Ashish Garg, Managing Director, Happy Forgings Limited

18 Dec 2023 , 02:35 PM

Help us understand the company’s business model.

Happy Forgings Limited was incorporated in the year 1979 to forge bicycle pedal arms, in Ludhiana which is a major hub for bicycles. We started with the forging of bicycle pedal which is just a 500 gram component and then we were forging parts upto 30 kgs. In 1996, we migrated into transmission components for the farm equipment sector. From 2011, we started with the machining business, which now forms about 85% of our revenue, which is the highest among our listed peers. Our components are used in commercial vehicles, tractors (farm equipment) as well as the industrials sector. Within the industrials space, we cater to the sectors of wind power, oil and gas and railways. These components are heavy in nature, largely ranging from 30-250 kgs. We are the second company in India to operate 14,000 tonne heavy forging press line and in terms of capacity, we are the fourth largest manufacturers of safety critical components. So we are not a forging company anymore, but an engineering company with aggregate capacity of almost 1,67,000 tonne for forging and machining on a combined basis.

Which are the comparable listed peers of Happy Forgings?

Bharat Forge is one of the directly comparable listed peer for us, wherein we compete with them for about 60% of our revenue. Next is Ramkrishna Forging and we compete with them in our business of front axle, rear axle and transmission components (forming 15-20% of our revenue). These are the two key peers of our company. Globally, we compete with Thysenkrupp. While we have listed Craftsman Automation as our peer, it is not directly comparable to us. 

Why should retail investors consider this IPO, especially in the current IPO frenzy.

We have been in business for more than 40 years now and our relationship with most of our top customers span anywhere between 11 years to 21 years. Most of these clients are large OEMs like Ashok Leyland, JCB, Mahindra and Mahindra, Volvo Eicher, among others. In the last 10 years, our revenue and EBITDA have grown at a CAGR of 18% and 24.5%, respectively. This shows our superior track record. In the last 5 years, our company’s average EBITDA margin has been around 27% which is highest amongst the listed peers. Similarly, over the last five years, our PAT margin stood at 15% and RoCE at around 23%, also the highest in the industry. 

We have been growing consistently and despite operating in a capital-intensive industry we have the lowest leverage. Our debt/equity ratio stands at 0.22 times which is very strong compared to some of our peers. We have diluted equity just once when we sold 11.76% stake to Motilal Oswal Private Equity Fund. Whereas rest of our peers have done multiple dilutions over the past decade. We enjoy AA rating by both CRISIL and ICRA and CRISIL has been rating us for the past two decades now. We are generating robust cash flows, out of which 70% has been deployed in the business. We have doubled our capacity in the past 4 years without incremental debt. These are the things which make us stand out and that investors must look at while considering our IPO.

What are the key strategic priorities of the company?

Our export revenues have grown nearly 6x over the last four years and direct exports contributed 21% of our total revenues for the first half of FY24. We are confident of maintaining this growth in direct exports. 60% of our new business is from exports. Our industrial business (wind power, heavy gensets and heavy engines) too is well poised for robust growth. This business includes our range of heavy products which was launched last year. While we are growing organically with similar client base as well sectors, we added Tata Motors, John Deere, Mahindra and Mahindra two years ago. We have also added customers in the Commercial Vehicles and Farm Equipment Space and we expect strong growth thereof.

Top 10 clients contribute about 70% to the company’s revenue. Are you looking to further diversify your client base to reduce this risk?

Our client concentration is reducing consistently. In the first half of FY24, revenue contribution from our top 10 clients reduced to 67%. We anticipate this metric to further reduce to 65% at the end of FY24 and to 60% by March 2025. This reduction is due to the fact that we have on-boarded 30 new large clients in the last 5-6 years. These clients are witnessing improvement in business every year. 

Give us an overview of the company’s ESG strategy.

We have over 6MW of solar power in our new facility. We are investing in another 1.5 MW of rooptop solar energy. As per the policies of the Punjab state, we can use only rooftop solar energy. Currently, we are using 7-8% of our total energy requirement from solar power. Going forward, if the norms are relaxed by the Punjab government, we can extend it further. We are spending about Rs. 5-6 crore every year on our CSR activities. Our focus is on providing affordable healthcare and education to the underprivileged sections of the society.