Harsha Engineers International Ltd Q2 FY2025 Concall Summary

Key Takeaways

• Subdued quarter, seasonal and cyclical: Q2 is historically Harsha's weakest quarter, but this one was compounded by broad industrial demand softness, customer destocking, and a sharp European slowdown.
• China turns the corner: The China subsidiary delivered positive profitability in Q2 and H1, a bright spot that management expects to grow significantly this fiscal year, helping to offset continued losses in Romania.
• India story intact, exports stall: India cage business grew ~15% YoY, but export stagnation from India and flat performance from Japan-origin customers reflect weak end-markets in Europe and the US.
• Greenfield CAPEX on track for Q4: The new Harsha Advantek subsidiary, skewed toward higher-margin bushings and stampings, is set for commissioning in Q4 FY25, though management deflected questions on a near-term margin boost.
• What to watch next quarter: Whether the Q4 demand normalization materializes as management expects, the pace of China's profit ramp, and any sign of stabilization in European order books.

Demand Environment

• Broad industrial weakness: Demand is down across all key markets, with the slowdown amplified by customers reducing inventory to preserve liquidity, making the impact on Harsha larger than the actual demand correction.
• Europe in a prolonged slump: Demand has softened significantly in Europe for almost a year, with no clear recovery timeline. Management is fairly confident it will revive but cannot predict when.
• US showing some slowdown: Exports from India saw minor degrowth, attributed partly to demand softening in the US alongside the more pronounced European weakness.
• Wind market split: Cage demand for wind applications remains subdued in Europe, but the wind market in India stays strong.
• Japan-origin customers flat: Growth from these customers is below expectation, not due to structural issues but because the European and American markets they serve are slow, and orders are taking longer to convert.
• Normalization bet on Q4: Management expects inventory corrections to have mostly run their course, with full normalization and a relatively strong Q4.

Rangwala: "historically Quarter 2 is a subdued quarter for us, both in terms of top line growth as well as in terms of margins. Whereas fourth quarter is usually our strongest quarter at Harsha."

Geographic & Subsidiary Performance

• Combined overseas subsidiaries: Losses expected to reduce in FY25 due to strong positive contribution from China, despite Romania's continued drag.
• Subsidiary margin decline: EBITDA margins at the subsidiary level fell to less than 1% from ~3%-3.5%, mainly due to the Europe slowdown and a price pass-through mechanism that squared off a prior-quarter procurement benefit.

Majmudar: "In an ideal situation I should have talked about an 8%-9% EBITDA in Romania. Today we are talking of reaching the positive EBITDA margin first and then we will talk of growth. So, it's really a tough thing."

Business Segments

• Bronze bushing stays strong: Q2 sales of ₹24 crores, H1 at ₹44 crores, in line or slightly better than expectation; continues to perform positively.
• Stamping business: Continues to grow quite satisfactorily.
• Large size bearing cages: Not picking up because major end-user segments, wind and industrial, are very soft.
• Solar business: Positive profit contribution of ~₹1.5 crores in Q2, pushing up EBITDA and PAT margins; expected to remain in a normal positive profit range annually on strong policy-level impetus and continued demand.
• Pricing pressure from bearing OEMs: Some pressure visible, but a big chunk is automatic pass-through via material price mechanisms; nothing out of the ordinary, though pressure intensifies when demand shrinks.

Strategic Developments

• China Plus One gaining traction: Order inflow already increasing from customers who have started facilities in India; more expected in coming quarters as other customers commence production.
• Schaeffler consolidation opportunity: Harsha believes it is a beneficiary of Schaeffler's global manufacturing footprint consolidation and China Plus One sourcing strategy. Ongoing outsourcing projects are in progress, though management deflected a direct question on the net impact.
• NBC Bearings expansion: Management is highly confident Harsha will benefit from NBC Bearings' ₹750 crore CAPEX plan to expand capacity by 50% over 2-3 years, given Harsha's diverse product portfolio and competency in bearing cages.
• Harsha Advantek subsidiary: The greenfield CAPEX for bushings, LSB cages, and stamped components is under this new subsidiary. It has started operations at a minuscule level and will be consolidated with India, so investors will see India as one clear number.

Greenfield CAPEX & Margin Profile

• Commissioning on track: Greenfield CAPEX to be commissioned in Q4 FY25, skewed toward higher-margin products: bushings, LSB cages, and plastic cages.
• Margin profile expectations: In the first phase, bushings and stampings will be the main production with overall infrastructure cost loaded. Management expects the medium-to-long-term margin profile to remain in the range of what India delivers, deflecting a question on whether it would substantially boost overall margins.
• Long-term impact: Should be positive, but difficult to pinpoint a specific quarter for significant impact; a gestation period for demand and production ramp-up is expected.

Guidance & Commitments

Key Metrics