Competitive strengths

Fourth largest engineering-led manufacturer of complex safety-critical, and high-precision machine components
It has 40 years of experience in manufacturing and supplying quality and complex components. It has emerged as a domestic leader in the crankshaft manufacturing industry having second largest production capacity for CV and high horse-power industrial crankshaft. It develops the majority of its revenue from the sale of Machined products which accounted for 78.66% of the total sale in FY23 whereas the sale of Forged products contributed 21.34%. The Forging industry has high barriers to entry because of the lengthy product approval process. From FY23 onwards, the company started focusing on manufacturing machined products and as a result, it was named as the highest revenue contributor among its peers.

Diversified business model, well positioned for advancement in alternative engine technology
It is present in the automotive as well as non-automotive sectors. In the non-automotive sector, it manufactures and supplies precision components to OEMs of farm equipment, off-highway vehicles, and industrial machinery and equipment for oil and gas, power generation. For the FY23 within the automotive sector, CV contributed 43.65%. The non-automotive sector's contribution to the total sale was 56.35% of which farm equipment contributed 36.79% the highest among the sector followed by off-highway vehicles which accounted for 15.86%. it has a diversified customer base from different sectors, as of FY23 customers from the Farm equipment and industrial sectors are 24 each.

Established partnerships with clients across various industries
It has a diversified customer base, and its focus on quality, providing customized solutions and timely delivery of products has helped the company to maintain long-term relationships. As of FY23, 19 customers were there with them for more than 10 years, this category of customers contributed 75.98% to the total revenue whereas 8 customers were there for more than 5 years but less than 10 years. The company has been successful in increasing its wallet share by offering additional products to its existing customers. In commercial vehicles, it supplies to SML ISUZU, Mahindra Rise, etc. For the Farm equipment sector, it supplies to Escorts Kubota Limited, Yanmar and Sonalika, etc. In the Off-Highway Vehicles, its customers are Dana, JCB India Limited, and Hendrickson.

Strong track record of building capabilities and infrastructure with a focus on capital efficiency
The company operates three manufacturing facilities, of which one facility is completely dedicated to forging operations and the other two facilities are functional with both forging and machining capabilities. Its manufacturing facilities are strategically located so that it enables cost and logistical advantages. Its upgraded manufacturing facilities, infrastructure, and equipment have helped it to manufacture diverse products, reduce its operating costs, and increase efficiency. It is the second company in India to have installed 14,000-tonne press machinery. The investment in press machinery which includes some features of automation has helped the company to increase the production speed, reduce cycle time, and improve productivity.

Foray into lightweight forging and machining with the introduction of aluminium components
By leveraging its existing capabilities, the Company intends to diversify its product portfolio by entering into the market of lightweight forging and machined components. In particular, they aim to introduce aluminum forging and machined components to cater to the growing demand for lightweight materials in various industries such as automotive, aerospace, and defence. They believe that this will potentially open up new opportunities for their business and help them stay competitive in the market. Further, they may pursue opportunities in the manufacturing of aluminium components for electric vehicles in the passenger vehicle market. With their existing forging machinery and certain additional investments in processes, they may explore manufacturing steering arms, knuckles, suspension parts, and powertrain components specifically tailored for the electric vehicle market.

Increasing wallet share and acquiring new business by leveraging existing OEM relationships and adding new customers
The Company is focused on leveraging long-standing relations with its existing OEMs and adding new customers to increase their wallet share across their products. They intend to target new business from global customers who were earlier importing from China and Europe, as well as new business from the global counterparts of their existing customers. Apart from catering to automotive demand from these countries, they plan to cater to the demand for products that have applications in industries such as defence, oil and gas, power generation, and wind turbine in the export market. They further endeavor to ensure that new business opportunities are margin accretive, by expanding their capabilities by adding new solutions for heavy transmission gear cutting in machining and foraying into heavy forgings up to one tonne, thereby expanding their range of forgings from 250 kilograms to one tonne.

Peer Comparison

Key Risks & Concerns

Customer Concentration Risk
In FY23 top 10 customers contributed 70 % to the total revenue. Loss of all or a substantial portion of sales to any of its top 10 customers could hurt the operations. Even though it has a long-lasting relationship of more than 10 years with its top 10 customers, the risk is still inherent in the business.

Supply Side Mismatch Risk
The company requires steel for manufacturing complex and high-precision heavy forged machine equipment for that it relies on a few suppliers. It does not have a definitive agreement with its suppliers. A delay in supply by its suppliers might extend the production schedule and can adversely affect its output.

Sectoral Cyclicality
It caters to the automotive and non-automotive sector, so it is exposed to fluctuation in sales due to the performance of these industries. A decrease in demand in the sales of vehicles due to consumer demand, trends, and economic conditions might affect the revenue for the company.

Reliance on Power & Fuel
Any disruption in the supply of power and fuel from sources can increase the production cost and adversely affect the business.

Outlook and Valuation

We like Happy Forgings' diversified business model, lean balance sheet, and strong returns ratios.  Strong leadership position in the heavy forged and high precision machined components, marquee relationship with leading OEMs, inorganic growth opportunities, strong industry tailwinds, expanding capacities, strong product portfolio, increasing demand, integrated manufacturing operations, unique positioning in the competitive market and healthy growth outlook makes it compelling bet. The IPO is valued at 36.44x its FY23 EPS (Rs.23.32), which appears attractive, and hence we recommend a subscribe rating for the issue.

Key Information

Use of Proceeds:
The total issue size is Rs. 1009 Crores, of which Rs.400 Crores is Fresh Issue and the balance Rs. 609 Crores is Offer for sale. The company will utilize net issues from the proceeding for the purchase of equipment, plant, and machinery and payment of outstanding debt.

Book running lead managers:
JM Financial Limited, Axis Capital, Equirus Capital Private Limited, and Motilal Oswal Investment Advisors Limited are the Book Running Lead Manager for the IPO.

Management:
Paritosh Kumar (Chairman and Managing Director), Ashish Garg (Managing Director), Pankaj Kumar Goyal (Chief Financial Officer), Megha Garg (Managing Director), Narinder Singh Juneja (Chief Executive Officer), Prakash Bagla (Nominee Director), Satish Sekhri, Vikas Giya, Ravindra Pisharody, Rajeswari Karthigeyan, Atul Behari Lall (Independent Director).