Happy Forgings Limited (HAPPYFORGE) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q1 FY '26 Earnings Conference Call of Happy Forgings Limited. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectation of the company as on date of this call. These statements are not the guarantee of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Ashish Garg, Managing Director from Happy Forgings Limited. Thank you, and over to you, sir.

Thank you. Good morning, everyone, and thank you for joining us today for the quarter 1 FY '26 earnings call of Happy Forgings Limited. FY '26 has started on a resilient note with positive growth and sustained margins despite of ongoing industry headwinds. For the quarter ended June 30, 2025, we achieved a revenue of INR 350 crores, marking a year-on-year growth of 3.6% despite a raw material price correction of 3%, driven by our forays into new business segments and onboarding of new business, which helped counter the slowdown in some of our old businesses. Top line growth of 3.6% was driven primarily by 3.8% year-on-year increase in finished goods volume with total volume for the quarter reaching 14,457 metric tonnes. Realizations remained strong at INR 245 per kg on a year-on-year basis despite of moderation in raw material prices, supported by higher share of value addition components. Our gross profit margins remained healthy at 57.9%, while our EBITDA margin stood at 28.6%, both around peak levels. This performance comes at a time when the industry is facing pressures on both growth and margins. We remain confident of sustaining these margins going forward as well. Uncertainty in export market continues. Influenced by shift in tariff regimes, our direct exposure to U.S. remains modest. However, there is a possibility of indirect impacts on European market arising from recent tariff measures by the U.S. At present, our business pipeline has not been adversely affected. On the contrary, we are working towards securing new orders from customers in Europe. Although tariff-related headwinds could temper revenue growth trends across the broader industry, our endeavor will be to protect revenue growth by focusing on securing new business, maintaining our margins, which we are confident of sustaining going forward. These dynamics also reinforce the importance of our diversification strategy and focus on higher value-added products, which help cushion volatility. We continue to monitor developments closely and await greater clarity on tariff situation. Now talking about segmental performance. From a reported geographical market segment's perspective, our domestic business grew by 7% year-on-year, while the export segment saw a decline due to continued weakness in commercial vehicle and off-highway and farm equipment segments as well as tariff-related uncertainty. From end user industry segment's perspective, starting with commercial vehicle, this segment contributes 39% to the overall revenues for the quarter. The global commercial vehicle industry continues to operate in a challenging environment. Several large U.S. and European OEMs reported 8% to 10% decline in CV unit sales for April to June quarter, marking 7 to 8 consecutive quarters of decline. In India, MHCV production was flat, while sales declined by 4% in quarter 1 FY '26. The market outlook for U.S. and European CVs in calendar year '25 remains negative with sales expected to be lower by 8% to 10%. Given the negative momentum, our sales in this segment were also impacted and declined by a mid-single-digit percentage year-on-year for the quarter. Moving to farm equipment sector, which accounted for 32% of our revenue. India's rural market continues to show strength. Tractor sales grew by about 9% year-on-year for the June quarter, while production increased by 13%. The outlook for the rest of the year remains positive with forecasted tractor volume of 4% to 7% growth, supported by an above-average monsoon and improving rural sentiment. However, export markets in U.S. and Europe remain under pressure with high single-digit volume declines. Large OEMs in this sector have forecasted a 5% to 15% decline for the calendar year 2025. As our direct exports in this sector are limited, we have managed to register better than overall revenue growth here on a year-on-year basis. Now on the off-highway segment, which constitutes 10% of our top line. This segment also experienced softness both domestic as well as globally. In India, the sector saw a mid-single-digit decline during the quarter, largely due to the delay in activity in end user sectors such as roads, highway, mining as well as regional disparities in project execution. Internationally and more specifically in Europe and U.S., the off-highway market declined by further 10% to 12%. Unit sales in these geographies are expected to stay subdued during 2025. However, industry analysts anticipate a recovery beginning in 2026 with a revival in infrastructure spending likely to support medium-term growth. Coming to industrials, which made 13% of our revenues in this quarter. On a year-on-year basis, this segment reported good growth, especially in domestic subsegment with growth led by strong demand for wind energy, power generation and oil and gas sectors. We are confident that this momentum will continue and we are looking to deepen our presence in these critical areas. Finally, let me touch upon the passenger vehicle segment, which contributed 6% of our overall revenues in quarter 1 FY '26. This is a segment where we are seeing a strong traction driven by a successful ramp-up of dedicated production lines for E-SUV platforms. Our PV business is scaling rapidly. We expect this segment to grow 8% to 10% of our total revenues over the next 2 years with domestic momentum and export contributions both acting as growth levers. To support this growth, we have committed a capital expenditure of INR 80 crores, which will go towards enhancing production capacities and strengthening our position in the evolving market. In summary, our diverse segment mix contributes to be a key strength, enabling us to weather volatility in global markets while capitalizing on domestic structural demand themes that are playing out strongly in India. We remain confident in our ability to sustain growth across our core verticals in the coming quarters. We also remain on track with our INR 650 crores CapEx plan to create a best-in-class forging infrastructure for heavyweight precision components. This facility will position us uniquely to serve complex and higher value addition parts for oil and gas, marine, wind and defense sectors. During the year, we expect additional commissioning for 10,000 tonne press and 4,000 tonne press with annual capacity addition of approximately 20,000 metric tonnes per annum. With this, our total forging capacity will be close to 1,50,000 tonnes. This capacity expansion elevates our operational strength, accelerates our ability to meet rising demand and cements our position for long-term growth and innovation. To conclude, looking ahead, while macroeconomic and industry developments are beyond our control, we will stay focused on our endeavor of adding new businesses, maintaining efficiency and profitability and preserving the strength of our balance sheet to build a strong foundation for the future. Our approach to capital allocation will remain judicious, always guided by our goal of creating long-term value. I will now request our CFO, Mr. Pankaj Kumar Goyal, to walk you through the financial highlights in a more detailed manner.

