Harsha Engineers International Limited (HARSHA) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Q4 FY '23 Earnings Conference Call of Harsha Engineers International Limited. We have with us today, Mr. Vishal Rangwala, CEO and Whole-time Director; Mr. Maulik Jasani, VP and Group CFO; and Mr. Sanjay Mazumdar, Strategic Adviser. [Operator Instructions] I now hand the conference over to Mr. Vishal Rangwala, CEO and Whole-time Director. Thank you, and over to you, sir.

Thank you, and you're all -- this is Vishal Rangwala and thank you for joining us on our Quarter 4 Financial Year 2023 Year-end Investor Call. While our CFO, Mr. Maulik Jasani, will give you more details about our financial numbers. I'm presuming that you would have had a chance to go through them already. And with that, in spite of very challenging times right now, considering geopolitical tensions, severe inflatory conditions in our key markets like Europe and North America. We have posted a fairly recent performance for the quarter 4 and the year. Our top line growth seems very muted. However, that's a factor of commodity price adjustments, contracts we have with our customers. So accounting for that, we have recently grown at about 8% on a consolidated basis. And I'm happy to inform that for us. The Indian market has performed very well, and it has reported a robust 20% around growth. However, Europe and then by extension of our Romania facility has faced significant headwinds due to high energy costs and overall inflatory conditions, which has resulted into a lot of soft demand. Similarly, if you look at China, during the year, we have seen a lot of lockdown in position by the government and that led to reductions or challenges in demand side as well as the automotive slowdown there. So those areas, those countries, our market has remained muted. But however, there is -- I would -- I'm happy to report that there is a significant reduction in operating loss in Romania in financial year 2023. I'm happy to inform that from a medium-term to long-term perspective. Those drivers remain very much intact. In case of bronze bushing while our current market demand is well muted due to soft wind market in Europe and other places. We still have a robust order book and visibility. We are developing certain new products in this segment as well from our Japan-based customers. Further, we believe that there is a significant CapEx announced by our customer base who are global bearing manufacturers and they're setting up a lot of CapEx in India. And and we remain confident that there should be a decent revival in second half of financial year -- current financial year. We have witnessed a strong growth both in large bearing cages segment as well as from our Japan customers. Further, we believe that there is a significant CapEx announced by our customer base who are global bearing manufacturers and they're setting up a lot of CapEx in India. And we believe that we would be one of the major beneficiary of such cage requirements of these companies in the future. If we get direction, we have -- Harsha has developed about 333 new products in financial year 2023, which indicates a very strong pipeline buildup going on -- going forward and now fairly confident that we can actually continue to grow in the market. While talking about financial year 2024, it's fairly difficult to give a precise guidance. However, on a internal -- internally, we are trying to target about 8% to 10% global growth for all markets combined. And we are expecting that margins of Romania and China will be quite positive. And overall, we expect good margin growth for financial year 2024. Lastly, I want to kind of share that we have incorporated or registered a subsidiary wholly owned subsidiary called Harsha Engineers Advantek Limited. This will be the vehicle for doing next greenfield project in India for HARSHA and we are very close to identifying land and related formalities for execution of legal documents and so on. We will be making some appropriate announcements in due course related to this. With that, I will request Maulik Jasani to take you through key financial numbers from here on.

Hello, everyone, and good afternoon. Thank you, Vishal, for the business overview and updates. Now let me quickly update on the major financial numbers. For the quarter ended March 23, in our engineering business, at a consolidated level, we have achieved revenue of INR 325 crores against the INR 297 crore in the immediate previous quarter and INR 330 crores in the same quarter last year. We have achieved consolidated EBITDA of INR 56.5 crores in the quarter 4 of FY '23 against INR 55 crores EBITDA in quarter 3 and INR 54.4 crores EBITDA in last year quarter 4. For the whole year in financial year ended at March 23, the company has achieved consolidated revenue of almost INR 1,300 crores in Engineering segment against the INR 1,239 crores in the previous year. Actually, EBITDA is achieved at INR 218 crores with 16.8% of revenue against INR 189 crores last year at 15.3% of Engineering segment revenue. Our profit after tax for engineering business for the financial year is reported at INR 123 crores versus previous financial year of INR 26 crores with a growth of 28.6%. In our solar segment, we have achieved revenue of INR 65 crores for the full year and profit of INR 0.19 crores for the financial year '23. We have achieved sales of INR 30 crores in our Bronze segment for the full year, while our business with the Japanese customers have grown by 34% year-over-year in last fiscal year, while precision stamping business has grown by 19% year-over-year. Our [indiscernible] business has grown around 15% year-over-year. Our CapEx has during the year has been INR 74.4 crores at console level which includes the work in progress also. For Engineering business, our working capital cycle is 128 days for the year ended against 129 days last year at a console level. Our net borrowing at stand-alone level is at INR 225 crores as investment negative, while at a consolidated level, it is INR 150 crores. Our gross borrowings at stand-alone level is INR 88 crore and INR 177 crores at console level. We have installed Hybrid captive power and the project of 3.71 megawatt at Gujarat, which has been commissioned. And we will see the full impact of that project in the coming fiscal year '23, '24. This brief on the financial numbers. I hand it over to the operator for Q&A from the participants.

