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

Ladies and gentlemen, good day, and welcome to Harsha Engineers International Limited Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Vishal Rangwala, CEO of the company. Thank you, and over to you, sir.

Hi, this is Vishal Rangwala here and I would like to welcome you to our quarter 2 FY 2025 investor call. And I would like to wish you all a very happy and prosperous new year. As we have been doing in the past, Maulik will take you through the numbers in greater detail. And I'm presuming that you would have had a chance to look at the numbers already. At the outset, I would like to mention that historically, quarter 2 is subdued quarter for us, both in terms of top line growth as well as in terms of margins, whereas fourth quarter is usually our strongest quarter at Harsha. If I talk about quarter 2 financial year 2025, it's a mixed bag for us. While India is more or less in line, though not fully up to our expectation and while China is looking better, we continue to face challenges in Europe as much as Europe is concerned in this quarter. And we have also seen demand from U.S. softening significantly. Let me talk of our principal verticals, starting with Harsha India Engineering business. First and foremost, I'm happy to inform that Bronze Bushing business has continued to be strong positive for Harsha. Thus in quarter 2, sales of Bronze Bushing, we were around INR 24 crores and the full -- first half sales for Bushing is about INR 44 crores. This is very much in line, a little bit better than our expectations. Going further, we see equally strong run rate as far as Bushing is concerned. If I talk further about India Cage business, cage demand coming from India, there is a decent growth in quarter 2, almost 15% over quarter 2 previous year. However, exports from India has remained stagnant with some minor degrowth again, largely attributed to continued soft demand from our key market of Europe. We have also seen some demand slowdown in U.S. market. Further, overall industrial demand in all key market is also down. We believe that Q2 overall slowdown is also a function of inventory reduction, destocking exercise being undertaken by our key customers, both in India as well as outside India in view of demand reduction as well as to preserve liquidity. We expect the normal purchasing to resume sometime soon and likely peak in quarter 4 onwards in terms of demand normalization. And based on this, we expect the second half of the current financial year, particularly quarter 4 to be relatively strong. Therefore, I'm pretty confident that India engineering business should grow positively in current financial year. Moving on to our other pillars. While progress on the major outsourcing projects in Europe is continuing, it may still take some time for us to conclude that exercise and given the usual challenges we face in such projects. Again, we remain very much excited about positive impact of China + 1 given major expansion undertaken by our customers in India. Thus, we have already started seeing an increase in order inflow from customers who have already started their facilities in India in response to this as well as we expect some to start coming few quarters as they commence their -- other customers commence their production. On the flip side of the growth, the large-size bearing cage segment is still not picking up given that the major end user segment, the wind as well as the industrial segment is very soft. The business from Japan-based customer is also a little bit of flat for this quarter and below our expectation. However, this is not a structural issue but it's more of a function of markets we serve them at these Japan-based customers, specifically in Europe and American region. And some of the orders which are taking longer for conversion. Lastly, the Stamping business, again, continues to grow quite satisfactory. As I mentioned earlier, China is distinctly looking better with steady improvement in performance and positive profitability that we achieved in quarter 2 and first half financial year '25. We expect China to grow significantly in current fiscal year, both in terms of top line as well as in terms of profitability as compared to last financial year. However, Romania prospects continue to remain bleak. So we are working very hard on the strategy for improving the product mix in Romania by pursuing more cases, both to our -- both for our -- from our existing customers as well as the new customers that we are in the process of acquiring. However, I'm afraid that in spite of best of our efforts, we may not be in position to achieve operating breakeven in Romania in current financial year given the fact that overall demand challenges and also the global volatility and geopolitical tension and supply chain-related challenges are continuing. However, on a combined basis, between our two key subsidiaries, I expect the losses to be reduced in current financial year, thanks to a strong positive contribution that has started to come from China. Now if I talk about our Solar business. Quarter 2, we saw a one-off positive profit contribution to the extent of about INR 1.5 crores, which has pushed up our EBITDA and PAT margins in quarter 2. However, on an annual basis, I believe that Solar business will continue to remain normal positive profit trends given strong policy level impetus resulting into continued strong demand that we are seeing in this segment. However, as indicated earlier, Solar division is operating on its own without any material additional capital contribution or additional management bandwidth support from the company. To conclude, I believe that we will achieve at least higher single-digit top line growth in India Engineering business. But on a consolidated basis, top line growth could be in a mid-single-digit range for the current financial year. However, as it is -- as we have indicated in the past, the bottom line growth would be much higher, more or less in line with our current run rate what we have achieved in first half financial year 2025. I would like to express my thanks to all of you for your continued trust and confidence, and I wish you all a very good evening. Over to you, Maulik bhai, for further numbers.