Thank you. Good morning, everyone. Let me take you through the key financial metrics for Q1 FY '26. Revenue from operations stood at INR 354 crores and up 3.6% Y-o-Y basis. EBITDA was INR 101 crores, transacting to an EBITDA margin of 28.6%, up 3.6% Y-o-Y basis. Profit after tax stood at INR 66 crores, reflecting a PAT margin of 18.6% and up 3.20% Y-o-Y. Our volume for the quarter increased to 14,457 metric tonne compared to 13,933 metric tonne in the same quarter last year, making a 3.8% increase. Importantly, realization per kg held steady at INR 245 per kg despite softer raw material prices, supporting our gross margin performance. The machining share of our revenue remains strong at 88% with focus on value addition and precision engineered components gaining ground. This continues to be a key margin lever and a strategic priority going forward. During the quarter, HFL has concluded negotiation with some of its customers on payment terms and Incoterms resulting into improved cash flows also. On the balance sheet front, we continue to maintain a healthy financial position with strong internal accruals and adequate liquidity of more than INR 350 crores to support ongoing investments. Our working capital cycle remains efficient and we have not seen any major stress receivables or inventory. That concludes our update. The floor is now open for questions. Thank you very much.

[Operator Instructions] The first question is from the line of Pratik Jain from Solidarity Investment Managers.

Sir, my first question, actually is on -- if I see your capacity utilization, it's been around 57% to 59% since past few quarters, right? And if I look at your EBITDA margin, you are still able to hold on to your EBITDA margin despite a little lower capacity utilization. If you can explain what helps you to maintain the margin despite low capacity utilization? And is there any scope of improvement once you start increasing your utilization?

So as I've understood you correctly, yes, the forging utilization right now is around 59% and that's on the -- in terms of tonnage. But in terms of numbers, if you see, the forging utilization is close to 74% in terms of numbers. So we have possibility to increase this utilization by almost 18%, 20%. As forging infrastructure takes a long time to build and we have seen a slowdown in the market for the last 4, 5 quarters, we expect once the momentum is there, definitely, the utilization levels will improve because the same die runs will be bigger and longer and we can easily encash from this opportunity. And definitely, some bit of fixed cost will get divided. And definitely, there is room for further improvement in terms of EBITDA margin as well as we -- as operational efficiencies will improve. Quantifying it will be very difficult. But in terms of machining, our utilization remains strong and we are adding lines as is when required because the ramp-up -- we can ramp up on the machining within 4 to 6 months' time frame.

