Harsha Engineers International Ltd Q2 FY2023 Concall Summary

Key Takeaways

• Revenue hit by metal pass-through, demand intact: Q2 FY23 consolidated revenue was impacted by a reduction in material prices flowing through to customers, yet EBITDA margin as a percentage actually improved, demonstrating the strength of the pass-through mechanism.
• Bronze bushings poised for a breakout H2: After a 1.5–2 month execution delay in capacity creation, the ramp-up is back on track; H1 FY23 sales already exceeded the entire previous year, and management expects 200–300% growth for the full year.
• Outsourcing trend accelerating structurally: The China+1 strategy and European challenges are driving customers to accelerate outsourcing to India, with the company winning more wallet share, particularly from Japanese OEMs where it holds only a ~2% share.
• Conservative FY23 guidance maintained at 10–15%: Management reaffirmed its annual growth outlook, assuming a nil or insignificant contribution from Romania, where volume softened due to the energy crisis.
• What to watch next quarter: The pace of the bronze bushing ramp-up in H2, any further softening in European demand, and the trajectory of margin expansion as material prices stabilize.

Revenue & Demand Dynamics

• Metal price pass-through: A significant reduction in material prices towards the end of Q1 FY23 mechanically reduced Q2 revenue as lower costs were passed to customers, but this protected and even improved EBITDA margin as a percentage.
• Europe softening: The energy crisis and war in Ukraine drove a ~20% QoQ volume degrowth in Romania in Q2, and management is seeing slight softening in European demand more broadly.
• China resilient: China continued to grow at ~22%, though this includes a trading portion eliminated on consolidation; COVID lockdowns created some impact, but the region remains strong alongside India and the US.
• Supply chain normalization: As shipping times normalize, customers are reducing buffer inventories and now order only 1.5–2 months ahead instead of a full quarter, a sign of stabilizing but less visible backlog.
• India strength: India remains in a very strong position, with H1 FY23 consolidated revenue growth of 14% driven by 23% growth in India Engineering.

Rangwala: "So, various stages are there to actually realize it, and we are actually seeing the acceleration of that trend specifically due to China + 1 as well as challenges in Europe. So, we are actually seeing positive acceleration there."

Bronze Bushings: The Growth Engine

• H1 execution delay resolved: Bottlenecks in ramping up new capacity and engineering caused a 1–1.5 month delay, but these were not demand-related; customers are pushing hard for supplies, and the ramp-up is now back on track.
• H1 sales milestone: Sales in the first half of FY23 were already higher than the entire previous fiscal year, setting the stage for the projected 200–300% full-year growth.
• FY23 revenue target: Management expects ₹40–50 crore in bronze bushing revenue for FY23, with H1 already exceeding the full FY22 base.
• Doubling ambition intact: The target to double from the FY23 base to FY24 and reach a ~₹100 crore run rate remains in place, with only a minor correction expected from the delay.
• Structural demand shift: Windmill and gearbox companies are redesigning products to replace bearings with bushings for weight, size, and other advantages; the company is working on next-generation bushing designs with customers, making this the largest growth opportunity globally.

Majmudar: "So, I think, Ajox, there are two parameters that we want to talk. One is if you compare what I did in bronze bushings in first half vis-à-vis what I did last year, we have done a higher sales in first half as compared to entire previous year... we believe that a 2-300% growth in bronze bushing business this year as compared to previous year."

Outsourcing & Customer Wallet Share

• Bearing manufacturing relocation: A significant ongoing trend of customers making India a preferred location for bearing manufacturing is confirmed; the company will indirectly benefit as this activity accelerates across the board.
• Japan wallet share: The company has grown 30–40% YoY with Japanese customers over the last 2–3 years, but wallet share with top players is only ~2%, leaving a large runway to capture share similar to the 10–30% held with European and US customers.
• Japan competitive proof point: Supplying Japanese customers from India, in direct competition with the incumbent Japanese player NKC, demonstrates the company's cost competitiveness and product acceptability even in that market.
• Large-size bearing cages: Management is internally very bullish on this segment, with projects underway for 1.4–1.5m diameter steel cages (currently at 1.1–1.2m) and Romania capable of delivering 2m diameter brass cages, overlapping with the outsourcing opportunity.

Rangwala: "Yes. We see that as a strong ongoing trend where a lot of our customers have indicated that to be the case. I am not at liberty to kind of share those specific details, but as a trend, I confirm that that is a significant ongoing activity by our customer, and this is happening across the board that India is becoming a preferred location for manufacturing bearing, and we will definitely indirectly benefit through that."

Segment & Subsidiary Performance

Margins & Capital Allocation

• Margin resilience: EBITDA margin as a percentage improved in Q2 despite the revenue headwind from metal price pass-through, and H1 bottom-line growth was better than top-line growth, validating the strength of customer relationships.
• Margin outlook: Management expects margin growth in percentage terms to be higher than last year, with bottom-line growth better than top line, and is on track for significant margin expansion, though volatility makes precise quantification difficult.
• IPO proceeds: Primarily utilized for debt repayment of approximately ₹236 crore; the India site will become net debt free, with some debt remaining in the foreign subsidiary. Balance utilization as per the prospectus to happen in coming quarters.
• FY23 CAPEX: Investing ~₹44 crore in capacity and infrastructure, plus ~₹28 crore in a wind and solar power generation project expected to save ₹2–3 crore annually and cover ~45% of power requirements.
• FY24 CAPEX: Approximately ~₹100 crore projected, with ~₹30 crore lined up in India for growth; most growth investment will happen in India for competitive products, with some capacity additions needed for ultra-large sizes.

Competitive Moat

• Distinct competencies in bushings: The company brings precision machining and non-ferrous casting capabilities that are not available with its bearing-manufacturer customers, whose strengths lie in bearing design, grinding, and heat treatment. This differentiation means the company competes with, rather than against, its own customers in bushings.
• Cage business growth above industry: While the bearing industry grows at 7–8%, management believes the cage business has enough depth to grow at least ~15%, driven by outsourcing and large-size opportunities.
• Third facility: Land acquisition for a third facility is in process but not yet completed, signaling continued capacity expansion beyond the current footprint.

Rangwala: "We bring to table competencies which are not available with our customer. Our customers, you know, strengths are bearing design, bearing grinding and those kind of heat treatment, those kind of competencies. And the bushing requires a precision machining and a casting of a non-ferrous material. So, these are very different competencies."

Guidance & Commitments

Key Metrics