Thank you, Vishal bhai. Hello, everyone, and good evening. Wishing you all happy and prosperous New Year. For the quarter ended September '24, for the Engineering business at consolidated level, we have achieved top line of INR 310 crores against top line of INR 327 crores in the immediate previous quarter and INR 298 crores in the same quarter last year. Our consolidated EBITDA for Engineering business remained at INR 50.2 crores for this quarter against INR 40.5 crores in the same quarter last year. On the back of the raw material price pass-through and also backed by Europe slowdown as well as product mix impact, our EBITDA margin has been lower compared to previous quarter. Our Solar business have achieved a revenue of INR 42.6 crores and EBITDA of INR 3.68 crores and the Solar continued to have a good order level. As Vishal has mentioned, we have some one-off revenue in the Solar in this quarter, and he has already given the number of around INR 1.5 crores. Overall, our working capital cycle at consolidated level is around 151 days against 153 days in the previous quarter. And company at a consolidated level has incurred a CapEx of INR 34.7 crores in this quarter. With this brief on the financials and the presentation uploaded on the slides, I now request operator to take the Q&A from participants.

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

Sir, my first question is, recently, we have witnessed a pressure on gross margins for bearing manufacturers, the likes of Schaeffler as well as Timken. So is that pressure being passed on to us by these OEMs or the domestic pricing levels are pretty much normal only?

Yes, we are seeing some pressure on that front. It's some we are able to address and a big chunk of it is automatic pass-through because of the material pass-through mechanism in place. So yes, that's -- there is some pressure on that, but nothing, I would say, out of ordinary normally when there is a demand shrinkage that pressure comes in.

Understood. Sure. Sir, secondly, the greenfield CapEx, which is to be commissioned in 4Q FY '25 and as per the press release, it is also pretty much on track. Now given that this CapEx is more skewed towards the high-margin products like bushings, [ LSB ] cages, plastics cages, et cetera. So will that give a substantial boost to our overall margin profile when fully commissioned?

So I would not be able to exactly say they are -- all those products have a high -- relatively high margin, but that's our general sense. Having said that, there is a lot of mix of product also what we are planning to produce at the third site. Now this investment because this is a completely greenfield project and as there is a gestation period of ramp-up of demand as well as production ramp-up as well. So in long term, I believe that this should be positive for us but difficult to fully answer where it should be significant -- I mean, significantly positive from like any specific quarter or otherwise. That's the general what I can share.

And just to add, in the first phase, what we are adding is actually on the bushings and the stampings as the main production. But then there is an overall infrastructure cost also that is being loaded on the first phase. So I think the margin profile of the greenfield will in the medium to long term remain more or less in range of what we are delivering at India level.

Understood, sir. Understood. Sir, lastly, recently, Schaeffler Global, they have started a substantial manufacturing footprint consolidation, which is a pretty much highlighted in their recent earnings call as well. So they are reducing the overall number of plants at the global level. So are we in any way positively or negatively impacted by these measures?

So yes, there are a few projects ongoing, which are related to some outsourcing as part of this consolidation strategy they have. Partly, we believe that what they are doing in India at Savli could be part of that strategy of consolidation from multiple European facility, which is response to China + 1 sourcing kind of thing from Schaeffler. So I don't have a specific answer, but in general, we believe we are a good beneficiary of that, what they are working on. We have been working with them on overall consolidation of their supply chain as well for a while now so.

[Operator Instructions] We have the next question from the line of Shirom Kapur from PL Capital.

I just wanted to add a few questions regarding some data points if you could help me with. One would be what was the sales for your Stamp component in Q2 and H1?

Sorry, am I audible?

Yes.

So our stamping business for H1 remained around INR 25.5 crores.

Okay. Got it. Just another question now on your Japan sales. So you said flat this quarter. You mean Y-o-Y or Q-o-Q? And how is it developing? And when -- you said -- and you also mentioned that it's not a structural issue, some market-related, maybe some timing issues. Could you clarify a little bit further on what's happening in Japan and how you expect that to pick up, if not in FY '25, but then in FY '26 and beyond?

