Happy Forgings IPO - Outlook, Valuation, Key Strengths, Risks, Peer Analysis And More: KRChoksey

KRChoksey Research's IPO Report

Happy Forgings Ltd. launched its initial public offering yesterday and the investors can subscribe to the offer till Dec. 21. The minimum order lot is 17.

Happy Forgings' IPO is sized at Rs 958.80 to 1008.60 crore, with a price band of Rs 808-850 per share. The Rs 400 crore fresh issue will be used to purchase plant and machinery, aiding future capital expenditures as the company targets capacity expansion.

Additionally, there are plans to prepay all or a portion of certain outstanding borrowings availed by the company. Excluding Happy Forgings, industry peers have a highest price/earning ratio of 105.5 times based on FY23 earnings per share and a lowest of 45.2 times, with an average of 66.7 times.

At the upper price band of Rs 850 per share, Happy Forgings is valued at 39.9 times based on FY23 adjusted EPS. The company's foray into lightweight forging and machining, with the introduction of aluminum components, and an increased focus on export opportunities set against the backdrop of continued efforts to reduce operating costs and improve operational efficiencies, are likely to keep the company on its growth trajectory.

Therefore, we recommend a ‘Subscribe’ rating for Happy Forgings.

Key strengths:

• Robust product lines.

• Leveraging machining capabilities for export opportunities.

• Continued focus on capacity expansion.

• Customer-focused solutions.

About the company

Happy Forgings is a leading Indian forging and machining company, incorporated in July 1979. It specialises in designing and manufacturing heavy forgings and high-precision machined components offering a wide range of solutions in the heavy commercial vehicles, farm equipment, off-highway construction and industrial equipment and machinery for oil and gas, power generation, railways, and wind turbine industries.

With over 40 years of experience in manufacturing and supplying quality and complex components, the company is well established within the industries and customers its caters to.

Happy Forgings is a supplier to each of the top five Indian original equipment manufacturers, by market share, in the medium and heavy commercial vehicle industry and four of the top five Indian OEMs in the farm equipment industry by market share in FY 2023.

Key risks

• Steel cost volatility and supply risk.

• Market shift risk in crankshaft sales.

• International market concentration risk.

• Industry performance dependency risk.

• Dependence on top customers.

Peer analysis

Over the years, Happy Forgings has developed a strong competitive edge by concentrating on margin-accretive value added products. The contribution of machined products has risen from 72.88% in FY21 to 84.17% in H1 FY24.

This focus on machining and value addition has resulted in the company achieving the highest Ebitda margin among its peers. Additionally, Happy Forgings has maintained the highest profit after tax margin at 17% in FY23, along with the highest return on equity at 21% and the highest return on capital employed at 24.12% compared to its peers.

The company's operational efficiency, combined with a continuous emphasis on value-added products, provides a solid competitive advantage within its industry.

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