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Growth-centric capability expansion

Happy Forgings (HFL) management value proposition: 1) significant market share gains from HFL’s best-in-class engineering capabilities, marked by rapid diversification & delivery of complex forged/machined components to auto/industrial segments 2) Constant focus on complex/critical parts and recent product additions to unlock new avenues: capability step-up from addition of 14k ton press line (in 3QFY23) helped expand product offerings from up to 90kgs to complex parts up to 250kg. 3) Brownfield capacity expansion projects on track in FY25; ramp up of 14k-ton press line for front axle beams (expected run rate for FY26 ~50k units) and large crankshafts. Further, a new 6.3k-ton press lines in 2QFY25, focused on farm and PV, is under trials. In FY26, another 10k-ton press line will help rebalance production and augment capacity. 4) Indicative order book of ~Rs6.5b-7b of which ~Rs1.5b for PVs, ~Rs2.5b for industrial, and ~Rs2.5b for CV (of which ~90% orders are for machining). New order wins in PV and industrials will help de-risk dependance on CV/tractors (~73% of revenues). Structural demand drivers like opening of Indiacentric global supply chain, and low revenue share of industrials and exports (vs peers) should trigger outperformance. The street has built in revenue/EBITDA/Adj.PAT CAGR of 18.8%/21.3%/28.7% for FY24-26E. Although execution and sustained revenue diversification are key success factors, we believe valuations at 37.3x/26.7x/20.6x FY25/26/27 bloom standalone EPS and partially price in the positives. Not rated. Key takeaways from our interaction Engineering niche enables revenue diversification & market share gains - HFL’s management and engineering capabilities have helped it quickly diversify its revenue base as 1) contribution of machined products increased to ~87% as of 1QFY25 (vs 78% earlier), 2) share of industrials and exports increased to 12% (vs 4%) and to 20% (vs 13%). ~48% as of FY24, revenues are from Crankshafts, wherein HFL indicative market share would be close to half/one third in CVs/tractors, given high tolerances of product design, manufacturing capabilities, causing high entry barrier and limited competition. Capabilities step-up to open new avenues - HFL is looking to add capacity in forging (brownfield expansion is underway for 10k ton press line while 6.3k ton press under trials and machining. Machining capacity utilization is (~85%) 52.5k tons currently; it is expected to move up to 61k-62k tons in phases. Front axle beam (new product) supplies are expected to start by end of FY25 and target is to reach ~45-50k beams by FY26 end (to start with 1-2k units/month and ramp up subsequently). New order wins in PV and industrials to help de-risk CV/tractor dependance - HFL expects PV segment to contribute 4-5% by FY25E and >10% of the overall revenues in 3-4 years, led by ramp-up with existing customer (crankshaft and suspension parts) and new order win from North American customer, slated to start in FY26E. HFL is setting up 3.1k tons press line dedicated to PV segment while ramping-up SUV crankshaft supply to domestic customers, where it has close to one third SOB for a single platform. Opening up of global supply chain for India, a structural demand driver - With installation of 14k tons press line (in 3QFY23), HFL experienced a major influx of new order wins from the Industrial segment. The current utilization of this press line is 45- 50% of peak potential utilization and it plans to ramp it up to 75-80% on the back of new order wins. HFL has made significant progress in exports as well by cross-selling products and expanding into new locations. HFL expect the share of exports in revenues to increase to >30% over 2-3 years (vs ~8%/20% in FY21/FY24). PV exports share to double to 4-5% by FY26 vs 2-3% currently.

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