Yes. So what specifically we mentioned are two things. And I'll clarify that, one, there are projects which are ongoing, which takes sometimes the ramp-up happens in one quarter and then we face a ramp-up challenge or initial issues. So those are the initial ramp-up challenges we face when it comes to inducting new customers. Second part, what we mentioned specifically because when we talk about Japan, what we say is a Japan origin customer. And these customers, we are serving them in various markets, not only Japan as a country. And we are seeing some significant slowdown of the offtake in Europe and America, looking at the overall market conditions. So the growth is not there because of the overall market condition. And then there are a few projects which are getting softer start versus what we have anticipated.

Right. So it seems that the slowdown in Europe has been going on for the past few quarters but now America is seeing a slowing down as well. Could you clarify a little bit on what exactly is causing the slowdown? Is it as a result of just lower demand from the customer side where they are experiencing lower demand? Or is there any -- could you just basically give more color on the slowdown in America?

Yes. I mean, specifically, I'm not able to -- all we can share is what we are seeing from our customers and our customers are -- they are asking for lower as compared to what they had earlier projected as well as what they were picking up earlier. And there is also an element of -- because of overall economic slowdown, we feel that they are trying to reduce inventory and conserve cash. So that -- we believe it's a combination of all those is we are seeing a lower demand from our customers across Europe and Americas.

Okay. Understood. And is this expected to correct anytime soon? Or do you see this as a long-term sort of impact on our business?

We -- basically, we are starting to see some normalization related to all those inventory corrections when a significant market demand is going down, we see our customer doing further correction on the inventory they hold. And so we see a little bit higher impact versus actual demand correction. And we are now seeing some normalization of demand based on those overcorrection or inventory correction mostly already taken place. And we expect that by quarter 4, January, February, March, we expect that -- that normalization would have fully taken place. So we are looking at that improvement in quarter 4.

Okay. Got it. That's helpful. And if I could just squeeze in one last question. It's in a recent interview, NBC Bearings, which I believe a big bearing company in India has announced that over the next 4 years, they plan to incur around INR 750 crores of CapEx to expand the facilities. And I just want to know if this is something that could benefit Harsha because they plan to increase capacity almost 50% over the next 2, 3 years. So how this could benefit Harsha and whether this has already been factored into your kind of growth projections for the next couple of years?

Yes. So -- so we have also -- we also understand that being the case, NBC Bearing or the company NEI is a big customer for Harsha, very respected customer for us. And we believe that we will definitely benefit out of that. We offer such a diverse portfolio of product and competency we have within this bearing case segment so that we are feeling quite confident that -- or we are highly confident that whatever their requirements are, we can fulfill, take care of it from a technical point of view as well as commercial point of view. Now I don't have a specific but also we believe that they would potentially be a beneficiary of this whole China +1 deployment by automotive industry or other industry. And we see that definitely benefiting us because we are one of their key suppliers when it comes to bearing cages.

[Operator Instructions] We have the next question from the line of Jason Soans from IDBI Capital.

Sir, I just wanted to understand, I mean, you had spoken very strongly about the Bronze Bushing segment last quarter also, of course, you were on target for probably reaching INR 80 crores to INR 85 crores of top line in the Bronze Bushing segment. Sir, any more incremental information on that? And you said that the wind market in Europe is still subdued. So just wanted to have an update on that market in terms of the windmill market, how is it going in Europe?

Yes. I mean, as far as what information we have when it comes to cages in the wind market specifically, we are seeing still demand is still subdued when it comes to Europe. However, based on the input from our customer, the wind market remains strong in India. Also, the strength of the bushing is coming from the fact that it is a conversion where it's include more product sold in the market with bushing as a rolling element. So that's what is going on there and the reason for growth in that segment. But overall, other than India, we see or at least what we hear from our customers that wind market remains still weak with some pockets of improvement visible.

Yes. Sure, sir. And sir, I just wanted to understand, of course, we are a consolidated entity. So now one thing I just wanted to understand in terms of stand-alone revenues, I believe when you look at Harsha, I think around 45% comes from exports. And if that is -- those numbers are right, just wanted to understand how much comes from Europe, U.S. and the rest of the world? For just standalone...

Sorry, Jason.

Yes. Maulik bhai actually for this -- for the stand-alone entity, I just wanted to know the domestic and the export figure. And in that exports, what regions contribute, what percentage?