[Operator Instructions] We have our first question from the line of [ Nikhil Rungta from Nippon India Mutual Fund ].

Am I clearly?

Yes, yes.

Yes. Sir, just a couple of questions from my side. To start with, on the Japanese customer, where you mentioned like we have grown around 34% on a yearly basis. So as a percentage of revenue or bearing business, what percentage would be Japanese customer now?

Okay. So Japanese customers roughly contribute around INR 60 crores in absolute value in our total turnover of INR 1,300 crores in engineering business.

This year?

For FY '23.

Okay. Okay. And here, we can easily see a similar type of growth going forward as well, right?

Because the base is low, no. See -- what is happening currently, we are still at 2% or 3% of the wallet share. So we are aiming at, at least 10%, 12% wallet share over the next few years.

Correct. Sir, coming to this bronze bushing, you have clearly indicated in your presentation an outlook that you see improvement only in second half of FY '24. So if you can give some more detail and highlights on this particular business because this bronze bushings was one of the key highlights during our IPO times as well. So what exactly happened? And why did that it's only H2 that you see a recovery?

Yes. So see, we spend FY '23 actually ramping up the production at our end, making those investments -- and all that was going on. So there was already a demand in place and we were replacing import and that kind of situation. However, while we were doing this, we have talked about starting quarter 3 and early quarter 4. The wind market started softening. And so we have the base business remains intense, but demand has softened. We have continued -- we have now become the significant supply in that segment to our customers. And that overall their demand has stopped -- softened since last few quarters. And we have received indication from our customers that in Quarter 3 and Quarter 4 is likely this revival will take place. So overall, the business remains intact what we had projected that we will do in the maturity -- full maturity of this bushing awarded business, we will do INR 125-odd crores plus business, that potential still remains intact. Short term, we are seeing a dip considering the wind market. And based on some indication, we are seeing that this will revive in second half of financial year '24.

This INR 125 billion annual target number at optimum level. Yes.

Okay. Okay. And sir, on this Hybrid captive power project, which we have commissioned, what type of benefit do we expect in FY '24? You indicated full benefit would be visible in FY '24 -- so if I have to put that into numbers, so what type of benefit would be there?

So as it is a hybrid project mix of wind and solar, our estimate out of this project is to have a INR 4 crores after-tax benefit for the full financial year.

Ok. Ok.

Now, it is from that generations this but years.

Sir, coming to our new investment or new subsidiary, which we have formed the Harsha Engineers Advantek Limited -- so you have indicated that you will be investing approximately INR 350-odd crores also there. So where will this funding come from? Because whatever IPO money was there, I believe we used it to repay our debt. So where will this funding come from?

So Nikhil, as I mentioned in my speech, currently, we are having more borrowings of INR 225 crores at stand-alone level. And if I see the gross investment is around INR 290 crores plus. That is the first. Second thing, this INR 350 crores is a enabling provision. We will do the investment in a partial manner in a tranches as in when required in next 3 to 4 years. And this 350 is also the best estimate we have as of now based on the need of the CapEx as well as working capital in that business. So we believe that we will have sufficient cash approval also by the time we will deploy this much fund of INR 350 crores. If we deploy fully INR 350 crores in that entity. And as I said, this is more of a enabling provision -- and we will decide as the things will improve, and we will start investing in the main entity. So incrementally, most of the -- really taking too much of the debt.

