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

Ladies and gentlemen, good day, and welcome to Harsha Engineers International Q4 FY '24 Conference Call. [Operator Instructions] I now hand the conference over to Mr. Vishal Rangwala, CEO of the company. Thank you, and over to you, sir.

Thank you, Jatin and hello all. Welcome to our quarter 4 FY '24 investor call. As per past practice, while our CFO, Mr. Maulik Jasani will take you through numbers in greater detail. I presume that you would have had a chance to go through them already. And I'll talk through some of those general trends. At the outset, I feel elated in reporting a much stronger quarter 4 FY '24 numbers, both at India level as well as global level, also quite happy to report that quarter 4 FY '24 factual results have turned out to be significant improvement. If we talk through India engineering business, talking specifically about our growth drivers. I'm starting with Bushing segment, where we have started seeing a good traction. Though a bit late in last financial year, which now reflected by a healthy inflow of orders thereby, improving our visibility in financial year '25. While we have closed the year with a sales of around INR 40 crores in the segment of Bushing, we expect this business to grow significantly, probably nearly double and expect to achieve sales of at least INR 75 crores plus in FY '25. This is specifically for Bushing segment. We continue to work further in this segment and win additional development and opportunities as well. Similarly, I'm happy to report that we have started seeing improved order flow from plants that have been set up by our key customers in India, which cater to their global requirement. This validates that we are the natural beneficiary of China Plus One strategy implemented by our main customers. And no doubt, we continue to have a dominant share in Indian market and we become a key beneficiary of all the increasing requirements from our customers. If we talk about our business from Japan-based customer, though this has been lower than our expectation in current or previous financial year '24, we expect this business to grow significantly in coming years. Further, though, I cannot share specific details, I can only say that we continue to work aggressively on various exciting major outsourcing projects of our key customers in various parts of the world, including Europe, Japan and U.S. Lastly, while our [ LSD ] business has not really grown the way we expected in the current year, which is largely due to subdued global demand and the current growth in wind as well as industrial segment, we believe that this should start gaining traction in financial year '25. I'm also happy to inform that we have witnessed a strong growth in stamping segment, particularly on the railway and the automotive side. Thus we saw sales jump to around INR 50 crores for stamping in FY '24. And we again expect at least a 50% growth in business in the segment for FY '25. Our retail project in India is on track. While major effect is on the site development as well as basic infrastructure, including utilities, as we have indicated earlier. In the first scale, we are creating additional capacity for Bushing as well as large sized cages. And we are targeting that this should become operational by quarter 4 financial year '25. I am happy and relieved to also report that China has already come in positive profit territory in quarter 4 financial year '24 indicating a revival in demand from our key customers in China. And I'm cautiously optimistic that this trend to continue through financial year 2025. However, I must say that Romania is continuing to face the headwinds in the form of no near-term revival sign either on the wind side or on the industrial side in Europe. However, we are currently working on the strategy of significantly improving the product mix by increasing the share of cages in Romania from current level of 15% to more than 30% in FY '25, and based on this strategy, we expect Romania to at least reach cash break even in FY '25. Lastly, as you can see our solar vertical has reported a decent growth in top line, and there is an improvement in bottom line also. This is largely on account of renewed interest in renewables in the wake of positive renewable policy in the state level. While strategically we do not propose to allocate any significant additional capital to this segment, we expect the same to continue growing at a very positive rate, and also we see that it will contribute to bottom line. Our targeted top line growth for financial year '25 on a consolidated basis is around 10% to 15%, but our bottom line growth expectation for financial year '25 is in excess of 25% over financial year '24. Thus I feel confident that financial year '25 will be much better year as compared to '24. I sincerely thank all of our investors for continuing to repose their trust and confidence in Harsha, and I wish all of you a pleasant evening. Thank you, and over to Maulik to walk us through numbers for quarter 4 '24.

