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Review By Dilip Davda on December 16, 2023

•    HFL is one of the leading and largest engineering led manufacturer of complex and precision machined components in India. 
•    It marked steady growth in its top and bottom lines for the reported periods. 
•    It supplies its products to renowned OEM clients globally. 
•    Based on FY24 annualized earnings, the issue appears reasonably priced.
•    Investors may park funds for the medium to long term rewards. 

ABOUT COMPANY:
Happy Forgings Ltd. (HFL) is the fourth largest engineering led manufacturer of complex and safety critical, heavy forged and high precision machined components in India as of Fiscal 2023 in terms of forgings capacity (Source: Ricardo Report). HFL is engaged in engineering, process design, testing, manufacturing, and supply of a variety of components that are both margin accretive and value-additive. The company primarily caters to domestic and global original equipment manufacturers ("OEMs") manufacturing commercial vehicles in the automotive sector, while in the non-automotive sector, it caters to manufacturers of farm equipment, off-highway vehicles and manufacturers of industrial equipment and machinery for oil and gas, power generation, railways and wind turbine industries.

With over 40 years of experience of manufacturing and supplying quality and complex components according to customers' specifications, it has emerged as a leading player in the domestic crankshaft manufacturing industry with the second largest production capacity for commercial vehicle and high horse-power industrial crankshafts in India (Source: Ricardo Report). Its focus is on producing margin accretive value-added products has led to its transition from being a forging led business to a machined components manufacturer. 

HFL's strength in machining and overall value addition to products has enabled it to achieve the highest EBITDA margin among peers in the last two Fiscals (i.e., Fiscal 2022 and 2023) (Source: Ricardo Report). It manufactures a wide range of heavy forged and machined products which include crankshafts, front axle beams, steering knuckles, differential cases, transmission parts, pinion shafts, suspension products and valve bodies across industries for a diversified base of customers.

It is among the few companies in India with the capability to manufacture and supply high precision safety critical components to leading OEMs including manufacturers of commercial vehicles, farm equipment, off highway and industrial equipment and machinery for oil and gas, power generation, railways and wind turbine industries (Source: Ricardo Report). It is a supplier to each of the top five Indian OEMs, 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 Fiscal 2023 (Source: Ricardo Report). HFL's long-standing relationships with customers has positioned the company as a trusted supplier for several Indian and global OEMs. Some of its customers include AAM India Manufacturing Corporation Private Limited, Ashok Leyland Limited, Bonfiglioli Transmissions Private Limited, Dana India, IBCC Industries (India) Private Limited, International Tractors Limited, JCB India Limited, Liebherr CMCtec India Private Limited, Mahindra & Mahindra Limited, Meritor HVS AB, Meritor Heavy Vehicle Systems Cameri SPA, SML ISUZU Limited, Swaraj Engines Limited, Same Deutz Fahr India Private Limited, Tata Cummins Private Limited, Watson & Chalin India Private Limited (Hendrickson India Commercial Vehicle Systems) and Yanmar Engine Manufacturing India Private Limited.

As of the date of this Red Herring Prospectus, it owns and operates three manufacturing facilities, of which two are located at Kanganwal in Ludhiana, Punjab and one is located at Dugri in Ludhiana, Punjab. Its annual aggregate installed capacity for forging and machining has increased from 67,000.00 MT and 29,500.00 MT, respectively, as of March 31, 2021 to 107,000.00 MT and 46,100.00 MT as of March 31, 2023 and further to 120,000.00 MT and 47,200.00 MT as of September 30, 2023, respectively. As of September 30, 2023, it had 3070 employees on its payroll. 

