Postponing IPO when markets move southward, resorting to financial engineering that facilitates higher stake for the promoters, returning to market with a larger IPO when stock indices are north-bound, family-crowded board, etc., etc., raise concern.
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HARSHA ENGINEERS OFFER AT A GLANCE |
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| Offer Type | Book Built |
| Platform | Main Frame |
| Fresh Issue | Rs 455 Cr (137.87 lakh equity shares) |
| Offer for Sale | Rs 300 Cr (90.90 lakh equity shares) |
| Face Value | Rs 10 |
| Price Band | Rs 314 – 330 |
| Mkt/Bid Lot | 45 Nos. |
| Implied M-Cap | Rs 3004 Cr |
| Implied Equity Cap | Rs 91 Cr |
| Free Float | 25.39% |
| Lead Manager | Axis Cap, Equirus Cap and JM Fin |
| Registrar | Link Intime |
| Listing At | BSE, NSE |
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INDICATIVE ISSUE SCHEDULE |
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| Opening :14-Sep-2022 | Closing :16-Sep-2022 |
| Allotment :21-Sep-2022 | Refunding :22-Sep-2022 |
| DematCredit :23-Sep-2022 | Trading :26-Sep-2022 |
The Offer
Four years ago the Ahmedabad-based Harsha Group filed a DRHP (Draft Red Herring Prospectus) with the market regulator under the banner Harsha Engineers Ltd (HEL) for a fresh issue of Rs 370 Cr and an offer for sale of 13.25 lakh shares. As the markets turned sluggish during the latter half of 2018 HEL put the IPO on hold. The group is now floating public Harsha Engineers International Ltd (HEIL) for a larger amount of Rs 755 Cr (fresh issue of Rs 455 Cr from the company and offer for sale of Rs 300 Cr from the promoter group). The offer is being made through the book-building route with a price band of Rs 314-330 for Rs 10 paid-up share. At the cap price, the quantum of offer works out to about 228.78 lakh shares.
Applicants should bid for a minimum lot of 45 shares and multiples thereof. The shares are proposed to be listed on the main frame of BSE & NSE on September 26, 2022. Axis Capital, Equirus Capital and JM Financial are acting as managers to the offer and Link Intime has been roped in as registrar to the issue. The bidding opens on Wednesday, September 14 and closes on Friday, September 16, 2022.
The company proposes to utilize the net proceeds to the tune of Rs 270 Cr towards repayment of loans, Rs 78 Cr for funding capital requirements towards purchase of machinery and Rs 7 Cr for infrastructure repairs and renovation of premises. The balance amount is earmarked for general corporate purposes.
Lineage
The Harsha Group, established in 1986 by two college-mates Harish Rangwala and Rajendra Shah, has over 35 years of operating history in the engineering business. Though the group is entering the capital market for the first time, the promoters are not new to the investing public. Rajendra Shah has been on the board of AIA Engineering which went public in 2005. He has also associated with other listed entities Welcast Steels and Transformers and Rectifiers India (TRIL). Harish Rangwala too had been on the board of TRIL until HEL filed its DRHP. Incidentally, Jitendra Mamtora, chairman and whole-time director of TRIL was the chairman of HEL at the time of filing its DRHP in 2018.
The company that is going public now (HEIL), incorporated in December 2010, was earlier a subsidiary of HEL. In fact in 2019 HEIL was a loss-making company. Under the pretext of consolidation of engineering and solar EPC businesses, the group structured a composite scheme of amalgamation and arrangement among HEIL, Aastha Tools Private Ltd (ATPL), Harsha Engineers (India) Private Ltd (HEIPL), Harsha Engineers Ltd (HEL), Helianthus Solar Power Private Ltd (HSPPL) and their respective shareholders and creditors. Under the scheme of arrangement, ATPL and HEIPL were merged into HEL with effect from April 01, 2020, and immediately upon effectiveness of the Scheme, HEL and HSPPL were merged into the loss-making HEIL.
After the Scheme becoming effective, the equity share capital of HEIL was reduced to 5,00,00,000 equity shares of Re 1 paid up. Simultaneously, every 10 such equity shares of the reduced face value of Re 1 each were consolidated into 1 share of face value of Rs 10. In consideration of the amalgamation of the group flagship HEL into HEIL, three equity shares of Rs 10 each were issued for every one fully paid-up share of Rs 10 held by the shareholders of HEL.