Thank you, Vishal, for the overall business review. Hello, everyone. On a consolidated basis, Q4 FY '24 reflects an all-round improvement in the top line as well as the EBITDA and PAT margins compared to the last quarter. For the quarter ended March '24 for Engineering business at a consolidated level, we have achieved top line of INR 321 crores against INR 278 crores in the immediate previous quarter and against INR 325 crores in the same quarter last year. We have achieved consolidated EBITDA for Engineering business at INR 60.6 crores in quarter 4 against INR 48.5 crores in the last quarter and INR 56.5 crores in the last year same quarter. Continuing focus on cost, improving sales as well as favorable pass-through situation for raw material prices and better product mix has resulted into improved EBITDA margin at stand-alone as well as consolidated level in the last quarter. For the financial year ended '23-'24, the company achieved consolidated revenue of INR 1,227 crores in Engineering segment against INR 1,299 crores last year, and annual EBITDA is at INR 128 crores, at 16.2% of the revenue against INR 218 crores last year at 16. 8% of the revenue for Engineering segment. On solar business, we have achieved INR 165 crores and EBITDA of INR 1.8 crores for the year '23/'24 after adjusting INR 0.67 crores loss of the U.S.A. company and one-off cost incurred in the quarter 1, as we discussed in the previous call. Overall working capital cycle at consolidated level is around 141 days at the year-end against 144 days in the previous year-end. The company has incurred a CapEx of INR 25 crores in the last quarter, which includes the CapEx out of the IPO money of INR 11.5 crores. With this brief number on the financial side, I hand it over to the operator to take over the Q&A from the investors. Thank you.

[Operator Instructions] The first question is from the line of Harshit Patel from Equirus Securities.

Congratulations on a good set of numbers. Sir, my first question is what kind of improvement do you envisage in FY '25, especially on the export front because we have seen global bearing companies reporting muted sales in Europe and the outlook shared by them is also not very encouraging. So how do you see our exports panning out. So I'm not talking about your sales from Romania and China from those facilities, but what you produce in India and sell to the outside.

So Harshit, we expect our export to continue to grow. However, we have also received muted demand expectation and forecast from our customers. So we expect some moderate growth on that front, is the current projection. Now it may change based on various segments, how things turn out. But that right now we are also expecting moderate growth, not a significant growth from that segment. However, we are also continuing to work on some outsourcing opportunities which might be an add-on business. and which may add to that growth number. I mean broadly, they remain -- Harshit, they remain in the range of around 50%, broadly, exports out of India, and that is more or less comparable with the previous year also.

Sure. Sir, in percentage terms, how our exports would have grown or degrown in FY '24?

So Harshit you can see that it is there in our IR presentation and our exports from India is 49.3% in FY '24 against 51.6% in the previous year for Engineering business.

Understood. Understood. Sure. Sir, secondly, the wheel equipment demand in China seems to be in a bad shape, and since we supply the bushings to the companies who are exporting out of India, I mean what gives you confidence that we will be able to grow more than 50% in FY '25.

So 2, 3 changes within that. One, our customer focus is not to export to China, but it's outside China, Europe, U.S. and other territories. Second, because the demand increase is driven by -- we were talking about earlier that how this bushing adoption is taking place. So more and more gearbox going in with bushings. And that is what is giving us the confidence, and this is net supported by the projections by our customer, so that is the reason we are confident of a significant growth in FY '25 for Bushing segment. In spite of overall wind demand may be muted, we see that India demand in wind is still strong, and our customers are going from -- moving from a normal gearbox or a without bushing gearbox to a bushing gearbox and that is what is driving the growth for us.

Just to add, there's a little bit of base effect also. So here, we have done 40, this year, which we should have done a little more and now it is shifting. So next year is the normal, which we would have or wanted to do this year. So that way also, it is -- yes, it looks very sharp, but this is how you have to actually look at it.

The next question is from the line of Amit Anwani from PL Capital.