Yes. It was all from cash accruals, mostly.

Okay. Okay. So can we say that our intended CapEx plan would also be a similar number? Or in our stand-alone entity, also there would be CapEx?

There will be CapEx in our stand-alone entity. And this INR 350 million includes the working capital need also of the new entity.

Okay. Okay. Sir, last question from my side. On this itself -- for FY '24, what type of CapEx are we playing?

For FY '24, including the greenfield expansion, it will be INR 100 crores to INR 130 crores.

We have our next question from the line of Harshit Patel from Equirus Securities.

My first question is that, we have grown about 5% in FY '23 in our engineering business. Now I assume here that the pricing of the products would have declined -- so could you give a breakup between how would have been the volume growth both in India business as well as the overseas business? And how much impact would have been there because of the decline in price?

So -- it is there were two things going on the -- for the year. First half of the year, prices were increasing and then therefore decreasing so it is a little complex thing -- having said that, as I mentioned, we estimate that we have grown about 8% on a volume basis for the year. So that's the our global estimate. On India basis, this number would be a little higher. So we grew on a absolute terms about 9% plus on engineering business stand-alone. And we estimate that about 12% to 13% would be a rough volume growth on a stand-alone basis approximately.

Just to add, Harshit. Here, it is also a combination of product mix. And as we speak in our initial commentary, the growth in bronze business, [indiscernible] business contributes in a in a different volume numbers. So it is always a mix of multiple things. But yes, this is the best what we can explain.

Understood, Sir. Very well, Sir. -- so my second question is on our Romania and China facilities. So what were the full year sales in margin posted by these two companies. And how do we see Romania margin signing out over the next 2 years or so -- can we reach historical margin levels of around 7% to 8%, not like right now, next year, but let's say by FY '25, '26 kind of a time frame?

So yes, at the EBITDA level, we have a very strong belief that Romania is able to reach that historical margin, 7%, 8%. We will definitely have a significant improvement on the margins from last year to FY'24 and as you rightly said, in a year or 2, we expect to reach that number, what you mentioned, 7% or 8%.

So last year, this is FY '23, currently, Romania was pretty low, so was China, and we were talking a very insignificant margin. So -- over the next 2 years, I would believe that we can reach about 8% in Romania. I think by '23, '24, we will have to wait, but target is about 5% to 6%, which can go to 7% to 8% in '24, '25. And China can easily do about 12% to 13% against current 6% or 7%. This is the way it will pan out. And that's why we made a statement that both this subsidiary should turn positive this year.

Understood, sir. What would be the quantum of sales that we have posted in financial year '23 at both these stages?

Do you mean by quantum means what are the revenues from those, right?

Yes, sir. The revenues in Romania and China.

So revenue from both the put the entity put together is INR 360 crores.

Okay. And what would be the split?

And the profitability at both the entity put togeather is INR 4.5 Cr.

Okay. Understood. What would the split in this INR 360 crores what you mentioned, how much would be Romania andn China.

On the revenue, China has achieved around INR 124 Cr and Romania around INR 230 Cr.

We have our next question from the line of Amit Anwani from Prabhudas Lilladher.

My first question, again, on Romania. So obviously, as you highlighted that we are expecting a turnaround there FY '24 and FY '25 -- so what is the, rational reward is going to change there? And right now, what is the contribution of semifinished versus large cages? And what is the utilization volumes? Any more color, if you could share on that?

Yes. So Romania, I think the biggest issue currently, apart from the energy crisis and related some cost is still left in our challenges, bigger issue is the volume and the recessionary environment in Europe plus combine that with wind market challenges overall globally. And from a semifinish to finish cage, I think we are still at about -- I'll check, but I think 80-plus -- Yes, 80 plus on the semi-finished side and remaining on the finished cage side. And -- so what's going to improve definitely is volume both on the semifinish and finish side. So on the semi-finish side, it's a competitive market, and it is driven by volume, and we are not at the optimal volume considering very soft demand in the whole year for Romania. So volume improvement, even on the semifinished side will help on the margins as well as the cage finished product has significant better margins and that we are expecting to grow significantly. We had grown to a level and then it has kind of crashed [ out of ], almost reduced significantly because of this demand situation. So combination of both is what we believe that we will be able to achieve margins in the directional growth we are expecting.

