Harsha Engineers International Ltd Q3 FY2023 Concall Summary

Key Takeaways

• Flat revenue, resilient EBITDA: Revenue fell ~7% YoY as Europe's energy crisis, China's zero-COVID policy, commodity pass-through and year-end destocking all hit at once, yet absolute EBITDA held up because of the material pass-through mechanism and a strong realized exchange rate.
• Romania swung to breakeven: The European subsidiary's EBITDA collapsed from ₹60 lakhs positive to zero as energy prices spiked; management is "keeping fingers crossed" and assumes near-zero margins persist in Q4.
• Wind-market slowdown now biting directly: After successfully displacing imported bearings, the bronze bushing business is feeling the European wind slowdown it was previously cushioned from; customers signal a second-half CY23 recovery.
• Other income flattered the bottom line: A ~₹10.5 crore QoQ spike in other income, driven by ~₹5 crores of realized FX gains plus treasury and MTM gains, boosted net profit in a soft operating quarter.
• What to watch next quarter: Whether the promised Q4 improvement materializes, any sign of volume recovery in Romania, and the FY24 growth guidance management deferred until Q4 is done.

Top-Line Softness: Four Headwinds Converged

• Europe energy crisis hit both the Romania plant directly and India-to-Europe supplies, with the wind market particularly weak and weighing on bronze bushing growth.
• China zero-COVID policy suppressed China revenue; Harsha China still delivered 15.6% EBITDA, so the damage was volume, not margin.
• Commodity pass-through mechanically reduced the top line as steel and brass prices fell; the 3–4 month lag in the pass-through mechanism means COGS declined faster (down 17% YoY) than revenue (down ~7% YoY), protecting absolute EBITDA.
• Year-end inventory control by customers caused broad demand softening, compounding the regional and commodity effects.
• Employee and other expenses as a percentage of sales rose partly because Romania had a Christmas-quarter effect on employee benefits, and partly because the metal-price-driven denominator shrinkage made costs look larger as a percentage while absolute amounts stayed roughly constant.

Rangwala: "We continue to see respectable top line and bottom line in Q3 results despite very difficult market conditions across Europe due to energy crisis."

Romania: The Quarter's Pain Point

• EBITDA fell to zero from ₹60 lakhs in Q2; energy-price increases that hit last quarter are now in the process of being passed through to customers, and management says the gap vs previous quarters has been bridged.
• Casting business (lower-margin, semi-finished) exists only out of Romania; bronze bushing is a finished product with respectable margin, so the mix shift toward finished products is the margin-recovery thesis.
• Mid-term margin target: casting at ~6%–8% EBITDA, finished products at ~15%–16% EBITDA, combining to a ~9% EBITDA target driven by growing finished products and stabilizing costs.
• Order realization cycles are long: development, validation, approval, then series production means finished-product wins in the pipeline will take time to convert to revenue; no specific large order to announce yet.

Majmudar: "Romania, we are keeping our fingers crossed, very honestly, we don't know, but, let's assume Romania remains more or less in this territory of zero or a very marginal 1% or 2%."

Bronze Bushing & the Wind Market

• Only 15%–20% of the industry's bearing-to-bushing conversion has happened per management's estimate; the next wave of conversion will roll over the next four to six years, and the next gearbox is already under redesign with the company working alongside its customer on the next set of products.
• Import substitution success had previously cushioned Harsha from the wind-market slowdown; now that substitution is achieved (one case done, another working toward 100%), the company is feeling the direct impact of market weakness.
• Customer signals point to a second-half CY23 recovery in wind; the opportunity and potential sit near ₹100 crores, but achieving that depends partially on the market situation.

Rangwala: "Our guesstimate today is that about 15% to 20% conversion has taken, the next set of conversion will continue to roll next four, five, six years in the industry."

Bright Spots: Japan, Railways, Precision Stamping

• Japan-origin customer base grew 35%-plus in nine months, with top line from the three major Japanese customers reaching ₹49 crores in 9M vs ₹47 crores in all of FY22; the company is winning business across the globe from this segment.
• Railways saw significant growth, with one newly developed product entering the segment and another where the company became an import substitute for what customers previously imported, now ramping up.
• Precision stamped components are growing ~25%-plus this year from a small base, with margins very similar to or slightly lower than standalone average margins; the majority of business is bound for India with no Europe-related impact.
• Large-size cages are winning incremental orders, with parts in testing and outsourcing; no single large order to flag but gains are continuing.

Margins, Other Income & the EBITDA Target

• Absolute EBITDA held up despite the flat top line because of the material pass-through mechanism, good realized exchange rates booked in the quarter, and decent India EBITDA.
• Other income spiked to ~₹13 crores from ~₹2.5 crores QoQ, driven by ~₹5 crores of realized FX gain (difference between booking and actual realization) plus treasury interest and mark-to-market translation gains; this flattered net profit in a soft operating quarter.
• Solar EPC made a loss in Q3 because it is a cyclical, Q4-heavy project business with a fixed cost structure; on a nine-month basis it is just breaking even, and management is "mindful of not losing money" in it, with the business remaining small and not a focus of investment or significant growth.
• Medium-term operating EBITDA target: grow from ~15%–16% to 18% over the next couple of years.
• Hedging policy is 50:50: hedge half, keep half open, with the stated aim of protecting margin in volatile situations.

Majmudar: "At an operating level, we are very clear that we should look at about 15% to 16% and slowly and steadily we want to grow it up to 18% over the next couple of years."

Balance Sheet, CAPEX & Disclosures

• IPO debt repayment complete: India debt (both short-term and long-term) repaid as per prospectus; new working-capital borrowings taken only for the EPC business in India at competitive export packing credit rates. China and Romania debt remain unchanged.
• Third India facility approved by the board as part of ~₹100 crores CAPEX for the year, but land acquisition and execution timing are uncertain; overall CAPEX expansion has been slightly slowed due to the European market slowdown and potential softening elsewhere.
• Medium-to-long-term CAPEX target remains ~₹300 crores over 3 years (~₹100 crores per year).
• Volume disclosure declined: management pushed back on requests for per-piece volume data, citing 7,500 SKUs with widely varying realizations (brass vs steel, small vs large cages) and arguing average realization per piece would be misleading; they prefer investors focus on percentage EBITDA.
• Inventory: finished goods across 20-plus warehouses is the major component; raw material days ~24–25, finished goods ~43–44 days, roughly flat YoY.

Majmudar: "To be very honest, we will still want you to look at a percentage EBITDA. It would be very misleading for me to say that this is average realization per piece, because I don't want you to promise something which we can't deliver."

Guidance & Commitments

Key Metrics