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A leading crankshaft manufacturer KEY CHANGES: TARGET …...

Happy Forgings Ltd. (HFL) is an Indian manufacturer that designs and manufactures forged and high-precision machined products such as crankshafts, front axle beams, steering knuckles, transmission parts, etc., catering to both the automotive and non-automotive sectors. Established in 1979, it has three facilities in Ludhiana and Punjab. With an installed capacity for forging and machining of 107,000 MT and 46,100 MT, it has expanded globally, reaching regions such as Brazil, Italy, Japan, Spain, Sweden, Thailand, Turkey, the U.K., and the U.S.

• The global forging and machining markets are projected to reach USD 97.0 billion and USD 71.2 billion by 2029 at ~5% CAGR while India's forging and machining markets, valued at USD 7.3 billion and USD 5.4 billion in FY24, are projected to grow at a CAGR of 7.1% and 8.4% by FY29. (Source: Ricardo Report).

• Happy Forgings Ltd supplies to the leading five Indian OEMs in the medium and heavy commercial vehicle industry and four of the top five Indian OEMs in the farm equipment industry by their market shares in FY23.

• HFL has consistently shown revenue growth and profitability, with revenues increasing from Rs.585cr in FY21 to Rs.1,196.5cr in FY23 at a CAGR of 43% and profits growing from Rs.86.4cr to Rs.208.7cr at a CAGR of 55% during the same period.

• It has an ROE of 21.1% and an RoCE of 19.5% as of FY23, indicating a good return to shareholders’ capital and an efficient use of company resources. The company reported an EBITDA margin and PAT margin of 28.5% and 17.4%, respectively, in FY23.

• The company’s total borrowings stood at Rs. 218.5cr in FY23, and the debt-to-equity ratio was 0.2x. The Rs.153cr raised from the issue will be used to repay the debt, which will enhance HFL's profitability in the future.

• HFL plans to introduce aluminium forging and machined components to meet the growing demand for lightweight materials, potentially enhancing the manufacturing of aluminium components for electric vehicles.

• Happy Forging's clientele comprises Ashok Leyland Ltd., International Tractors Ltd., JCB India Ltd., Mahindra & Mahindra Ltd., SML ISUZU Ltd., Swaraj Engines Ltd., Tata Cummins Private Ltd., and more.

• In FY23, 22 and 21, and H1FY24 and H1FY23, the overall forging capacity utilization was 62.9%, 67.3%, 60.4%, 65.9%, and 73.6%, respectively, and the overall machining capacity utilization was 79.2%, 78.2%, 70.6%, 87.97%, and 79.2%, respectively.

• At the upper price band of Rs.850, HFL is available at a P/E of 33.6x (FY24 annualized), which seems in-line compared to its peers. Considering the company's well-established standing in the crankshaft manufacturing industry, notable customers, solid financials, varied product range, global reach with future strategic acquisitions and expansion plans, and new customer additions, we recommend a ‘Subscribe’ rating for the issue on a short to medium-term basis.

Purpose of IPO

The IPO comprises a fresh issue (Rs. 400cr) and an OFS portion (Rs. 609cr). From the fresh issue's net proceeds, Rs. 171cr, will be utilized for the purchase of equipment, plants, and machinery, and Rs.153cr will be used for repaying debt.

Key Risks

• Rising adoption of electric vehicles, particularly in commercial and farm equipment, may adversely affect the company's financial performance.

• Its business largely depends on its top 10 customers. (70% of the revenue in FY23).

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SEBI Registration Number: INH200000345