IPO Analysis: Happy Forgings Limited

IPO Rating: Apply for the long-term

About the Issue: 

The company holds a prominent position in India's domestic crankshaft manufacturing sector, offering a range of products such as crankshafts, front axle beams, differential cases, transmission parts, suspension products, and valve bodies. It is gearing up to launch its Initial Public Offering (IPO) for equity shares, each having a face value of Rs 2. The IPO price range is set between Rs 808 and Rs 850 per equity share, resulting in a total issue size of Rs 1,008.59 crore at the upper price band. The IPO is scheduled to commence on December 19, 2023, and will conclude on December 21, 2023. The market lot size for the IPO is 17 shares, with the option to apply for multiples of this lot. Individual retail investors have the opportunity to apply for a maximum of 13 lots, equivalent to 221 shares or a total investment of Rs 1,87,850 assuming the upper price band. 

Objects of the Issue 

The offer encompasses both the fresh issue and the offer for sale. It's important to note that the company will not accrue any proceeds from the offer for sale. The company plans to allocate the net proceeds raised from the fresh issue for the following purposes: 

1. Purchase of equipment, plant and machinery 
2. Prepayment of all or a portion of certain outstanding borrowings availed by the company 
3. General corporate purposes 

Promoter holding 

Paritosh Kumar, Ashish Garg, Megha Garg, Ayush Capital & Financial Services Private Limited, Garg Family Trust, Paritosh Kumar Garg (HUF) and Ashish Garg & Sons (HUF) are the promoters of the company. The promoters currently hold a pre-issue shareholding stake of 88.24 per cent in the company.  

Company profile 

For more than four decades, leveraging extensive expertise in manufacturing and delivering high-quality, complex components tailored to customer requirements, the company has ascended as a leading player in India's domestic crankshaft manufacturing sector. It boasts the second-largest production capacity for commercial vehicle and high-horsepower industrial crankshafts in the country. As of Fiscal 2023, the company stands as the fourth-largest engineering-led manufacturer in India, based on its forgings capacity within the industry. 

Through its vertically integrated operations, the company is actively involved in engineering, process design, testing, manufacturing, and supplying a diverse range of components. The company manufactures an extensive array of heavy forged and machined products, including crankshafts, front axle beams, steering knuckles, differential cases, transmission parts, pinion shafts, suspension products, and valve bodies. These products cater to a wide range of industries, serving a diversified customer base. 

In Fiscal 2023, the company served as a supplier to all of the top five Indian Original Equipment Manufacturers (OEMs), based on market share, in the medium and heavy commercial vehicle industry. Furthermore, it was a supplier to four out of the top five Indian OEMs in the farm equipment industry, also determined by market share. As of September 30, 2023, the company extended its services to customers in nine countries, namely Brazil, Italy, Japan, Spain, Sweden, Thailand, Turkey, the United Kingdom, and the United States of America. 

Financials  

The company has demonstrated substantial growth in both its top line and bottom line in recent years. In FY23, it achieved a revenue of Rs 1,197 crore, reflecting a remarkable growth of approximately 39 per cent compared to the FY22 figure. Similarly, the net profit experienced a notable surge of over 47 per cent, increasing from Rs 142 crore in FY22 to Rs 209 crore in FY23. The impressive financial performance continued into H1FY24, reinforcing the company's sustained strength in its financial indicators for the fiscal year 2024. The company boasts a return on equity (RoE) and return on capital employed (RoCE) of 23 per cent and 26 per cent, respectively, for the fiscal year 2023, underscoring its robust performance. 

Valuation and outlook 

The issue is priced with a P/BV ratio of 6.89 times, calculated using its Net Asset Value (NAV) of Rs 123.28 as of September 30, 2023. When we calculate the PE ratio for the company by considering the annualized FY24 earnings relative to the post-IPO fully diluted paid-up equity capital, the resulting PE ratio stands at 32. As per its official documents, the company has referenced several listed peers, including Bharat Forge Ltd, Craftsman Automation Ltd, Ramkrishna Forgings Ltd and Sona BLW Precision Forgings. In terms of valuation and returns when compared to its listed peers, Happy Forgings Ltd demonstrates a significant outperformance.  

Given the company's robust standing in the crankshaft manufacturing sector, noteworthy clientele, and a solid financial position, we recommend investors to subscribe to the issue with a long-term perspective.