Key Management
As many as five members from the promoters’ families hold executive positions in HEIL. Promoter Rajendra Shah (74), who holds a bachelor’s degree in Mechanical Engineering, is the Chairman and Whole-Time Director. He looks after overall management of the company, particularly financial matters. He has over 35 years of experience in the precision engineering business of bearing cages and stamped components.
Co-promoter Harish Rangwala, who is also Mechanical Engineer, is the Managing Director of the company. He reportedly looks after overall management of the company along with renewable energy division. He too has over 35 years of experience in the precision engineering business of bearing cages and stamped components.
Vishal Rangwala (44), another promoter and son of Harish Rangwala, is the Chief Executive Officer and Whole-time Director. He holds a bachelor’s degree in Mechanical Engineering and Master of Science degree in Engineering Management. He is responsible for the overall strategic directions of the group and is currently leading marketing and corporate functions. He has over 13 years of experience in the precision engineering business of bearing cages and stamped components.
Pilak Shah (40), the fourth promoter and son of Rajendra Shah, is designated as Chief Operating Officer and Whole-time Director. He holds a bachelor’s degree in Mechanical Engineering and a master’s degree in Integrated Manufacturing Systems Engineering. He too has over 13 years of experience in the precision engineering business of bearing cages and stamped components.
Hetal Ukani (47), daughter of Rajendra Shah is designated as Whole-time Director. She holds the bachelor’s degree in Mechanical Engineering and has completed Master of Technology in Mechanical Engineering with specialization in Design Engineering. She has been associated with the company since 2015 and is responsible for health and safety of employees.
Stakeholders
Of the present equity of Rs 77.24 Cr, the promoter group collectively holds 99.7%. Chairman Rajendra Shah holds 19.95% while the MD, Harish Rangwala, holds 17.45%. CEO Vishal Rangwala holds 10.06% and COO Pilak Shah holds 9.97%. The rest is held by the promoter group members and associates. Post public offer, the promoter group will have 74.61% and public will hold 25.39% of the enlarged equity of Rs 91.03 Cr. Post-offer for sale, the promoters’ average cost of their residual holding would be negative, except that of Vishal Rangwala, who is not participating in the offer for sale.
Business Track
HEIL is claimed to be the largest manufacturer of precision bearing cages in the country. Also, it is among the leading manufacturers of precision bearing cages in the world. The company offers diversified suite of precision engineering products across geographies and end-user industries.
HEIL reportedly has two business streams. Its engineering business comprises of bearing cages (in brass, steel and polyamide materials), complex and specialized precision stamped components, welded assemblies and brass castings and cages & bronze bushings. The company’s solar EPC business provides comprehensive turnkey solutions to all solar photovoltaic requirements.
HEIL reportedly has 50-60% share in the organised segment of the Indian bearing cages market and 6.5% share in the global bearing cages market for brass, steel and polyamide cages. HEIL offers a wide range of bearing cages starting from 20 mm to 2,000 mm in diameter and has its application in the automotive, railways, aviation & aerospace, construction, mining, agriculture, electrical and electronics, renewable sectors etc.
Financial Track
Before the amalgamation, HEL had over Rs 800 Cr revenue on which it netted a profit of Rs 57 Cr in fiscal 2018. In fiscal 2019 HEIL posted a loss of Rs 27 Cr on Rs 123 Cr revenue. Post-amalgamation, though HEIL’s top line climbed to Rs 886 Cr, its net profit was much lower (Rs 22 Cr) than what HEL had posted in March 2018!
In fiscal 2021, though HEIL’s revenue dipped marginally, net profit more doubled to Rs 45 Cr. On the eve of IPO, the company’s revenue has surged beyond Rs 1300 Cr and net profit has vaulted to Rs 92 Cr. Nevertheless, the operating profit margin of the so called precision parts manufacturer remains unimpressive at around 13%. Post-IPO, the company’s capital base will increase to Rs 91 Cr and its borrowings are proposed to be reduced by Rs 270 Cr which should significantly boost the bottom line.