Next question is from the line of Ronak Mehta from ICICI Securities.

Congratulations on a resilient performance despite challenging environment. My question is on the order book. So you have -- you used to highlight that you have about INR 600 crores of order book in the past couple of -- so I think in one of the quarters earlier. Can you update on that? What is the status? What is the order book right now? Also, if you can highlight what are the orders that are likely to come into execution this year, specifically on the CV and the farm seg. That is my first question. Second is, also if you can highlight what is the growth for the India CV business and what is the decline in the export CV? So the blended CV growth, I think, is about -- there's a decline of about 4%. If you can just break that down into India growth versus domestic versus exports decline.

Ronak, so your first question was with regards to the new order wins, what I have understood. Yes. In terms of our old order books, if you see the last 3 to 4 months passed by, HFL has won almost INR 250 crores business with one of the largest farm equipment OEMs in Europe, which is close to INR 50 crores to INR 60 crores per annum and for which the work has already been started in terms of development. There is another farm equipment order, a large farm equipment business, which is in discussions and almost at finalization in Europe. This is because of the ongoing prolonged slowdown in global farm equipment sectors where HFL will be directly exporting for farm equipment products in European market. Currently, we are doing through Tier -- via Tier 2 right now. On the U.S. side as well -- on the wind side as well, we have already won a business close to INR 300 crores, which comes out to around INR 60 crores to INR 70 crores per annum, which is for one of the wind lines, which the company is installing, which is getting started by January this financial year, which is for the heavy sector for the wind shafts, which are in the range of 150 kg to 300 kg size range. Further, we are in a process of -- we have quoted several businesses on the -- for our high horsepower line, for which OEMs are waiting for us to speed up on our infrastructure, but we see a strong traction over there. Already a very large order, which we have signed is close to INR 180 crores per annum, which is on the industrial side and for the large requirement of data centers, which will be for full machine components, which is ongoing, for which the CapEx is already planned and which is ongoing. Besides this, we have -- we are anticipating wins coming up in the next 3 to 4 months, which is on the EV side for European market, which we have quoted and negotiating for the last couple of months and also for one of the CV clients who is setting up their complete transmission plant in India. So there is a strong business flow. There is a strong pipeline and we expect a lot of businesses to get converted for European market given the currency situation. Even for the U.S. market, we have expected ramp-up this year from November, December for one of the large PV order wins that we have achieved, which we have recently -- which we have won in the last 1.5 years, for which testing is ongoing. And despite of the tariff situation, we expect things to normalize and ramp up in a normal manner, even though we will see some reduction in schedules because of the ongoing slowdown in the domestic PV business, but we don't see any shift of business in that sector as well. At the same time, we have also quoted some of the new businesses. I think once the tariff situation is settled, I think we'll get a better clarity on that.

Yes. Also on the breakup of CV growth, CV revenue from India and exports?

At the moment, the European CV business has kind of witnessed almost 8% to 10% fall in the last quarter. And this year, if you are looking at most of the commentaries from the European OEMs, we are looking at around kind of a 10% fall in the CV production numbers in Europe. So if you look at our growth on the CV side, we have picked up some new businesses on the domestic side as far as crankshafts are concerned and for the CV players. And we expect this ramp-up to be very strong going forward as well. And this will continue. So it's because of the growth that we'll be seeing in the domestic CVs because of the new business picks that we have already done in the past 1.5, 2 years, which will be ramping up, which have already started ramping up and will continue to ramp up going forward as well.

Is it fair to assume that even for this quarter, your CV -- domestic CV revenue growth was higher than the industry growth -- industry volume growth?

We were almost at par Ronak for this quarter, slightly better, I can say.