Congrats for the decent set of numbers. Am I audible?

Yes, very much.

Yes. Sir, first question on Romania. You said we still continue to face headwinds and the revival is low, and we're going to increase cages from 15% to 30%. So if you could throw some more light on are we shifting some production there? Or is it the increased demand, how significant that in terms of revival from any, I understand we were doing largely castings, and what is the utilization level currently. We did talked about energy cost there, what is the status, the other things getting better from that aspect? Or is it that there's no demand for -- from there, which we are not able to meet as per plans that is still impacting.

Yes. So Amit, we -- basically, we are seeing overall a muted demand in Europe, and that is one main challenge. On top of that, our semi-finish portion is significant is another challenge. Now what we talked about increasing cage share from 15% to 30%. We are seeing some traction in terms of more and more customers wanting to buy out of our Romania facility, and there are discussions about additional outsourcing by our customers. So a combination of that, we are expecting to grow the cage supplies out of Romania facility this year, and based on that additional conversion of cage, which is a higher value-added product, we are expecting that we will come very close to breakeven or better in Romania. That's the thinking. And actually, there is some back-end support from our customer in terms of award in that direction. So we are continuing to win some additional orders in Romania to support this direction. So fairly confident that we'll be able to change or shift the portfolio based on what's going on right now. However, headwind still remains overall muted demand in industrial and wind market, which is a large size, is our biggest segment when it comes to cages. So that challenge still remains.

Right, sir. Second thing on the penetration with Japanese customers. So just wanted to understand how much was the contribution this full year, and did we made any progress? What is the outlook?

So we grew I believe if I remember the top of my head, about 10% plus last year, and that was expected to be higher and some of our projects, which were in pipeline, it got delayed in terms of realizations, they are back on track, and we are expecting that growth to come in this year. We are seeing already higher flow or a forecast from our customer on that front. So fairly confident of that happening, we are expecting, again, Japan-based customer and when I say Japan-based customer, not necessarily export to Japan, but supply to Japanese companies to grow significantly in the tune of 20% to 30%, that is what we are roughly projecting at this time for FY '25.

Right. Sir, how much was the percentage contribution from Japanese?

Percentage contribution in terms of total revenue?

Yes.

I think we'll have to check. But we'll come back to you. Yes.

Yes. no worries. So for when bushing, sir, just wanted to understand you said INR 40 crores, and now we are expecting INR 60 crores in FY '25. So I just wanted to understand, there's a lot of talk about -- you're talking about muted market outside, but there's a lot of talk about wind additions in India. And so how is the outlook in Indian market? And second thing, are we the only vendors supplying to global MNC gear box manufacturer? Or is there a competition within India or outside where we are competing, so just more color on the Bushings market.

Yes. So on the bushing side, I want to first clarify the numbers. We are expecting to grow almost to the tune of near 200%. So maybe -- so we are going from INR 40 crores to about INR 70 crores, INR 75 crore plus is our expectation today. This is, as I mentioned, that this is -- from a competition point of view, I'm not right now aware of any competition in India. Yes, there are suppliers who supply this product outside India. One, that's exactly the reason one, we are -- they are taking us as a bigger and bigger substitution supply, meaning what they were importing earlier, now they are moving to 100% supplied by Harsha. That's 1 move. Second move I talked about is how they are making x number of gearboxes, not all gearboxes were using these bushings. Now as a percentage higher number of gearboxes are using these bushings or maybe they are selling a higher number of gearboxes with bushing integrated into it, and thereby the market is growing for Harsha in India specifically. Our customers, as I mentioned, are primarily supplying into Indian market as well as globally other than China, and overall market outlook may be somewhat muted. India looks good and primary this growth is coming not out of the wind market growth but out of conversion to bushing is what will happen.

So you mean to say largely good part is coming from conversion then the new addition. Is it the right understanding?