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Harsha Engineers International Consolidated Financials (in Cr) |
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| Year Ended |
Mar-22 |
Mar-21 | Mar-20 |
Mar-19 |
| Revenue |
1321 |
874 | 886 |
123 |
| Operating Profit |
169 |
122 | 86 |
-23 |
| OPM% |
12.8 |
13.9 | 9.7 |
-18.7 |
| Other Income |
18 |
3 | 14 |
-5 |
| EBIDTA |
187 |
125 | 100 |
-27 |
| EBIDTA % |
13.9 |
14.2 | 11.1 |
-23.3 |
| Interest |
25 |
30 | 33 |
11 |
| Depreciation |
35 |
34 | 35 |
0 |
| Tax |
33 |
0 | 15 |
0 |
| Net Profit |
92 |
45 | 22 |
-27 |
| Equity (Implied) |
91 |
50 | 50 |
20 |
| Reserves (Implied) |
886 |
377 | 322 |
1 |
| Accumulated Loss |
0 |
0 | 0 |
19 |
| Borrowing |
378 |
348 | 412 |
122 |
| Fixed Assets |
287 |
273 | 267 |
1 |
Valuation
In 2018, HEL categorically stated in its DRHP that the Industry Peer Group P/E ratio was not applicable to the company as there were no listed entities similar to its line of business and comparable to its scale of operations. Quite contrary to this claim, HEIL’s RHP presents multinational bearings manufacturers like Timken and SKF along with Sundram Fasteners as listed industry peers!
If one were to compare with purely bearing component industry peers, Rolex Rings comes closer to Harsha in size and stature. Rolex is enjoying a higher P/E multiple of 40x as compared to Harsha’s IPO pricing of about 33x. The reason for Rolex’s higher discounting is not far to fetch. Rolex operating margin is more than 22% as compared to Harsha’s less than 13%. Rolex’s RoNW and RoCE are also more attractive than Harsha’s. Further, Rolex’s borrowings are relatively less as compared to its value of productive assets. What’s more, Rolex’s equity base is attractively low against its profitability.
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HOW HARSHA COMPARES WITH OTHER BERAING PARTS MANUFACTURERS |
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Financials |
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| (Amount in Cr) |
Harsha |
Rolex Rings | SKP Bearing |
Vishal Bearings |
| Main Product |
Bearing Gage |
Bearing Rings | Bearing Parts |
Bearing Roller |
| Market Cap |
3004 |
5358 | 210 |
58 |
| Borrowing |
379 |
223 | 19 |
44 |
| Fixed Assets |
287 |
426 | 21 |
22 |
| Revenue |
1321 |
1017 | 41 |
108 |
| Other Income |
18 |
11 | 4 |
1 |
| EBIDTA |
187 |
240 | 22 |
16 |
| Interest |
25 |
20 | 3 |
3 |
| Net Profit |
92 |
132 | 13 |
7 |
| Equity Cap |
91 |
27 | 17 |
11 |
| Reserves |
886 |
518 | 10 |
15 |
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Stock Features |
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| Current Price (Rs) |
330 |
1967.6 | 126.65 |
53.45 |
| Face Value (Rs) |
10 |
10 | 10 |
10 |
| Book Value |
107 |
200 | 16 |
24 |
| Promoter Stake % |
74.6 |
57.6 | 73.5 |
70.8 |
| Debt/Equity |
0.4 |
0.4 | 0.7 |
1.7 |
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Profitability |
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| OPM % |
12.8 |
22.5 | 44.9 |
14.0 |
| Net Margin % |
6.9 |
12.8 | 29.2 |
6.2 |
| Cash EPS |
13.98 |
57.81 | 8.69 |
9.68 |
| Earnings Per Share |
10.1 |
48.43 | 7.86 |
6.27 |
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Return |
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| RONW % |
17.6 |
24.2 | 48.1 |
26.6 |
| ROCE % |
16.8 |
28.0 | 54.4 |
17.9 |
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Discounting |
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| Price/Earnings |
32.7 |
40.6 | 16.1 |
8.5 |
| Price/Cash EPS |
23.6 |
34.0 | 14.6 |
5.5 |
| Price/Book Value |
3.1 |
9.8 | 8.0 |
2.3 |
| Price/EBIDTA |
16.1 |
22.3 | 9.5 |
3.6 |
| Price/Revenue |
2.3 |
5.3 | 5.1 |
0.5 |
| Price/Fixed Assets |
10.5 |
12.6 | 10.2 |
2.7 |