Prabhudas Lilladher sees sharp upside in Harsha Engineers but target price still below IPO level

The business lines

The company’s primary business vertical is engineering, which makes up 94 percent of revenue, involving the production of brass, steel and polyamide bearing cages, bronze bushings, precision stamped components, and brass castings. It has four manufacturing units for its engineering business – Changodar and Moraiya in Gujarat; Changshu in China, and Ghimbav Brasov in Romania.

In its engineering business in India, Harsha Engineers is focused on increasing its share of higher margin products like large-sized cages, bronze bushings, and precision stamped components.

The remaining 6 percent of revenue comes from the Solar EPC vertical which provides comprehensive turnkey solutions in the solar photovoltaic industry and operation and maintenance services in the solar energy sector. This vertical has historically been a loss-making and thus a minor drag on margins and profitability but the domestic brokerage firm expects it to continue contributing marginally to the bottom line going forward.

Bearing cages

Bearings are used across a wide range of sectors, with automotive accounting for the largest share.

The $273-million Indian bearing cages market, which accounts for 5.2 percent of the global market, is expected to grow fastest within Asia Pacific at a compounded annual growth rate of 8.3 percent from FY22 to FY30, with bearing manufacturers scaling up investments for local production in India while diversifying their supply chains away from China, Prabhudas Lilladher said.

Railways is one of the end-users of bearing cages and with the government’s thrust on the railway sector, as is seen from the higher allocation, companies that manufacture the product are expected to benefit materially.

The bearing cages maker is well-placed for growth in the long term, according to Prabhudas Lilladher.

The brokerage firm explained that the company’s underperforming Romania operations are expected to turn around on the back of improving demand in Europe and greater production of large-sized cages whereas the Solar EPC segment has turned profitable in the first nine months of FY23.

Additionally, the company has utilised its IPO proceeds to repay the majority of its debt and is now investing in wind and solar plants.

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“These measures combined can generate interest and power costs savings of Rs 18-19 crore annually, aiding margin expansion from FY23 onwards,” the domestic brokerage firm pointed out. The company makes large-size cages which are a low-volume, high-value product, and hence this will also expand the company’s margins.

Here’s why the brokerage likes the bearing cages manufacturer:

Gain wallet share

The global bearing market is concentrated, with Schaeffler, Timken, SKF, JTEKT, NTN, and NSK commanding around 54 percent of the market, and all six of them are Harsha Engineers’ long-term clients. The company has managed to win repeat orders from its key clients because once a customer trusts a reliable vendor, they usually tend to stick around due to the complexity of the production process for bearing cages. The company has also built relatively newer relations with the three big Japanese players–NTN, NSK and JTEKT–and plans to increase its approximately 2 percent wallet share to around 10 percent within the next three-five years by directly supplying to these customers in Japan.

Play on wind energy

The company has recently diversified into producing bronze bushings as a substitute for bearings for wind turbine gearboxes and this market has the potential to expand from Rs 200 crore to Rs 5,000 crore, driven by the cost and operational benefits of using bushings instead of bearings, along with growing demand for renewable energy sources, the brokerage firm said. “As an early mover, Harsha has the potential to capture approximately 10-15 percent of the market over the next few years,” Prabhudas Lilladher said.

Outsourcing - a big opportunity

An estimated 40 percent of bearing cages are still produced in-house by bearing manufacturers but this can fall to about 25-30 percent over the next decade, which will create a huge opportunity for cage producers like Harsha Engineers because of cost advantages, strong technical expertise and the China+1 theme in India, said the domestic brokerage firm.

“The outsourcing opportunity is considerable in large-size bearing cages, which Harsha supplies from its Romania facility, and for which it is ramping up capacities in India to grow wallet share from around 2 percent to over 10 percent in this high-value segment,” Prabhudas Lilladher said.