Harsha Engineers International Ltd Q3 FY2025 Concall Summary

Key Takeaways

• Flattish quarter, no green shoots abroad: India engineering grew high single digits, but Europe remains deeply subdued and the US shows no revival, leaving consolidated performance flat.
• Romania is a double-whammy: Casting volumes are down and the planned cages ramp-up has not materialized, pushing the subsidiary deeper into loss; management sees no dramatic improvement even next year.
• Two large contract wins signal medium-term confidence: A major sourcing contract and a 6-year supply agreement (€6-10 mn potential) were signed, with material revenue expected from H2 FY26.
• Bushing segment is the bright spot: On track to cross ₹80 crores this year, with management targeting 50% minimum growth in FY26 and a long-term ₹300 crores annual run rate.
• What to watch next quarter: Whether India cages resumes 8%-10% growth as guided, any sign of demand stabilization in Europe, and the pace of Romania loss containment.

Demand Environment

• Europe still in a trough: Demand remains very subdued, with no concrete sign of revival. The windmill market and high-end industrial segment for large-size cages are particularly weak.
• US not helping: The US market is not showing any significant sign of revival, though a stronger USD may improve price competitiveness for Harsha's exports.
• India cages: cyclical softness, not structural: Q3 was soft due to year-end inventory reduction pressure from major MNC bearing companies whose overseas parents follow the calendar year. Domestic demand was flattish. Management expects normal purchasing to resume in Q4, with 8%-10% annual growth returning.
• Railway demand moderating: Government CAPEX allocation to railways has been lowered, though metro implementation is increasing and products are increasingly going into those bearings. Growth should continue but not as aggressively as before.
• Geopolitical cross-currents: Management expects US proactive steps under Trump to reduce geopolitical tension, partly offset by increased tariff wars between US and China that could have a domino effect on international trade.

Rangwala: "We are getting a feeling that with the US taking positive proactive steps under the new leadership of Mr. Trump, the geopolitical tension should start reducing, thereby making the business sentiment positive. However, this could be partly offset by increased tariff wars, particularly between US and China, which could have a domino effect on overall international trade."

Romania: The Double-Whammy

• Volume collapse on both fronts: Romania's peak revenue was about ₹300+ crores annually; the current run rate is sub-₹200 crores, with a deteriorated product mix dominated by semi-finished castings. The strategy was to increase cages share while maintaining castings, but casting is down and cages is not improving.
• Loss drivers stack up: Low demand, fixed cost at the leased site, inability to pass through inflation costs on semi-finished products to one customer, and overall plant efficiency decline due to lower volumes.
• No dramatic improvement ahead: Management's first target is containing losses; they do not see a dramatic improvement happening even next year. The situation is still developing with no clear picture.
• China a relative bright spot: Q3 was not positive from a PAT point of view, but year-to-date performance showed respectable improvement over last year and decent projections are expected to continue.

Majmudar: "In all honesty and to be very candid. Currently, it is a very tough situation in Romania because our strategy was to increase the share of cages maintaining the share of castings. Now right now what happened is casting is also down, and cages is not improving. So, therefore, there is a double-whammy."

India Engineering: Cages & Bushing

• Cages: inventory destocking hit Q3: Major MNC bearing companies in India reduced inventory at year-end, creating a soft quarter. Domestic demand was flattish both YoY and QoQ.
• Bushing: the growth engine: 9-month sales around ₹60 crores plus, on track to cross the ₹80 crores annual target. Management expects 70%-80% YoY growth this year and at least 50% growth in FY26, with a long-term potential of ₹300 crores annual run rate. The company has become the first or only supplier in India to supply bushings to the wind market.
• Stamping expansion beyond bearings: The company is looking to expand stamping into green, battery-operated vehicle areas, seeing strong traction and a great long-term growth opportunity in India.
• Pricing pass-through: Price reduction occurred due to metal price reduction, majorly on steel, through the standard pass-through mechanism.

Majmudar: "We believe this quarter Q4 we should see India, the big business also again starting to grow 8%-10% per annum. That is what our assumption is. We don't see this as a structural issue. It is more like a cyclical issue."

Contract Wins & Capacity Build-Out

• Major sourcing contract signed: Concluded with a large global customer for cages; considerable additional business expected from H2 FY26.
• Long-term supply agreement: A 6-year contract with revenue potential of €6-10 million at full potential; supply expected to start in H2 FY26, scaling up gradually.
• Greenfield site progressing: First phase commissioning of one subsection expected towards end of Q3 or early Q4; all capacities should come online by end of Q1 next year.
• CAPEX on track: ₹70.8 crores spent in Q3 at consolidated level; full-year FY25 target is about ₹170 crores, primarily for the new plant, building and equipment.
• Customer CAPEX opportunity: Bearing customers are deploying large CAPEX in India as part of China Plus One de-risking. Management guesstimates this could represent around ₹200 crores at peak incremental additional opportunity for cage supply, though it will take time as large CAPEX takes a long period to bring capacities online.

Competitive Position & Market Structure

• Global #2 in outsourced cages: NKC (Japan) is the number one player globally; Harsha believes it holds the second highest global market share in the outsourcing space. MPT (Germany) is another competitor. Harsha differentiates by offering steel, brass, and plastic cages while NKC does mainly steel and MPT does mainly brass.
• Dominant in India: Harsha estimates more than 70%-80% outsourced cage market share in India, where most bearing companies have practically no cage facility.
• Global wallet share has headroom: Supplying to almost 60-70 plants worldwide with only 10%-20% wallet share among the top three players (SKF, Schaeffler, Timken). [10-11]
• Japan-based customers progressing slowly: Revenue largely flat vs previous year at about ₹50 crores year-to-date. Development is progressing well but some projects are delayed due to technical issues; translation to sales is happening slowly.

Margins & Costs

• Employee cost structurally higher: At 11%-12% of sales, driven by high engineering skill sets for precision-oriented jobs, in-house tooling, and a large number of engineering graduates with extensive training. Management notes overseas comparable operations would be at 25%-30%.
• Long-term margin target distant: Consolidated margin target is 17%-18% versus the current 14%-15%, but management says it is very difficult to predict anything right now given the dicey situation.
• Working capital improved: Reduced to 144 days from 151 days in the previous quarter.

Majmudar: "Long term our target is the consolidated margin for 14% to 15% our target is to take it to 17% to 18% but it is very difficult for me to predict anything right now."

Guidance & Commitments

Key Metrics