Harsha Engineers International Ltd Q4 FY2023 Concall Summary

Key Takeaways

• Muted revenue masks volume growth: Consolidated volume grew ~8% but reported revenue growth was lower, dragged by commodity price pass-throughs and a mix shift toward lower-realization semi-finished castings.
• India is the bright spot, Europe and China are the drag: India engineering grew ~20%, while Romania suffered from energy costs and soft wind demand, and China was muted by lockdowns and an automotive slowdown.
• Subsidiary margins are the swing factor: Both Romania and China operated at near-breakeven margins in FY23; management expects both to turn positive in FY24, with Romania targeting 5%–6% EBITDA and China 12%–13%.
• Greenfield expansion signals confidence: A new subsidiary was incorporated and an enabling resolution passed for up to ₹350 crores of investment, with capex of ₹100–130 crores planned for FY24.
• What to watch next quarter: Whether the promised margin recovery in Romania and China materializes, the pace of bushing order book conversion into revenue, and concrete details on the greenfield project’s capacity and product mix.

India vs. Global: A Tale of Two Markets

• India delivered robust growth: The Indian engineering market grew ~20% in FY23, driven by customer capex and China Plus One effects. Standalone company engineering revenue grew 9.5%–10% because it exports to multiple locations beyond India.
• Europe hit by energy and inflation: Romania faced significant headwinds from high energy costs and overall inflationary conditions, resulting in soft demand. The wind market, a key driver for bronze bushings, was also muted in Europe.
• China locked down: Government-imposed lockdowns led to demand-side challenges and an automotive slowdown, keeping the China market muted with no volume growth.
• Bullish on India, realistic on the globe: Management expects to continue growing at least double-digit in India, but acknowledges that at 38%–40% of revenue, overall growth is still driven by how the globe grows, which creates both opportunity and challenges.

Rangwala: "India is a 38% for us... it has grown very significantly... almost to the tune of 20%... we are quite bullish, and we will continue to grow at least double digit in India. But at the end of the day, it is still 38%, 40% of our market. So obviously, our overall growth is driven by how the globe grows — and that kind of creates opportunity as well as challenges."

Subsidiary Margins: The Recovery Bet

• Romania operated at near-zero margin: FY23 Romania margin was very low and insignificant, driven by 80%+ revenue from semi-finished products that are energy-intensive and volume-dependent. Finished product margins, normally 14%–15%, also crashed due to soft demand.
• China margin depressed by one-off costs: China margin was also very low at 6%–7%, weighed down by a significant one-time cost related to reprocessing slag from equipment breakdown during COVID, inability to get restart approval, and ultimately selling that inventory at a loss.
• Cost pass-through lag amplified the pain: A continuous pass-through process operated with a lag through most of the year; when lag exists, the impact hits P&L but the benefit moves later, so fixed overheads remain high and margins appear very low. Most of the lag effect was addressed and removed in Q4.
• Romania margin path laid out: Management targets ~5%–6% EBITDA in FY24, reaching the historical 7%–8% in FY25. Growth is expected from existing customers where business is currently soft, adding new customers in the European region, and working with customers to outsource some of their cage demand.
• China can double margins: Management believes China can easily do ~12%–13% against the current 6%–7%, with year-over-year improvement expected to continue in FY24 and beyond.
• Both subsidiaries expected to turn positive in FY24.

Product & Segment Dynamics

• Large bearing cages and Japan customers were bright spots: Both segments witnessed strong growth in FY23. Wallet share with Japan-based customers is currently only 2%–3%, with an aim to reach at least 10%–12% over the next few years.
• Bronze bushing fell short but order book is intact: FY23 bushing revenue of ₹30 crores was ~₹10 crores short of expectation due to soft wind market demand. A decent revival is expected in H2 FY24, with a conservative early estimate of ~₹45 crores for FY24.
• Stamped components grew 19%: Revenue reached ₹45 crores for FY23, with 19% YoY growth.
• Solar EPC is a non-core drag: Revenue declined from ₹82 crores in FY22 to ₹69 crores in FY23, with margins at ~1.5%. Management stated it is not an area of growth or capital allocation focus and is open to divestment options, though no final plan is in place.
• New product development pipeline is strong: ~333 new products were developed in FY23, indicating strong pipeline build-up.

Majmudar: "Mind you, this a very conservative estimate our earlier estimate was actually aggressive. So, 30 to 45 is again quite conservative. And it can change as we move ahead."

Greenfield Expansion: Building for the Long Term

• New subsidiary incorporated: Wholly owned subsidiary "Harsha Engineers Advantek Limited" was registered as the vehicle for the next greenfield project in India, with land identification and related formalities very close to completion.
• Enabling resolution for ₹350 crores: The board passed an enabling provision for total potential investment of ₹350 crores, including working capital, over the next 2–3 years. Investment will be done in tranches over 3–4 years as needed, funded mostly from cash accruals with not much additional debt.
• FY24 capex planned at ₹100–130 crores: This includes the greenfield expansion plus capex in the standalone entity for existing facilities and debottlenecking.
• Greenfield is a 3–5 year horizon play: Existing plants can reach ₹1,700–1,800 crores revenue but are chock-a-block in many production areas with no room for expansion. The greenfield is for futuristic needs, not the next 1–2 years. Blended asset turn is expected to be maintained at 1:2 on fixed asset spend.
• Detailed plans coming soon: The exact capex program, capacity plan, and product mix for the new facility will be shared in the next couple of quarters. Additional business beyond existing capacity plus diversification on core competency will go to the new facilities.

Majmudar: "You see from my present plants that I have; I can go up to maybe INR1,700 crores, INR1,800 crores. Now the problem here is, it takes a couple of years for you to set up a new plant. We are working on several directions of growth. It's a long term story. So by the time, business is available, I have to have the capacities."

Medium-Term Growth Thesis

• 15% CAGR ambition vs. 6%–8% industry growth: Management expressed confidence in outpacing the industry over the medium to long term, driven by multiple factors: increasing wallet share, in-sourcing to outsourcing trends, large size bearing cages, Japan-based customers, the India opportunity, and China Plus One-driven new plants.
• Global bearing manufacturer capex in India: Significant capex has been announced by global bearing manufacturers setting up in India; Harsha believes it will be a major beneficiary of cage requirements from these companies in the future.
• Wind market directionally bullish: Management is confident the wind market will grow mid- to long-term based on global projections, carbon-neutral goals, and zero CO2 emission goals, and that Harsha will win opportunities within it.
• Beyond-India growth levers: Opportunities exist in converting in-sourcing to outsourcing and building the portfolio with Japan-based customers; management is fairly confident of outpacing global growth significantly on the bearing side, with additional growth from bushings and other products.

Majmudar: "It's a multiple host of factors that keeps me growing or makes me confident that, over a medium to long term, I should be able to do at a 15% CAGR, vis-a-vis, 6%, 7%, 8% at which the industry is growing."

Guidance & Commitments

Key Metrics