Correct, or rather any incremental requirement getting shifted to bushing. That's what it is. We are not replacing the existing gearboxes per se. This is what our perception is. But incrementally, more and more the new requirements are moving towards bushing in gearboxes.

The next question is from the line of Naysar Parikh from Native Capital.

First one is, could you -- you mentioned in terms of the outlook for next year, can you just talk about what are the drivers of profits growing faster than revenue? And what pockets will we see the margin expansion?

Okay. So if you see this year, at our international subsidies level, there is a negative contribution to the extent of INR 14 crores, INR 15 crores, correct? So one, as we already explained, China has turned positive. B, our strategy is to ensure that somehow at least in Romania, we doesn't contribute more on the positive side, at least, it should stop losses. So that could be, therefore, an incremental direct addition to the bottom line. That is why assuming that India continuing to grow maybe at higher double digits and Romania, China not growing that aggressively, but maintaining more or less a muted growth. So overall top line would grow 12% to 15%. Bottom line is bound to grow higher because of these typical change in the composition at the consol level, with India continuing to contribute same in -- more or less in the same percentage range of 20%, 21% EBITDA.

So India margin, we're not expecting to increase significantly. There's international, which will drive the profit growth.

India remaining constant or slight improvement, international -- India will improve actually a little bit, definitely.

Because of product mix.

Yes, product mix change. But international stopping negative contribution and keeping in a little bit of positive.

Okay. Got it. And can you just -- just to be clear, this year, I think if I just -- based on the numbers you mentioned, on a consol level, India business would be around -- the domestic business would be around 33% and 2/3 is rest of India, right, including international and exports. Is that fair?

So India -- can you just repeat your point.

At consol level, India is 33%.

India to India, you are saying. Am I right?

Within India. Yes, that is right.

International, can you just give a broad split between geographies?

On a macro level, about 25% to 30% is Europe -- and about 10%, 12% is Americas and other 10%, 15% is China, and the rest is rest of the world kind of.

Okay. Understood. And in Europe, right, which segment is our biggest because you mentioned Europe, there is slowdown, and we are seeing it across industries. So which are your top segments in Europe that you're catering to? And how should we look at that for the next year?

So from our portfolio, we cater to across complete segments, which includes wind to industrial to railway to automotive and everything in between. And we have seen very muted growth projection on the industrial side, including wind. And maybe a little bit of better relatively improvement on the automotive side is what we are seeing. Again, nothing to say that it's full recovery. But some improvement is what we are seeing on the automotive side. That's how we -- our order book is looking like. Beyond that, I mean, I don't have a very specific segment wise because right now, we -- our customer also don't precisely tell us exactly what goes into what segment.

Got it. And if I can squeeze in one last question. What is your order book at the end of the year and order intake for Q3 -- Q4, sorry?

See we don't really work on a long-term order book. We are basically supply to the -- we get a forecast, and that's what I tend to talk about kind of a rolling forecast from our customer so that becomes our indication for projection. So we don't really talk about our order book as such because that's how the industry works in this end.

So just to elaborate, we have all long term, very long-term contracts with almost all customers, and then we get rolling annual forecast. And then they keep on defending POs as they need. So that is why if I annualize then my -- frankly my order book is almost for the full year. But then in reality, the PO would be maybe on a monthly basis or something like that.

The next question is from the line of Aditya Shah from Vikram Advisory Services Private Limited.

Sir, I have a question regarding our capital allocation policy. So within that, what are our CapEx plans for the next 2 years and any reason for conserving so much cash?

Yes. So Aditya, as we have discussed our overall CapEx plan is in the next 3 years is around INR 300 crores including the new greenfield site, which is still under the construction phase. And as you've observed, the major cash conservation is on account of our IPO money and which has been kept for the further growth investment only, and once we have a new site in place, we will have a major plant and machinery CapEx in a phased manner will continue. So just to answer your point, it is around INR 300 crores plus in next 2 to 3 years, and we are also exploring if any right opportunities we evaluate the various market opportunities available in our segment.

