Harsha Engineers International Ltd Q2 FY2024 Concall Summary

Key Takeaways

• Disappointing quarter, full-year confidence intact: Q2 top and bottom line fell short, but management expects much better annual numbers for FY24 and a return to normal growth from FY25.
• Gross margin reset to 42%: A raw material pass-through lag that benefited Q1 reversed in Q2, compounded by forex, inventory liquidation and solar mix dilution, pulling consolidated gross margin well below its historical 46–48% band.
• Europe and China subsidiaries dragged hard: Romania suffered from weak industrial and wind-turbine demand plus fixed-overhead absorption pain, while China order books softened sharply in line with the broader market.
• India engineering margin is the anchor: Standalone India gross margin of ~50% is maintainable year-over-year, and management expects H2 improvement across India, Romania and China to bring FY24 close to last year's performance.
• What to watch next quarter: Whether the promised Q4 demand revival in Romania wind and China actually materializes, the pace of gross margin recovery toward 48%, and any concrete subsidiary margin guidance as management gets "more enlightened."

Top-Line Performance & Demand

• Standalone growth masks core softness: 11% YoY standalone revenue growth was driven entirely by the solar EPC segment riding favorable renewable policy; the core engineering business contracted ~4–5% YoY.
• Volumes roughly flat: Supplies to Europe and China weakened, offset by positive demand in the Americas and India, leaving net volumes flat with some degrowth.
• China demand fell sharply: Q2 order books from China softened in line with the broader market; management sees positive government signals but says it is too early to predict, and the company may need to rescale its China business if order books stay at current levels.
• Romania industrial demand stayed adverse: Industrial products demand dropped significantly, hitting offtake from a key Romania customer on semi-finished fasting and case supply.
• Japan customer growth softer than targeted: First-half growth of 17–18% fell short of the ~30% management expected; new order wins and product approvals underpin a positive turnaround outlook.
• Precision components grew below expectations: 10–15% H1 growth; new products coming online and order maturity are expected to lift growth by year-end.
• Railway segment a bright spot: The company supplies bearing cages in steel, brass, plastic and steel inserts to the railway segment, holds ~100% market share among bearing manufacturers, and is seeing significant growth.
• Customer localization progressing well: Localization projects by global customers are on track or ahead of plan, and customers remain bullish on the mid-to-long term.

Rangwala: "At the outset, I must admit that this quarter, the number look a little disappointing both from point of view of top line as well as the bottom line. However, let me assure you that while Q2 numbers are not up to the mark, we expect much better overall annual numbers for FY '24, and we should be back on normal growth track from financial year 2025 onwards."

Gross Margin Mechanics

• Consolidated gross margin fell to 42% from a historical 46–48% run rate, driven by four factors: raw material pass-through timing, lower forex gains, inventory liquidation of non-moving material, and solar EPC mix dilution.
• Pass-through lag explains the swing: In Q1, the company bought raw material at lower prices but sold at the previous quarter's higher rates, boosting margin. In Q2, selling prices reset to match the lower buying prices, compressing the spread. The lag is 3–4 months.
• Solar EPC structurally dilutive to blended margin: Solar carries 75–80% raw material cost, so its growth pulled down the consolidated gross margin percentage even as it added absolute revenue.
• India engineering margin is resilient: Standalone India engineering gross margin of ~50% is maintainable year-over-year, though not quarter-over-quarter; blended with solar, the India business should hold ~48%.

Rangwala: "So, I think from a Harsha Engineering India standpoint, a 50 odd percent gross margin is very much maintainable. There is no problem. Not exactly quarter over quarter, but year over year, you should not see any major hiccup on that."

Subsidiary Performance: Romania & China

• Romania fixed overhead bit hard: Weak demand combined with fixed overhead absorption issues produced a sharp negative impact on the bottom line.
• Romania wind demand expected to revive from Q4: Management anticipates a significant second-half improvement that should offset a large part of the first-half losses, though the year-end position may still be negative, just much reduced.
• China losses should partially neutralize by year-end: Demand is expected to start improving from Q3 and reach normal levels in Q4, partly offsetting the negative first-half position.
• Management is buying time before any strategic call: Given the strong strategic roles of both Romania and China, management will wait at least two more quarters before taking a final decision, but is optimistic both subsidiaries will at least break even next year.
• No subsidiary margin guidance yet: When asked what margin level a turnaround would produce, management declined to quantify, saying they will share as they get "more enlightened."

Majmudar: "However, very honestly, given the fact that Romania as well as China has a very strong strategic roles to play. I think as a management, we have taken the call to wait for at least a couple of more quarters and then take a final call, but we are very optimistic that by next year, at least, there should not be any loss at both the subsidiary level."

Capex & Capacity Expansion

• Phase 1 greenfield capex frozen for Bushings: Management approved a ~₹120 crore investment in a third manufacturing site, with the bulk going into land and building as foundational infrastructure for multiple investment cycles.
• Bushing capacity to add ₹80–90 crore top line initially: Productionization is targeted for Q3 FY25, roughly a one-year installation timeline, based on customer discussions pointing to a significant demand increase.
• Bushing demand revival expected from Q4: Management anticipates a decent pickup in bushing orders from Q4 onwards, particularly on the energy side once global markets improve.
• Bearing company capex cycle a medium-term tailwind: The company is in dialogue with most bearing manufacturers and believes it will be a major beneficiary, but conversion to demand will take at least a year or two.

Majmudar: "We are in dialogue with most of them. Most of these products are under discussion, but as you would appreciate, it will take at least a year or two for that to convert it to demand. So, that opportunity remains absolutely intact. It is just the timing part."

Segment & Customer Dynamics

• Customer onboarding is a long-cycle process: Onboarding a new customer takes a minimum of six months and can extend to two years, which tempers the pace at which localization and new-order wins convert to revenue.

Guidance & Commitments

Key Metrics