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HEIL (Harsha Engineers International Ltd) 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. HEIL manufactures brass, steel and polyamide cages and stamped components with production facilities located in Asia (India & China) and in Europe (Romania).

Details and Objects of the Issue

* The total issue size is Rs. 755 Cr constituting (i) Offer For Sale of up to 0.91 Cr equity shares aggregating to Rs. 300 Cr; and (ii) fresh issue of up to 1.38 Cr equity shares aggregating to Rs. 455 Cr. The offer shall constitute 25.1% of the post-offer paid-up equity capital of the company.

* HEIL shall utilise the proceeds from the fresh issue for pre-payment or scheduled payment of a portion of existing borrowing; funding capital expenditure towards purchase of machinery; infrastructure repairs and renovation of existing production facilities and general corporate purposes.

Investment Rationale

* Strong growth outlook for the Global Bearings and Bearing cages industry

* Import substitution together with development of India as a manufacturing hub for exports at the bearings industry level shall propel higher growth in the bearings rings industry

* Comprehensive product portfolio makes the company a preferred supplier

* Long standing customer relationships; geographically diversified revenue base

* Manufacturing capabilities offering scale, flexibility and locational advantage

* Strong financials and balance sheet strength

* Strong, experienced and dedicated senior management team and qualified workforce

Valuation and Recommendation

HEIL is a proxy play on (i) rising global outsourcing of bearing components from inhouse facilities of clients in Europe & US to India (ii) relocation of global supply chains from China to India and (iii) strong upturn in domestic industrial and auto segments reflecting in strong growth outlook provided by bearing clients. With increasing utilization rates, turnaround in solar EPC business (6% of revenue) and debt being repaid, we expect ROCE to improve to 20% levels in a couple of years. We appreciate HEIL’s quality of business, industry positioning (industry leadership in India) and cash flow generation. We recommend subscribing to the issue.

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