growth recovery in auto/auto ancillary and strong momentum in the midcaps, we expect the IPO to do well. We suggest investors to Subscribe for listing gains.

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