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with a maiden combo book building route IPO of Rs. 400 cr. worth fresh equity shares (approx. 4705889 shares at the upper cap), and an Offer for Sale (OFS) of 7159920 shares (worth Rs. 608.59 cr. at the upper cap). Thus the overall size of the IPO is 11865809 shares worth Rs. 1008.59 cr. The company has announced a price band of Rs. 808 - Rs. 850. The issue opens for subscription on December 19, 2023, and will close on December 21, 2023. The minimum application to be made is for 17 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. The issue constitutes 12.60% of the post-IPO paid-up capital of the company. From the net proceeds of the fresh equity shares issue, the company will utilize Rs. 171.13 cr. for purchase of plant, equipment and machinery, Rs. 152.76 cr. for prepayment of certain borrowings, and the rest for general corporate purposes.

The joint Book Running Lead Managers (BRLMs) for this issue are JM Financial Ltd., Axis Capital Ltd., Equirus Capital Pvt. Ltd. and Motilal Oswal Investment Advisors Ltd., while Link Intime India Pvt. Ltd. is the registrar of the issue. 

Having issued initial equity capital at par value, the company issued further equity shares in the price range of Rs. 14.65 - Rs. 379.90 (on the basis of Rs. 2 FV) between March 2005and January 2019. It has also issued bonus shares in the ratio of 3 for 1 in August 1994, 3 for 10 in December 2004, and 1 for 1 in March 2022. The average cost of acquisition of shares by the promoters/selling stakeholders is Rs. NIL, Rs. 2.02, Rs. 2.33, Rs. 3.47, Rs. 4.81, Rs. 7.87, Rs. 9.79, and Rs. 189.95 per share. 

Post IPO, HFL's current paid-up equity capital of Rs. 17.90 cr. will stand enhanced to Rs. 18.84 cr. Based on the upper price band of the IPO, the company is looking for a market cap of Rs. 8007.42 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, HFL has posted a total income/net profit of Rs. 509.81 cr. / Rs. 86.45 cr. (FY21-Standalone), Rs. 866.11 cr. / Rs. 142.29 cr. (FY22 - Consolidated), Rs. 1202.27 cr. / Rs. 208.70 cr. (FY23-Consolidated). For the H1 of FY24 ended on September 30, 2023, (on a standalone basis), it earned net profit of Rs. 119.30 cr. on a total income of Rs. 675.73. (for compare it has given data on a consolidated basis for the corresponding previous period where it earned net profit of Rs. 116.40 cr. on a total income of Rs. 602 cr.) 

The Standalone and Consolidated data leads to some confusing signals. On this matter, the management informed that they had one JV to be approved and hence as per accounting norms, they used Consolidated tag for FY22 and FY23, but in fact, they are standalone data. As the JV has yet to receive necessary approvals from regulators which has just been given last month, the process will take time and till then its financial data should be taken on a standalone basis only. 

For the last three fiscals, the company has reported and average EPS of Rs. 18.57 and an average RoNW of 18.82%. The issue is priced at a P/BV of 6.89 based on its NAV of Rs. 123.28 as of September 30, 2023, and at a P/BV of 5.33 based on its post-IPO NAV of Rs. 159.58 per shares (at the upper cap).  

If we attribute FY24 annualized earnings to post-IPO fully diluted paid-up equity capital of the company, then the asking price is at a P/E of 33.56. Thus the IPO appears reasonably priced. 

For the reported periods, the company has reported PAT margins of 14.78% (FY21), 16.54% (FY22), 17.44% (FY23), 17.73% (H1-FY24), and RoCE margins of 16.13%, 19.38%, 24.24%, 12.21% respectively.

DIVIDEND POLICY:
The company has declared a dividend of 65% for the period from April 01, 2023, and has adopted a dividend policy in July 2023, based on its financial performance and future prospects. 

COMPARISON WITH LISTED PEERS:
As per offer document, the company has shown Bharat Forge, Craftsman Auto, Ramkrishna Forgings, and Sona BLW as their listed peers. They are trading at a P/E of 45.85, 47.01, 47.92, and 68.02 (as of December 15, 2023). However, they are not comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORD:
The four BRLMs associated with this issue have handled 81 issues in the last three fiscals, out of which 22 issues closed below the IPO price on listing date. 

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