Accumulate Harsha Engineers International Ltd for Target Rs.839 by PL Capital
Muted quarter amid persistent pain in Romania
Quick Pointers:
* India Engineering domestic/export mix stood at 60%/40% (vs 47%/53% YoY).
* Management has guided for low teens revenue growth of India Engineering while consolidated revenue is expected to grow at high single digit in FY26.
We revise our FY26/27E EPS estimates by -12.7%/-19.8% factoring in continued slowdown in Romania. Harsha Engineers International (HARSHA) reported a soft quarter with a 2.0% YoY revenue decline and a sharp 491bps YoY EBITDA margin contraction to 9.4%, mainly due to bad debts in the Solar EPC segment. Domestic Engineering demand remains resilient aided by inventory restocking and early signs of revival in industrial demand, though key export markets, including Europe and the USA, continue to experience weakness due to global demand slowdown. Pain persists in Romania due to lower offtake by customers while China’s performance remained satisfactory. Amid geopolitical and demand uncertainty in global markets, management guides for low teens revenue growth in India Engineering business driven by domestic strength while the consolidated business is expected to grow at a high single digit in FY26.
We believe that the continued pain in Romania may impact mid-term consolidated financial performance of the company however, HARSHA’s long-term outlook remains positive given its 1) market leadership in bearing cages, 2) greenfield capacity expansion plans, and 3) multiple levers for growth viz. i) bearing cage outsourcing, ii) capex by global bearing players in India and iii) growing demand for bronze bushings. The stock is currently trading at a P/E of 23.5x/19.7x on FY26/27E earnings. We maintain ‘Accumulate’ rating with a revised TP of Rs398 (Rs440 earlier), valuing the company at a PE of 21x Mar’27E (21x Sep’26E).
Strong domestic performance partly offset by weaker export markets: Consolidated revenue declined by 2.0% YoY to Rs3.7bn (Ple: Rs3.5bn). Consolidated Engineering revenue rose 3.0% YoY to Rs3.3bn. Meanwhile, Solar EPC sales declined by 28.6% YoY to Rs427mn. Gross margin expanded by 180bps YoY to 45.9% (PLe: 46.3%).EBITDA fell 35.5% YoY to Rs352mn (PLe: Rs440mn) while EBITDA margin declined by 491bps YoY to 9.4% (PLe: 12.5%) primarily due to higher operating expenses and higher bad debts (Rs200mn vs Rs23mn in Q4FY24).Adj. EBITDA (ex-bad debts) fell 3.0% YoY to Rs552mn with EBITDA margin remaining flattish at 14.8%. Consolidated Engineering EBITDA margin declined to 11.6% (vs 18.9% in Q4FY24). Solar EPC EBITDA margin turned negative to -46.5% as it included Rs200mn of bad debts. [Note: Segmental EBITDA includes other income]. Company reported loss after tax of Rs24mn (vs profit of Rs368mn YoY) while the adj. loss after tax was Rs116mn (PLe: profit of Rs278mn) due to weaker operating performance and higher effective tax rate (133.2% vs 25.7% YoY)
Margin decline across segments led to lower consolidated margins: Consol. Engineering revenue rose 3.0% YoY to Rs3.3bn within which, domestic sales rose ~32% to Rs1.5bn while exports from India declined 20.0% YoY to Rs1.0bn and foreign subsidiaries sales also declined ~2% to Rs799mn. Solar EPC sales declined 28.6% YoY to Rs427mn. Consol. Engineering EBITDA margin rose to 20.0% (vs 18.9% in Q4FY24) as India Engineering margin improved by 183bps YoY to 26.2% while foreign subsidiaries margin came in at 0.5% (vs 2.8% in Q4FY24). Solar EPC EBITDA margin declined to 0.6% (vs 2.8% in Q4FY24).
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