HAPPY FORGINGS LIMITED IPO: ISSUE SIZE, PRICE BAND AND MORE

The fourth IPO that opens for subscription this week is Happy Forgings Limited (HFL). The other IPOs that are live for subscription are Muthoot Microfin and Suraj Estate Developers. HFL is the leading and largest engineering-led manufacturer of complex and precision machined components. HFL opens for subscription on the 19th and closes on the 21st of December. 

In this article, we look at the various aspects of HFL's business. It will help you decide whether to subscribe or invest in the IPO for the long term.

Happy Forgings Limited IPO: Key Details

Below are the key details related to the HFL IPO:

• Issue Size: Rs 1,008.59 crore
• Price Band: Rs 808 - Rs 850
• Lot Size: 17 Shares
• Issue Details: Fresh Issue of Rs 400 crore + Rs 608.59 crore Offer For Sale (OFS)
• Market Cap: At the upper price band, Rs 8,007 crore
• Minimum Investment: Rs 14,450

Happy Forgings Limited IPO: The business

Happy Forgings was established in 1979. They are the fourth largest engineering-led manufacturer of complex and safety-critical, heavy forged, and high precision machined components (FY23) in terms of forgings capacity. The company, through its vertically integrated operations, is engaged in engineering, process design, testing, manufacturing, and supply of a variety of components that are both margin accretive and value-additive. 

SHL primarily caters to domestic and global original equipment manufacturers (OEMs) manufacturing commercial vehicles in the automotive sector, while in the non-automotive sector, they cater to manufacturers of farm equipment, off-highway vehicles, and manufacturers of industrial equipment and machinery for oil and gas, power generation, railways, and wind turbine industries.

They manufacture a wide range of heavy forged and machined products, which include crankshafts, front axle beams, steering knuckles, differential cases, transmission parts, pinion shafts, suspension products, and valve bodies across industries for a diversified base of customers.

For FY23, SHL is a supplier to each of the top five Indian OEMs, by market share, in the medium and heavy commercial vehicle industry and four of the top five Indian OEMs in the farm equipment industry by market share. As of March 31, 2023, they are only the second company in India to have a 14,000-tonne forging press or higher forging press and are among the four companies in India that possess an 8,000-tonne forging press or higher forging press.

They own and operate three manufacturing facilities, of which two are located at Kanganwal in Ludhiana, Punjab and one is located at Dugri in Ludhiana, Punjab.

Happy Forgings Limited IPO: Industry Overview

India's CV production registered a growth of 4.5% CAGR from FY14 to FY23. Rising demand for pickup trucks, owing to the growing e-commerce and logistics sector is responsible for the growth in this period. HCV of more than 16 tonnes registered the highest CAGR of 11.6% during FY14 and FY23 due to increased government expenditure on infrastructure, BS-VI transition, and growth in the mining and quarrying sector which is about 3% of the GDP. 

Turnover of India's automotive components Industry registered a growth of CAGR 7.7% over the period FY14 and FY23 with maximum contribution from exports with a growth of CAGR 9.4% between FY14 and FY23 supported by the fact that India has a competitive advantage in categories such as shafts, bearings, and fasteners due to a large number of players which is resulting in higher exports.

The forging industry market size was about 216.2L MT in the calendar year 2014 and increased gradually until the calendar year 2018 to become 243.1L MT where the highest volumes of automotive were registered in the given timeline. The Medium and Heavy Forging market in India, accounted for 45% of the total Indian forging market by volume and 76% by value as of FY23. 

Happy Forgings Limited IPO: Listed Peers

The company faces tough competition from listed peers, which include names like Bharat Forge, Craftsman Automation, Ramkrishna Forgings, and Sona BLW Precision Forgings. In this section, we will compare the financials of HFL with its peers to give you an idea of where it stands compared to peers. Here is a comparison based on FY23 numbers:

• In revenue terms, Bharat Forge is the biggest player, while Happy Forgings is the smallest player (revenue 1/10 of Bharat Forge).
• If we look at ROE and ROCE, HFL tops the table, followed by Sona BLW Precision Forgings.
• Return on Net Worth (RoNW) is highest for Happy Forgings (21.12%), followed by Craftsman Automation (18.04%).
• On the EPS table, HFL is only behind Craftsman Automation, with significantly higher EPS than its remaining peers.

Happy Forgings Limited IPO: Financials

Let us look at HFL's financials to give you an idea of how the company has grown in recent years. Below are the recent years' financial numbers of HFL:

• The company has reported a revenue of Rs 584.96 crore, Rs 860.05 crore, and Rs 1,196.53 crore for FY21, FY22, and FY23, respectively. Revenue has grown at an exceptional 43.02% CAGR in this period. The revenue for H1FY24 was Rs 672.90 crore, which suggests growth in FY24 as well.
• For FY23, FY22, and FY21, the customers who have been associated with HFL for more than 10 years represent 75.98%, 79.38%, and 80.67%, of their revenues from the sale of products during the respective periods.
• For FY23, FY22, and FY21, the revenue from contracts with customers outside India represented 12.89%, 10.94%, and 8.77% of their total revenue from contracts with customers during such periods, respectively.
• HFL has reported an EBITDA of Rs 158.75 crore, Rs 230.89 crore, and Rs 340.94 crore for FY21, FY22, and FY23, respectively. The EBITDA margins for the same period were 27.14%, 26.85%, and 28.49%, respectively. The margins have remained stable in this period.
• They have reported a net profit (PAT) of Rs 86.45 crore, Rs 142.29, and Rs 208.70 crore for FY21, FY22, and FY23. The profits have more than doubled in this period. The trend continued in H1FY24, the company reported a PAT of Rs 119.30 crore.
• For the last three financial years, HFL has reported a fully diluted average EPS of 18.57 and an average RoNW of 18.82%. 
• If we attribute FY24 annualized earnings to the post-IPO fully diluted paid-up equity capital of the company, then the asking price is at a P/E of 33.56. 
• Return on Capital Employed (ROCE) has increased from 16.13% in FY21 to 24.24% in FY23. ROE has increased from 13.40% in FY21 to 21.21% in FY23.

Happy Forgings Limited IPO: Competitive Strengths

As per the company, their competitive strength is as below:

• They are the fourth largest engineering-led manufacturer of complex and safety-critical, heavy forged, and high precision machined components in India.
• HFL has integrated manufacturing operations coupled with in-house product and process design capabilities, resulting in a diverse product portfolio with increasing value addition.
• The company has a diversified business model, which is well-placed to take advantage of potential alternative engine technologies.
• They have long-standing relationships with customers across industries.

Risks associated with the Happy Forgings Limited

Below are the risks associated with the HFL:

• The business largely depends upon its top 10 customers. For FY23, the top 10 customers represented 70.08% of their total revenue from operations.
• HFL does not have agreements of commitment on the part of their customers to purchase or place orders with them.
• They depend on a few suppliers for the supply of steel, their primary raw material. Also, they do not have definitive supply agreements with their suppliers for the steel supply.
• The company has incurred indebtedness, and an inability to comply with repayment and other covenants in their financing agreements could adversely affect the business.