Sure. What was the utilization this year?

On the -- on [ thing ] side, it is around 60% of our current users. I think more like 50% on semifinished side -- and on the finish side, the product cage side almost 40%, around that -- 40 to 50 somewhere in there. So very low utilization currently. And I am talking about a couple of quarters.

Yes. So volume growth, which you are mentioning, is it from the same customer? Or are we diversifying from where exactly we're thinking that the volumes will come back -- are we expecting scenario has completely started improving there with respect to energy prices or volumes. How -- what is the expectation coming from? [Technical Difficulty]

Yes. So from a volume growth point of view, we are expecting actually to grow with existing customers. We are expecting actually that some of the business, which is soft today will improve, which is already -- one already developed and we are a regular supplier for that business, but the demand is significantly muted. And the second part of it is that we are actually adding new customers in specifically Romania or in European region. Third element is that we are also closely working with our customers to outsource some of their cage demand. So combination, it will -- the growth will come from a combination of all three-- for us, specifically on the finished cage side.

Sure, sir. My next question is on wind bushings, which we are expecting from as to, the demand will come back. So just similarly wanted to understand, are we really expecting that within 6 months, things will be normal? And how much was the bushings contribution to FY '23 and any expectations for '24, '25?

So the FY '23 bushing contribution, as I mentioned in my speech, is INR 30 crores for the year. We are short by around INR 10 crores of our expectation. And for the guidelines, let like Vishal also give you inputs on the market estimates and the guidance -- so see, right now, we are expecting we are going to continue to grow in the bushing market. We are expecting to do a revenue of about roughly INR 45-odd crores for financial year '24. This is our very early estimates and we have received some indications from our customer for revival of wind business. So we feel that we could potentially improve on this number, but it is very early right now. Definitely, we have already accounted for some improvement in business in second half based on the indication we have received. And then we are closely watching the market and how it is behaving and very hopeful that wind market will revise in second half and primarily calendar year '24. It is based on our customers' indication looks very positive.

Sure, sir. My last question...

[indiscernible] There is a very conservative estimate our earlier -- estimate was actually aggressive. So 30 to 45 is again quite conservative. And it can change as we move ahead.

Got it, sir. Sir, last question on, if you could share the revenue contribution from bearings, stand component, bushings, castings for FY '23?

Only have disclosed, what based we could disclose. I think, you already have the bushings number.

Yes. We have given the best possible disclosures, Amit.

[Operator Instructions] We have our next question from the line of Pradyumna Choudhary from JM Financial.

So three questions. First is my understanding is that currently 38% of our engineering revenue comes from India, right? So I wanted to understand like what is really stopping us from growing this pie, like because ideally India is a faster-growing market and this pie should -- can -- is it possible to increase it much more from here in terms of contribution to total revenue? Or have we already captured most of the opportunities on the Indian side considering our high market share? Second would be, why is the rent market slow in Europe, like considering the, all the energy crisis talks and everything. So you would usually expect that all these ultimate alternative sources would have a good demand right now. And third would be regarding the low margins in our foreign business, foreign location, China and Romania. So I do understand the utilization part that we are operating at less than ideal utilization. But energy crisis and all these things, usually my sense is considering that a product is a very low percentage of the total bearing cost. So I would expect a better pass-through of the other issues like the energy issues or raw material prices -- like I would expect a higher price and power with a -- considering how critical our product is. And at the same time, how small will it's contribution to total bearing cost is -- so what is really happening on that side? These are my three questions.

