Happy Forgings expects normalised revenue growth over next 2-3 years

The company is into forging and machining business. So 85 percent of our revenue comes from the complete machine component business. And it's not a sector-specific business for us. So we cater to commercial vehicle farm equipment, industrials and off-highway vehicles. And for us, we are in a product range from 10 kg to 250 kg. So basically, on a heavy side of the business. So majorly, it's a complete machine component business for us.

Your revenue contribution from the top 10 clients has come down from 80 percent to 70 percent. What are your further plans for diversification going forward?

So we have around 66 clients on board now, and the top 10 clients for us constitute 70 percent of our revenue. But these clients are very old with the relationship of between 11 to 21 years of age now, and even the business is growing with these customers. And for new clientage, we have onboarded over 30 clients in the last six years, majorly around 24 clients in the industrial sector, especially for wind turbines, industrial engines and a heavy range. And this is a sector which is growing for us where we have incrementally improved our revenue from 3.7 percent to almost 14 percent in H1. So in terms of client concentration, it has already reduced to 67 percent in H1. And going forward, we feel it's going to reduce to around 50 percent by FY25.

So exports is a sector which is growing for us and the direct exports have improved from 13.5 percent to 21 percent in H1. Going forward, we see exports improving to 30 percent in the next 15 to 18 months. And some of these clients for us include customers from the wind turbine sector and also some of the exports to some of our existing customers like JCB and clients like Liebherr, Bonfiglioli in the wind sector. And then we are already working with some of these clients like Meritor Cummins going forward.

What's the margin difference between your domestic as well as export business?

The export business is definitely more margin accretive. There are around 10-12 percent better margins in the export sector. So there is around 3-4 percent additional cost on the exports. But on the EBITDA side, it is around 5-7 percent better than the domestic business.

What strategies are you implementing to evolve your margin profile by FY25? With the current range at 28-30 percent, do you foresee achieving a potential range of 40-45 percent by FY25, particularly with the anticipated shift in the mix, especially from increased exports?

No. It's the incremental business which is coming at a better realisation. So we see around 1.5-2 percent improvement on a consolidated basis because it's an incremental business which is coming at a better realisation, but EBITDA margins should be upwards of 29 percent going forward in the next 15-18 months.

On the absolute, EBITDA per kg will improve. But sometimes the steel price also has an impact on the EBITDA percentage because steel is a passthrough for us. So if the steel price is going up, then the EBITDA percentage normally goes down for us because steel is a passthrough. So basically, you see, if we consider the steel price base as the same, then absolute EBITDA per kg will improve. On a percentage basis, we see that, yes, around 1-2 percent it will improve.

Your revenue growth for the last two years has been between 40 percent and 47 percent in FY22 and FY23. How sustainable is this growth and what are the key drivers behind this growth?

So I will talk from the last 10 years' perspective because the topline has grown at a CAGR of almost 18 percent in the last 10 years, whereas EBITDA has grown at a CAGR of almost 24 percent in the last 10 years. So going forward, we see that we'll be able to maintain this growth trajectory. And also we believe we'll be able to do better with the primary fundraising that we are doing in the company, which will kind of help us in accelerating this growth. So going forward, on a yearly basis, it's difficult to say, but definitely the numbers going forward if you see, we'll be able to maintain this growth going forward as well.

Your revenue CAGR between FY21 to FY23 stood at around 44-45 percent. Do you expect to have that same CAGR going forward too for the next two-three years?

On a topline basis, it will be between 18 percent and 22 percent. But on an EBITDA basis, it will be far more. It will be upwards of 24-25 percent.

You expect the growth to normalise from here on. You had the number of 40-45 percent CAGR from FY21 to FY23. You expect that number to normalize from 40 percent to 20-25 percent in the next two-three years. What explains that?

Yes, that's all from organic growth. But the EBITDA growth will be much faster because that's traditionally due to exports and the industrial mix and the heavy component range that we are doing today.
But EBITDA CAGR will be upwards of 24-25 percent. We'll be maintaining a similar trajectory. But at the same time, we expect that because of the primary fundraising. It should be in terms of 1 percent or 2 percent better than what we have achieved in the past.

But help us understand the drivers behind your revenue growth hereon, which seems to be now a normalised number from what we were looking historically.

Yes, historic numbers, because it was COVID years. So post COVID, it was a higher base, but if you look at a traditional five-year scenario, the topline growth has been in the range of 21-22 percent. So going forward, the major growth drivers will be from the export side So, we are looking at exports improvement. The Rs 700 crore of annual incremental business which is in the pipeline is from the export sector. And we expect the export percentage to improve, thereby helping us to improve our realisations. Even on the domestic front, we have added more clients in CV, as well as in farm equipment and we are also entering into the SUV business with Mahindra. So we expect the console business will probably help us in improving our realisation as well as growth.

The revenue growth for the first six months stands at 12 percent for the period ended September 30, 2023. This number seems to be way lower as compared to your peers like Bharat Forge, Craftsman Automation, Ramkrishna Forgings, Sona BLW Precision.

First six months, in terms of topline, the growth has been 18-20%. I think in the last year, there was a one-time other income, which was around Rs 18 crore to Rs 20 crore. So if you exclude that, then the topline growth is in the range of 18-20 percent in H1 for us.

So basically, we are not into a commodity business. And in terms of many other players, typically, we are not only into the forge component business. If you look at our margin profile, if you look at our realisation, it is far superior and we are in a complete machine component business. So in a machine component business, our intention is not to just add topline, it's always about adding a better realisation and a better bottomline. So in terms of the last six months, if you look at our EBITDA growth, it is upwards of 20 percent in the first H1. And for us going forward as well, we feel that we'll be able to maintain a similar trajectory. So in comparison to others, I don't want to comment because there will be some inorganic expansions also in some of the names that you have given. For us, it's totally organic.

Going forward in the future, do you also expect to grow just organically? Would you not be looking at any inorganic methods?

We will be looking at inorganic as well, as we have strong liquidity in hand. We are almost at a debt-equity of 0.22, which is far better than, far superior than some of these peers. So going forward, we feel that we will be accelerating our growth through the inorganic route as well. But we're looking at some of the deals which probably will materialise. We'll let you know in the next six to eight months.

Speaking of inorganic growth, the company is in the discussion phase, but the idea is to grow the forging and machining business. So it will not be in some other domain. And the acquisition will be within India. So we are looking for it, but nothing concrete as of now. Also company is looking at JV on a heavy side of the business, which is from 250 kg to 1 tonne application, especially on the marine side. So once it gets materialised, we will definitely communicate.

What's the asset size and the geography in which you're looking for this inorganic expansion?

So as discussed, we are not in a commodity business and we are, you know, making qualitative business. So we are in a complete product business, almost 85 percent of the business. Because in the last 10 years, the machining business has grown almost 8x. So our idea is to improve the machining content, improve the realisation in the business and also to grow in terms of exports. So that's what we feel. And in terms of machining, we feel that we are very different from some of the other forging players.