Harsha Engineers IPO review (Apply)

•    HEIL is the largest manufacturer of precision bearing cages.
•    It has marked growth in its earnings year on year.
•    Based on its FY22 earnings, the issue is fully priced.
•    It may generate a fancy post listing being a first mover in the segment.
•    Investment may be considered for the medium to long term. 

PREFACE:
Harsha Engineers Ltd. filed its DRHP in August 2018 with two BRLMs, but it scrapped the IPO process later on. It refiled DRHP post-merger/acquisition process under the new name as Harsha Engineers International Ltd. in February 2022 with three BRLMs and is now finally entering the capital market with its maiden issue. It changed BRLMs between the last two filings. This issue was eagerly awaited by investors across the board due to its niche play in the segment enjoying virtual monopoly. Considering its financial performance and future prospects, this IPO is a medium to long-term bet for better rewards going forward. However, the company has evoked good fancy in the primary market so far.

ABOUT COMPANY:
Harsha Engineers International Ltd. (HEIL) is the largest manufacturer of precision bearing cages, in terms of revenue, in the organized sector in India, and among the leading manufacturers of precision bearing cages in the world. (Source: CARE Advisory Report). It offers a diversified suite of precision engineering products across geographies and end-user industries. 

HEIL's business comprises: (i) engineering business, under which it manufactures bearing cages (in brass, steel, and polyamide materials), complex, and specialized precision stamped components, welded assemblies, and brass castings and cages & bronze bushings; and (ii) solar EPC business, under which it provides complete comprehensive turnkey solutions to all solar photovoltaic requirements. It has approximately 50-60% of the market share in the organized segment of the Indian bearing cages market and 6.5% of the market share in the global organized bearing cages market for brass, steel, and polyamide cages in CY 2021 (Source: CARE Advisory Report). It offers a wide range of bearing cages starting from 20 mm to 2,000 mm in diameter and HEIL's bearing cages find their application in the automotive, railways, aviation & aerospace, construction, mining, agriculture, electrical and electronics, renewables sectors, etc.

The company has four strategically located manufacturing facilities for engineering business with one of its principal manufacturing facilities at Changodar and one at Moraiya, near Ahmedabad in Gujarat in India, and one manufacturing unit each at Changshu, China, and Ghimbav Brasov in Romania. It has entered into arrangements to stock inventory in warehouses spread across more than 20 locations across the world including in, Europe, the US, China, and South America. Its multinational presence has also allowed the company to diversify its revenue geographically.

As on March 31, 2022, it had a total of 2,198 employees, of whom approximately, 1,955 employees are skilled and technically qualified employees in the engineering business and 68 employees are skilled and technically qualified employees in the solar EPC business.

ISSUE DETAILS:
To part finance its need for prepayment/repayment of certain borrowings (Rs. 270.00 cr.), Capex for purchase of machinery (Rs. 77.95 cr.), repairs/renovation of infrastructure (Rs. 7.12 cr.), and general corporate purposes, HEIL is coming out with a maiden combo IPO of fresh equity issue worth Rs. 455 cr. and an offer for sale (OFS) worth Rs. 300 cr. making an overall size of the IPO of Rs. 755 cr. It has announced a price band of Rs. 314 to Rs. 330 per share of Rs. 10 each. Thus its fresh equity share issue will be approx. 13787865 shares and for OFS it will be approx. 9090900 shares. Thus the overall number of shares to be issued will be approx. 22878765 (at the upper cap). The issue opens for subscription on September 14, 2022, and will close on September 16, 2022. Minimum application is to be made for 45 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. The issue constitutes 25.13% of the post-issue paid-up capital of the company. The company has reserved shares worth Rs. 2.50 cr. for its eligible employees and from the residual portion, it has allocated 50% for QIBs, 15% for HNIs, and 35% for Retail investors. It has 

Joint Book Running Lead Managers (BRLMs) for this issue are Axis Capital Ltd., Equirus Capital Pvt. Ltd., and JM Financial Ltd. while the registrar to the issue is Link Intime India Pvt. Ltd. 

Having issued initial as well as additional equity shares at par, HEIL issued further equity shares in the price range of Rs. 20.00 to Rs. 20.18 in March 2011. The average cost of acquisition of shares by the promoters/selling stakeholders is Rs. 1.85, Rs. 3.10, Rs. 3.51, Rs. 6.04, Rs. 10.85, and Rs. 14.35 per share.  

Post-IPO, HEIL's current paid-up equity capital of Rs. 77.25 cr. will stand enhanced to Rs. 91.04 cr. Based on the upper cap of the IPO pricing, the company is looking for a market cap of Rs. 3004.20 cr. While it suffered a minor setback in the top line for FY21 following the pandemic, it marked growth in its bottom line for all these years. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, HEIL has (on a consolidated basis) posted turnover/net profits of Rs. 899.514 cr. / Rs. 21.91 cr. (FY20), Rs. 876.73 cr. / Rs. 45.44 cr. (FY21), and Rs. 1339.00 cr. / Rs. 91.94 cr. (FY22). 

For the last three fiscals, HEIL reported an average EPS of Rs. 8.50 and an average RoNW of 13.17%. The issue is priced at a P/BV of 4.83 based on its NAV of Rs. 68.34 as of March 31, 2022, and at a P/BV of 3.06 based on its post-IPO NAV of Rs. 107.96 per share (at the upper cap). 

If we attribute FY22 earnings on post IPO fully diluted equity capital, then the asking price is at a P/E of around 32.67. Thus issue appears fully priced. 

DIVIDEND POLICY:
The company paid a dividend of Rs. 1.69 per share for FY19, but thereafter it has not paid any dividend for the last three fiscals. It will adopt a prudent dividend policy post listing, based on its financial performance and future prospects. 

COMPARISON WITH LISTED PEERS:
As per the offer documents, HEIL has shown Timken India, SKF India, Rolex Rings, and Sundram Fasteners as its listed peers. They are currently trading at a P/E of 65.12, 55.32, 35.42, and 41.53 (as of September 09, 2022). However, they are not truly comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORDS:
The three BRLMs associated with this issue have handled 57 public issues in the past three years, out of which 19 issues closed below the offer price on the listing date.