Yes. So to start with your comment about India. India is a 38% for us, as you rightly mentioned, and it has grown very significantly for us last financial year. Almost to the tune of for 20% India as a market. So we are very bullish on India specifically. I talked about, how our customers are setting up a lot of CapEx over next 2 years. And so this is a very positive effect of China+1. So we are quite bullish and we will continue to grow at least double digit in India. But at the end of the day, it is still 38%, 40% of our market. So obviously, our overall growth is driven by how the group grows -- and that kind of creates opportunity as well as challenges. I've talked about beyond India, there are a lot of opportunities on in-sourcing to outsourcing building our portfolio with Japan-based customers or Japan origin companies. So all those, the main additional opportunity for us, which we are working and fairly confident that we will outpace the global growth in a significant way for bearing -- specifically bearing side. And then additional growth will come in from bushings and a few other products we are working on. Now coming to your second question about the wind market. Again, that's something I'm not in a position to actually qualify -- anything specific. What is -- on what I've heard wind market is driven and significantly supported by the government directives, subsidies and all that and potentially during COVID time, a lot of funding went into other direction. So -- that's explanation I've heard out from our customer, but now they have not -- doesn't make me expert here. So difficult to actually say why -- but we also believe that directionally, what you mentioned that this is something will grow eventually turn around. And definitely, if you look at global projections from various consultant or the predictions from various government considering the carbon neutral goal zero CO2 emission goals and et cetera. Absolutely, we are very bullish on this market. And in the mid- to long term, we are very confident that it will grow, and we will win a lot of opportunity within that. On the third aspect of low margins, I'll break this down into Romania and in China, Romania, -- we have talked about this is -- we do a lot of 80% plus of the revenues coming from semifinished products, which are crafting relatively energy intensive products. So that's where the volume matters and the margins are lower at the EBITDA level on optimal basis, what we are expecting is about 6% margin -- 67% margins on the semi-finished side. On the finished product side, we are expecting a good 14%, 15% EBITDA level margins. And that is also currently muted. And as we mentioned, almost it is down significantly from its normal cycle. So both those will come back. And so thereby Romania margins will significantly improve. Obviously, the reason for low number is semifinished. On the China side, also, a very up and down cycle, very challenging market. And specifically, last year, we have talked about there was a significant onetime cost related to reprocessing slag and that equipment breaking down and during COVID we didn't get an approval to restart that equipment and then ultimately resulting in selling that inventory at loss. So those were the two very distinct reasons for us to have a relatively lower margins there. But again, that's the reason gives confidence that they will actually do much better. We have actually done much better. We have done a year-over-year improvement in FY '23 and we think that this improvement will continue in FY '24 and beyond.

So just to add quickly on the India side. As you know, we have been -- we have a very line market share, frankly, with all the key major customers who that really matter the global ones where it is 80%, 85% plus. -- lot of new investments are coming, and we believe we should be the major beneficiary in those investments. And a significant business that is expected to come. But as Vishal explained -- India is actually a little relatively still a smaller market and therefore, we grow with whatever capacities are growing either for India or for outside India. And on the margin side, just very quickly, there was a continuous process of pass-through, which we went for most of the year with always a lag. So therefore, what happens that when there is a lag, the impact is it in your P&L, but the benefit moves a little low -- later. And therefore, the fixed overheads are on the higher side therefore margins is expected to be very, very low. Having said that, if you look at Romania '21, we did a decent margin in Romania. I think -- that is why we feel that now it seems that the pace of inflation as well as cost increase has slowed down a bit. And therefore, the indications are that Europe should start reviving and we are hoping for the best. And as we all very clearly said, we are closely watching. Let us go as we move ahead in the year and probably we should have more clearer things to say.

Understood. Sir, just one follow-up here. So in Romania, you said 80% is coming from semifinished product. So -- what is the plan over there? Like can we move up the value chain, like -- how much can we -- how much of this 80% can be reduced to maybe a much lower number so that a lot of it is from finished products where the margins are much higher. So, and the second would be so considering this cost pass-through things that you mentioned. So maybe 1 quarter -- I'm not asking for you for the exact quarter where we'll start seeing improvements. But maybe in the next couple of quarters, at least, if the price of inflation situation remains similar, we should expect improvement, right, because that's when most of the pass-through kicks in.

So I think on the first one in Romania, specifically, our means of increasing the finished percentage is actually growing in the cage market. And we are fairly confident that we will grow there. So by virtue of that growth, we expect that semi-finish will become more like 70%. And going forward, 60% when an optimal volume comes in for finished products. We don't intend to reduce the semi-finish per se directly. But we continue to work with our customer to go into semi finish to finish portfolio. And so that journey will continue. On the pass-through, I think we feel that most of the pass-through has happened. And in quarter 4, most of the lag effect was addressed and removed. Unless prices now go further up or down, we expect that this quarter 4 is a good indication of a stable situation, unless, again, as I said, if it changes further.