All right. Okay. And just last one on the heavy component CapEx side, so last time you indicated 1 order win of about INR 180 crores. Any update on more order wins because I believe the total revenue potential from that facility would be somewhere between INR 500 crores to INR 600 crores. And so any update on that?

Ronak, we have quoted to almost all clients on the high horsepower category. And in fact, the clients are waiting for us to be ready with the infrastructure because right now, we are in a phase where it is coming up. And the CapEx will get finished by, say, second quarter or third quarter of next financial year. So we are in the midst of discussing with all our customers. We remain very bullish on this sector. And at the same time, we have 1 business of INR 60 crores per annum on this side -- on the wind side on these lines. But at the same time, we are in place where we have quoted and a lot of customers are waiting for us to get close to the infrastructure.

All right. Just last one, any -- so what would be the utilization level of the 14,000 tonnage press right now, given that your overall utilization is about 58%, 59% and the front axle beam order, is that ramping up well?

Ronak, we are at around 46%, 48% in terms of tonnage basis and in terms of our -- around 55% in terms of units on -- because we do a lot of industrial production on these lines. So if you look at it, we are close to 55% in terms of the units. In terms of tonnage, it is close to 45%. And the front axle beam business is ramping up. Because of the ongoing slowdown in the domestic market, the units are a little less, but we expect to deliver close to 35,000 units in this year.

Next question is from the line of Sahil Rohit Sanghvi from Monarch Networth Capital.

Well done on -- holding on to the numbers -- the results. I have 2 questions. First, we were expected to start the orders for the precision machine components for power sector from 2Q FY '26. So is that on track? And secondly, we were also looking to commission the 25-megawatt solar CPP, captive power plant. So any updates on that?

Can you -- Sahil, can you just repeat your first question?

So there was a INR 145 crore order that we received for the precision machine components for power sector, roughly some INR 30 crores annually expected to start in 2Q FY '26. So just was looking to get some time line or an update for that.

Okay. This is for the industrial genset business, I think you're talking about.

Yes. Yes.

Which is for the North American market and for which the testing is almost over. The line is ready with us and we are expected to start ramp up in this quarter. And we expect the line full utilization to come from fourth quarter and around 50% utilization by third quarter on this line. But despite of the ongoing tariff situation, the business is stable. We see good numbers because the business is kind of shifting from China. And on the second question regards to the solar project, yes, the solar CapEx is ongoing. And we have already acquired 40 acres of land on this, already signed agreement for this. We expect the project to commence by first quarter of next financial year. We are expecting closure by March, but to be on a safe side, we expect it by first quarter of next financial year.

Next question is from the line of Aniket Mhatre from Motilal Oswal Securities.

Just a couple of questions. One was, could you help us understand your contribution from CV exports and farm exports to your revenues?

CV exports is close to 50% of the total exports, which is close to 9% to 10% and farm direct exports are negligible, which is close to 1% right now. But we do a lot of indirect exports as well as deemed exports for farm equipment products, which goes as semi-machined. The direct exports are close to 1%. And this is one area where we are -- we have won new orders, which is for farm equipment direct exports.

And sorry, the deemed exports, would you have a number in terms of the contribution? Indirect exports for farm?

Just a sec. Around 10%.

Sure. And you did mention about the weak outlook for CV exports. Anything on the farm exports? What is the outlook for the industry? And how are you looking at the industry for this year and the next based on your order wins?

Farm exports as we are working a lot of -- we are working with 2 large clients, they have plants in Europe as well as U.S. The order flow that we have are from Europe right now, and we are working on several projects with them. So the first order that we are executing is close to INR 50 crores per annum, but we have several projects in pipeline with the same customer. At the same time, we also have another large OEM from Europe where we are working on developing some projects. Already, the plant approval has taken place. Everything has gone well. So we expect farm exports to be a good business. It's a bit a little early to quantify on the business for next year. But definitely, the new businesses are coming up well from Europe for farm equipment sector.

But is the industry picking up or it continues to be weak?

Industry continues to be weak. If you look at some of the large players' commentary from CNH or John Deere or AGCO, the industry continues to remain weak to the tune of 10% to 15%. But these order wins are because of the current situation as most of the OEMs are trying to cut on the cost. It's an opportunity from the Indian sector plus currency is also playing a better role.