Right. So INR 300 crores this year is your CapEx and any idea on what is the ROE that as a company we are targeting for the next 3 years? Because currently, our ROE is pretty low at 10%.

Yes, mainly, as you rightly observed, it is on account of the cash resources allocation available with us, cash now available with us and it is actually pulling down. And once everything will be deployed, maybe it will take another 2 years to reach to the peak and maybe down the line 4 years, our expectation is just to generate the similar ROE pre-IPO time is around 17%, 18%. After 3 to 5 years it will gradually increase.

Okay. Okay. So next 5 years our internal target is around 17%, 18%, probably till so far -- till 5 years we would expect our sales to be between 10% and 12%. Am I right? Because of the heavy...

It will gradually go up. We expect that in next year, the pace of CapEx and all other investment plans would accelerate. So I would say, next 3 years, we should reach 17%, 18%.

Okay. That's helpful. And sorry, sorry, last question is about any dividend policy as a company do we have or no?

Yes, we do have it, and it is already there in place, and we are following.

The next question is from the line of Jason Soans from IDBI Capital.

Sir, my first question was, I understand that you said your customers are not telling you where your bearing cages are being employed. But sir, of course, when you talk about India from a macroeconomic perspective, there is a lot of talk on how the industrial side is picking up. CapEx plans are very, very big for the next 3 to 5 years, of course, with a stable government if elected. So just wanted to know from your perspective, you did say that there is some recovery in automotive side. But I believe when you look at bearings, industrial side also, it will contribute very, very handsomely and meaningfully and you basically supplying component or a bearing cage to that industry will definitely benefit out of it. So sir, I just wanted to know how is your -- what's your view on the industrial side from a long-term perspective.

Yes. So again, we are -- from a long-term perspective on the industrial side, we are very bullish, rightly, as you mentioned, we see a significant CapEx investment in India. And since we are in that segment, we should benefit. We continue to see growth in India and which includes industrial as well as automotive for the last year. And then we are continuing to see that growth. More than 10%, 12% growth we are seeing in India, a combination of industrial and automotive. And my comment related to industrial still muted, but automotive improving was reference to European demand or global demand, which we cater out of India as well as various, okay.

Sure, sure, sir. And sir, just in terms of bushings, if I got the numbers correctly, you said you have sold INR 40 crores worth of bushings in FY '24 and INR 70 crores to INR 75 crores, you are basically planning in FY '25. Is that right?

Yes. Yes.

Yes. But sir, just again, from a perspective, just wanted to ask on this bushings going to the windmill gearboxes. And they are seeing some muted growth, as you said, Europe also is muted on that front. So sir, how will we achieve almost a double kind of growth? Just wanted some more color on that.

So I think I'll just elaborate on what I answered. One, I think what is happening is conversion of gearbox without bushing to with bushing. So basically, if my customer is selling 100 gearboxes, maybe they were selling 20 or 30 with bushings and thereby my demand was based on that, the 30 we were supplying. Now they are converting more models, a bigger portion of their supply to bushings. So basically, instead of 30, 60 gearboxes out of the total 100 they supply are going with bushings and that's what is increasing the demand for bushings. As Sanjay Bhai mentioned, we have talked about this in the past that when we won the order, it was about with both 2 customers we have. We had INR 120-plus crores order opportunity which we had won, which was supposed to mature in '25/'26 or '24/'25 rather. And we are running 1 year delay on that. So basically, what was supposed to happen in '23/'24 is now realizing in '24/'25 is what we are seeing. In spite of overall global market still muted, India is still doing decent that it's the conversion of more gearboxes bushings is what is driving this growth, which we were expecting when we started supplying to these sort of customers.

Okay. Okay. But this growth basically is coming from Europe only or this INR 75 crores -- basically, this growth comes from Europe only, right? When you are talking about double? Or is there some growth from India as well in this?