Sure. So as we mentioned in our investor presentation, this quarter, around 42.7% is export from our stand-alone revenue. And out of our overall stand-alone revenue, roughly, I'm just giving you a ballpark number, around 20%, 22% is Europe. And also, you asked about U.S., right?

Yes.

U.S. is around 7% to 8%. And China is around again 7% to 8%.

Sure. So this is for the exports. Okay. Okay. And anything else, Maulik bhai, is this, the rest is -- rest of the world that way.

Rest is, yes majority goes to Japan out of the rest. Japan -- Southeast Asia and Japan.

And then the biggest market still remains India.

India is the best.

Obviously.

Yes, yes, yes.

So just a clarification, Maulik bhai, these are the percentages of total sales or composition of export sales. I think what Jason was -- so Jason, that is where the confusion is. So this is the percentage of the total sales.

Yes, yes. I got that. I got that. Yes. So from -- so it's basically a breakup of the 43%.

Yes.

So 20% to 22% Europe, 8% U.S., China, 8% and Japan and Southeast Asia, the others.

That's right.

So 57% coming from India basically for the stand-alone entity.

Yes. That's right.

And sir, just my next question is actually I just wanted to understand, when you look at -- of course, the other -- when you look at the other pieces, it's China and Romania subsidiaries, which are the main ones for you. So when you look at China, is that only catering to the domestic China market? Or are you looking at exports from that entity also? And same question goes to Romania also. Romania, I believe, will be a hub for Europe to the surrounding areas. But just wanted to know about China, how is the strategy there? Is it only catering to the domestic market? Or are you looking at like an export hub for other countries as well?

Yes. So China's main focus is China market. We do send some -- sell it to some customers outside China, but it remains less than 5%. And for Europe, same main focus is European market. And that's where most of the product is going. Most of the customers are located. In addition to those entities selling in the local market of China and Europe, we significantly send what numbers we just talked about a few minutes back. We send a lot of products from India to China as well as India to Europe.

Okay. And sir, just needed your view on this. I mean, of course, we serve the bearings customers, the biggest and you have a very, very good market share for bearing rings also from them. And of course, long-term story being strong, I understand. But sir, just wanted to understand how do you look at -- I mean, there is some -- clearly some weakness going on in the bearing segment, even in the domestic side. And of course, Europe and all is weak itself. So sir, do you see any green shoots going ahead? Or do you think this is just seasonal structure is we are still on the uptrend, but probably seasonal, there's some slowdown. Just your views on it. And Europe, basically, Europe, again, remains to be a pain point for other players as well. So any reason as such you see for this slowdown? And now again, if I look at it connected economically, China also was facing a slowdown or stimulus measures are being given. Do you see any such measures giving -- because Europe also has been soft for a very, very long time. So anything which will probably boost our market there?

So I think for us to predict on the economic front, what will happen, it's difficult. Having said that, as you rightly said, definitely, we feel that whatever this specific year, the Chinese market is doing much better versus earlier. Could be due to stimulus or otherwise. We believe that Europe is already in a tough spot for almost 1 year, and it's a matter of time when it will revive. We are fairly confident, but not able to fully predict exactly how that happens. And to your question about are we seeing any structural shifts? Not really as yet, but this would be -- we are seeing a few things. I'm sure you might have seen globally SKF, separating out industrial and automotive Schaeffler also in face of this difficult situation, reorganizing, including the merger with [indiscernible] and doing -- so a lot of things happening within our customer. Yes, it could happen. As you said, some shift could come about. But right now, we are yet to see that.

Yes. Sure, sir. Sure. And just lastly, sir, just wanted to understand, if possible, I mean, when you again look at it from your subsidiary perspective, the Romanian subsidiary in FY '24, it basically yielded a PBT margin of around 4% -- minus 4%. That's just because it's at a loss. So going ahead -- any guidance or anything you would want to give structurally? I understand you said in the opening comments that you are looking at basically reducing the losses. But any more specific guidance, if possible, on the -- you already mentioned China has been doing well. And just -- but the Romania is a bigger piece in terms of revenue and profitability. So I just wanted to understand how is that going? Any guidance on that front?

So Jason, if I -- yes, Vishal, you want to?

No, go ahead.

