Happy Forgings IPO - Investment Rationale, Issue Details, Financials, Risks And More: Anand Rathi

Anand Rathi's IPO Report

Happy Forgings Ltd. will launch its initial public offering today and the investors can subscribe to the offer till Dec. 21. The company has fixed a price band in the range of Rs 808 to Rs 850. The minimum order lot is 17.

The Rs 1008.60 crore IPO is a mix of fresh shares worth Rs 400 crore and an offer for sale of 71.6 lakh equity shares worth Rs 608.6 crore.

Objects of the Issue

Fresh issue:

• Purchase of equipment, plant, and machinery

• Prepayment of all or a portion of certain outstanding borrowings availed by the company.

• general corporate purposes.

Strengths:

• Fourth largest engineering led manufacturer of complex and safety critical, heavy forged and high precision components.

• Diversified business model, well placed to take advantage of potential alternative engine technologies.

• Integrated manufacturing operations coupled with in-house product.

• Long-standing relationship with customers across industries.

• Track record of consistently building capabilities and infrastructure, with focus on capital efficiency.

• Experienced Promoters and senior management team.

• Healthy financial performance.

Key Strategies:

• Foray into lightweight forging and machining with introduction of aluminium components.

• Capitalise on increasing demand from international markets to grow exports.

• Leverage in-house engineering and product development capabilities to grow product portfolio and tap growing business opportunities in the industrial markets.

• Increase the wallet share and acquire new business by leveraging existing OEM relationships and adding new customers.

• Expand capacity of existing manufacturing facilities.

• Continue to reduce operating costs and improve operational efficiencies.

• Grow inorganically through strategic acquisitions and alliances.

Valuation and outlook

Happy Forgings’s diversified product portfolio, coupled with its focus on margin-accretive and value-additive products, has contributed to its transition from a forging-led business to a leading player in the machined components manufacturing industry.

It also serves a wide range of industries, including automotive, farm equipment, offhighway vehicles, and industrial machinery for oil and gas, power generation, railways, and wind turbine sectors.

At the upper price band, company is valuing at price/earning of 38.4 times with a market cap of Rs 80,074 million post issue of equity shares and return on net worth of 21.12%.

On the valuation front, we believe that the company is fairly priced. Thus, we recommend a 'Subscribe – Long Term' rating to the IPO.

Key Risks

• The company depends on a few suppliers for the supply of steel, their primary raw material. Further, they do not have definitive supply agreements with their suppliers for the supply of steel. Interruptions in the supply of steel could adversely affect their business, financial condition, results of operations and cash flows.

• Happy Forgings has incurred indebtedness and an inability to comply with repayment and other covenants in their financing agreements could adversely affect their business, results of operations, cash flows and financial condition. They also intend to utilise a portion of the net proceeds for prepayment of all or a portion of the borrowings availed by the company.

• The company has substantial capital expenditure and working capital requirements and may require additional capital and financing in the future and their operations could be curtailed if they are unable to obtain the required additional capital and financing when needed.

• Happy Forgings does not have agreements having commitment on part of their customers to purchase or place orders with them. If their customers choose not to source their requirements from them, there may be a material adverse effect on their business, financial condition, cash flows and results of operations.

• The company is exposed to counterparty credit risk and any delay in receiving payments or non-receipt of payments may adversely impact their business, financial condition, cash flows and results of operations.

• Happy Forgings exports their products to various countries and their revenue from contract with customers outside India represented 12.89%, 10.94%, 8.77%, 20.75% and 11.87% of the total revenue from contract with customers in fiscal 2021, 2022 and 2023 and the six months ended September 30, 2023 and 2022, respectively. Any adverse events affecting these countries could have an adverse impact on their revenue from operations.

• The company derives a substantial portion of their revenue from the sale of crankshafts and loss of sales due to reduction in demand for crankshafts would have a material adverse effect on their business, financial condition, results of operations and cash flows.

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