So for us the supplies happened out of India. Our customer majorly they are supplying -- we are supplying to customers who are located in India. Our customers who supply to Indian market gearboxes they also supply to European market and other markets. We don't have an accurate number of exactly where the gearboxes are going.

But yes, that includes India also.

Yes. Okay. Okay. Okay. Sure, sure. But you do expect good numbers from this segment. Okay. Sure, sir. And just when you go back, when you look at your subsidiary performance, I mean just if you just deduct the consol minus stand-alone. Now when I look at this, of course, you have plugged in the losses, losses have come down from the subsidiaries. And when I look at the EBITDA margin is around breakeven 0.3% for FY '24. Okay. Now just, sir, I mean, of course, it's a combination of Romania and China. Those are your main subsidiaries overseas. So sir, going ahead, how do you look at the EBITDA margin for both these subsidiaries going ahead? I mean, just some color on that.

Yes. So as we were -- I don't have an exact number in front of me from where exactly it is going to go from a percentage point of view. But what we are sharing that definitely it has turned positive for China and Romania in terms of losses, they have also are reduced. And ultimately, we expect the EBITDA margin to turn significantly positive. And expecting positive PBT, PAT from China and roughly breakeven from Romania, that's the transition we are working on.

That's for the current year. But yes, just to add, the targeted blended EBITDA at China level would be in the range of 12% to 13%. And in Romania, in a good year, normal year, it should be around 6% to 8%, not '24/'25, okay?

Right, right. This is the blended EBITDA, what you expect in a good year, right, for Romania.

Hopefully, in '25/'26. Yes. But it is too early to comment about that.

Yes, sure, sir. I understand that. I was just -- my question was from a -- I mean on an FY '24 basis, it's 0.3. I mean just talking only about your subsidiary. So I just wanted to know how you see it going ahead. Okay. Sure, sir. And sir, just finally, one what I wanted to ask you is when you look at -- of course, your -- say 30% to 40% business is coming out of India. So that is -- and 40% -- 35%, 40% is domestic, I mean, coming in from India. So just wanted to know from your side, which pockets do you see, like, for example, say, it could be railways, it could be auto, of course, auto you mentioned, railways, which pockets do you see good growth in terms of domestic and exports, both, if I could ask you.

Sure. So for FY '25, basically, we are -- domestic side, we are seeing a positive growth across, little less on the industrial side of the things, because -- partly because our customers also export to other markets. But overall, we are seeing growth on the -- projecting growth or expecting growth from railway segment, we are seeing growth on the automotive side as well as projecting growth on the industrial side, well muted versus relatively other segment on the industrial side, that's what we are seeing for India. Globally, as I mentioned, most of the growth projections are somewhat moderate. Definitely, is a growth we are expecting over FY '24, specifically because it was a significantly down year, when we see a down year usually our customers also tend to conserve inventory, and they take some action to reduce inventory, which sees a little bit bigger degrowth sometimes for us. And in a somewhat of a growth year that [indiscernible] expecting that this from our international customer point of view, we should see -- for an established business, we should see a moderate growth and not a significant growth. And then we continue to work on additional business opportunity with various customers, so which would include some of the outsourcing projects as well as some resourcing projects. So combination of that, we still see internationally for us Harsha growing about 8% to 10%. It's my rough average overall. And then India would grow more than 10%, 12%. And then other -- the difference will be kicked in through the products, what I've talked about, bushings and stamping and all that.

Sure. And sir, lastly, I just wanted to ask you, I mean, it's commendable that '24, I'm just seeing your stand-alone results. So margins in Engineering, your core Engineering segment, you have managed to keep it at 21.7% or 22% odd level, which is very commendable. Sir, do you think this should be a sustainable margin going ahead, 21% to 22% for Engineering I'm talking about.

Yes. Yes, I think definitely.

The next question is from the line of [ Divya Gupta ] from Gupta Family Office.