Sure. And for the farm exports, the deemed exports, what -- how have we delivered in terms of our growth or our performance in this quarter?

It's almost flat.

Understood. Related to the industry decline. Right?

Yes. Yes.

Just one other question I had was on the CV domestic front. While we have -- you are indicating our order wins and you also indicated the front axle beam is ramping up. But at the same time, you mentioned we have grown in line with the industry. So I mean, what am I missing here? I mean, we thought we should be outperforming the industry, right because of the new orders. Any…

Some of our customers, if you look at because we are not major suppliers for -- we are large suppliers to one of the OEMs and that particular OEM has kind of witnessed a sharp fall in the month of -- specifically in the month of June, the production levels were really low because of the AC cabin norms. Overall, if you see particular OEM has gone down by almost 10% to 12%. So despite of that, if you look at our growth, it was -- our numbers, it was kind of flattish. Plus some of the new businesses have already started taking place in terms of like the front axle beams, but we have yet to see a big quantum coming up from that business.

Sure. So that should start ramping up from Q2 and that should help in our performance going forward?

Yes. Yes.

Next question is from the line of Vijay Pandey from Nuvama.

I have a couple of questions. I wanted to check on the -- what was the impact from the raw material pricing or steel inflation in terms of realization?

It was close to INR 4 to INR 5 a kg. Yes.

So if you see in the percentage terms, it's close to 3%, 3.5%.

Okay. If that would have not been the case, our prices would have been around INR 250 per kg. INR 250, INR 255.

Yes. So in spite of fall in raw material prices, the realizations remained flat, which shows overall improvement in the realization despite of falling steel price.

Okay. Secondly, sir, can you like the North America order for the industrial business, like if you had any chance for interaction like how the tariff situation will work, like who will be bearing those incremental tariff? Will it be us? Will it be the OEM? Or how is it going to be? And is there any risk of substitution from like other players? Or are we looking to potentially do around -- like do an export to another market and then export to U.S. Like are we thinking on that line? Or how is it?

No. So our direct exposure to U.S. currently is around 3% to 4%, where at the moment, we are not selling on the basis of DAP. So we are not in discussions for the tariffs at the moment for this business. For the new businesses where we have -- we were expecting U.S. exports to be 10% to 12% by next year as some of the new CapEx is done around the U.S. market and order wins were already there. For those customers as well, our Incoterms are not DDP, as -- but if the tariff settles at 25%, 26% for the automotive components, I think we are in a safe situation because if you look at the currency has played out well. The steel prices are also -- have gone down from what the settlement which has happened in the last 2 years. So we are not looking at sharing these tariffs at all for the businesses as we work on a model basis where the model is completely signed off with the OEM. So in terms, we are not under -- we'll be under the pressure to pass on any of the tariff increases. But if North America will see a slowdown on the PV side as well as on the industrial side, it can impact the numbers, but not the margins.

Okay. Okay. We will not be bearing that tariff impact. Probably it will be borne by the OEMs?

Yes.

Okay. Okay. And just lastly, sir, one more question I had was on the -- how do you see the utilization moving forward like? Should we expect -- the machining utilization, because it came at 77% for first quarter. Should we expect it to return to around 84%, 85%, which was seen previously? Or will it be below 80%?

It's just the capacity addition which has recently happened for which we will be ramping up very soon. So that is the reason it looks low. But as we ramp up on the new projects for the -- for which already we are just waiting for the green signal, these levels will again improve to 84%, 85% levels because we have invested close to INR 110 crores in quarter 1 on the new lines. That is the reason it looks slightly low.

Next question is from the line of Akash Vora from Dalal & Broacha.

Sir, firstly, I'd just like to complete the loop on one of the questions my earlier participant had asked to you. So basically, I think we have reported a total exports of 16% this quarter, out of which you mentioned that around 9% to 10% is CV, 1% is direct exports for farm equipment. So the balance I can consider for industrial, is it, right? That's correct to understand, right? Balance 5%, 6%.

Yes. Yes.