Harsha Engineers International Ltd Q3 FY2024 Concall Summary

Key Takeaways

• Subsidiary turnaround delivered: Combined international subsidiary losses collapsed from ₹9.2 crore in Q2 to just ₹0.3 crore in Q3, with China turning PAT-positive and Romania narrowing its operating loss sharply.
• India margins improved despite soft topline: A slight cyclical dip in India engineering revenue was more than offset by raw material pass-through catching up and cost controls, driving a distinct EBITDA and PAT margin improvement.
• Next year's bottom line ambition is aggressive: Management sees a "definitely deliverable" 20–25% consolidated PAT growth in FY25, anchored on eliminating the ~₹14–15 crore subsidiary drag and returning India to 10–15% growth.
• Capex cycle conviction holds: Large customer India capex plans remain fully on track with no deferments, framed as a structural China-plus-one supply chain strategy rather than cyclical spending.
• What to watch next quarter: Whether the Q4 demand uptick in Europe and China materializes to validate the subsidiary turnaround, and any quantification of the 200+ new SKU pipeline converting to revenue.

Subsidiary Turnaround

• The Q3 inflection: China delivered positive EBITDA and PAT, while Romania's operating net loss reduced markedly. On a consolidated basis, the two subsidiaries together generated no loss in the quarter, down from a ₹9.2 crore loss in Q2.
• What changed: Management tightened spending, focused the product portfolio, improved material yields, scaled down overheads to match lower volumes, adjusted fixed costs, and finally achieved raw material pass-through. Demand also began turning positive toward the end of Q3 and into Q4.
• The FY25 bet: Combined subsidiary losses of roughly ₹14–15 crore for the full year are expected to disappear next year. Romania's improvement is expected to continue, though management cautions that predicting the European economic situation is extremely difficult.

Rangwala: "While China has reported a positive EBITDA and a PAT, there is a marked reduction in operating net loss in Romania, so that on a consolidated performance of both these subsidiaries, particularly, there is no loss in current quarter."

India Engineering Business

• Topline softness is cyclical, not structural: India engineering revenue dipped slightly on softening industrial demand, continued weakness in Europe and China export markets, and quarter-end inventory adjustments. India-to-India volumes grew over the nine-month period, while India-to-outside and outside-to-outside flows de-grew.
• Margin story decoupled from revenue: EBITDA and PAT margins improved distinctly, driven by two factors: raw material pass-through finally catching up after 1.5 years of volatility, and cost control measures taking hold. Gross margin at the consolidated level benefited from the same dynamics.
• Pricing stabilizing: Raw material prices saw a reduction in 2023 but also a spike; by the December quarter, fluctuation was stabilizing and some pass-through impact was flowing through.
• Q4 and FY25 outlook: India should look better in Q4 and return to normal growth in FY25, with management expecting at least 10–15% overall India-level growth next year.

Demand Environment & Customer Activity

• India capex cycle intact: All large customers continue to invest in India for bearings, with capex plans fully in line with earlier projections and no deferments or postponements. This is driven by a long-term strategy to position India as a China-plus global supply center.
• Industrial softness a watchpoint: A little bit of softness on the industrial demand side was noted, though management did not characterize it as broad-based or structural.
• Japanese customer trajectory: Growth from Japanese customers ran at 10–12% over nine months, but the last two quarters went flattish after a strong start. Management remains confident of a return to expected numbers.
• New product pipeline robust: Over 200 SKUs were developed in the nine months to December 2023, and the current development and inquiry pipeline continues to be very robust.

Majmudar: "I think the capex plans of all the big companies are absolutely in line with what earlier we were talking about. So we don't see any deferment or postponement of those capex cycles, to my mind. Again, that's more a function of their long-term strategy to position their India additional capex as a China plus some kind of a global supply center."

EV Transition & Product Development

• Solutions in development: The company has worked on EV bearings, plastic cases, and ceramic bearing solutions, including low-noise, low-vibration cages driven by extremely clean manufacturing. Work is underway with customers to develop these.
• Near-term conversion still pending: Significant opportunities are visible in the short term, but conversion has not yet taken place. The industry must still build capability to deliver at scale.
• Volume impact manageable: Management's view is that overall volumes in India will grow to compensate for any reduction from the EV transition, because applications change rather than get eliminated, and the number of bearings per vehicle only reduces rather than disappears.
• Capex aligned: Current investments are flowing into large-size bearings, bushings, stamping components (a big investment), and plastic cages, all in line with the EV transition theme. Further investment plans for long-term growth are being developed.

Rangwala: "Short term, we are seeing significant opportunities that conversion has not yet taken place. Industry has to also build up the capability to deliver that. So we are part of the chain and working closely with our customer and confident that we will continue to lead within that."

Segment & Market Performance

Guidance & Commitments

Key Metrics