Yes. So Jason, the problem here is in Romania, our strategy is that we are -- you see we are trying to move away a little bit in terms of product mix with more cages coming in, okay? So we are trying to add new customers. We are also negotiating with our existing key customers to buy more of cages and the talks are positively moving. So I don't see really a top line growth possible even in near term in Romania. In fact, this year, there would be a little bit of a negative top line growth. But hopefully, by the fourth quarter, if our cage starts picking up, even if the demand remains more or less stagnant, we should be able to try to see whether the margins can become positive. So this year, really, it's ruled out. Next year, we are internally hoping that we will be able to stop losses. Again, beyond that, today, to do any prediction is like gauging a crystal ball and we don't have that. But it's just trying to tighten the belts, improve the product mix, reduce the losses and see whether we can -- because in an ideal situation, I should have talked about an 8%, 9% EBITDA in Romania. Today, we are talking of reaching the positive EBITDA margin first, and then we will talk of growth. So it's really a tough thing. But yes, we have a strategy in place and we are working on it.

[Operator Instructions] We have the next question from the line of Shirom Kapur from PL Capital.

I just want to get a couple more data points if you could share the revenue and EBITDA figures for Romania and China individually for Q2 and for H1.

So, Shirom as we have informed in the previous investor call also, for the overseas subsidiaries, we prefer to give a combined numbers, and that's what we have given also in our investor presentation and even our results in the segment information.

Okay. Sure. And if I could also just -- maybe this has been addressed in the past, but your greenfield CapEx that you're doing with Harsha Advantek and you're adding new additional capacity for your existing products with Bronze Bushing, large size cages and standard components. I just want to understand the rationale for it kind of being part of a new subsidiary as opposed to just a regular expansion of your existing business. And this is more from a perspective of going forward, when we were to see a consolidated minus stand-alone numbers, it won't just reflect your Romania and China numbers, but would likely also include Harsha Advantek's numbers, right, after the plant is commissioned. So I'm just wondering maybe going forward, whether you'll be giving some sort of bifurcation and how -- just to understand the thought process behind this being under a subsidiary as well?

Yes, one subsidiary will be in a fully operational, although it has started doing operation in the offsite, but it is still on a very miniscule level. And once it is fully operational, we will decide how to share those numbers with the investors. And on the rationale, yes, this is our incremental business where we see a good amount of growth prospects. And although in our existing line of business, both bushings as well as [ LSB ] are very small pie in the overall existing business, which we see that it has a potential to grow. And hence, we need incremental setup and capacities over there. And that is the reason it qualify for the new site. And the same is the logic with the stamping, which is a very small business, as you are aware. And we see that there is a great potential over there also to expand these business lines. And hence, we have decided a separate site and separate company for the same.

But just to add, Maulik bhai is anyway going to be a part of engineering and others India.

Exactly...

It will be consolidated with India. So you will always have India is a one clear number and then the overall consolidated. So you should be able to clearly decipher how things are moving. It should not be a problem.

Okay. So the numbers in the presentation of India will going forward always include the new subsidiary as well?

Yes obviously.

Yes. Yes. We will ensure that number is communicated well.

Yes, yes, don't worry.

Sure. Absolutely. I appreciate that clarity. And just if I could squeeze in a last follow-up is on -- as we saw this quarter, the exports definitely from India have declined considerably. But from your sales, your domestic sales within India have seen quite a good improvement. And I'm just wondering from a long-term perspective, how you see the growth in India? I know that with the China + 1 and the outsourcing opportunity taking place. So can we see this sort of sustainable 15%, 20% growth happening in India going forward? I'm just talking about the sales within India, given your new subsidiary coming up as well?

So we are not actually giving any specific guidance for next year.

But I think -- I will take that as a directional -- we see very positive growth so far as well as we expect that positive growth or a good significant growth will continue. I don't -- as Sanjay mentioned, we don't have a specific guidance right now, and we do not intend to share that. But all those drivers, as you mentioned, our customers drive towards China + 1 and Bushing business growth, which is currently focused on the Indian market specifically, all that will definitely drive that number positive is what we see.

Yes. So just to add, we are very bullish on India and India can definitely grow at around 20%. But I think it's a bit early for us, but let's wait. We are very hopeful that we are working on a lot of projects also. So things can definitely be very aggressive at India level, but we'll have to see how globally things pan out. That's why we said that we'll probably want to wait for some more time.

Sure, sure. And just one last question on the subsidiary, the margins that you saw at subsidiary level. So if you were to bifurcate the consolidated subsidiary -- consolidated India coming subsidiary number, the margins that we saw there last 3 quarters after Q2 last year, we see them be positive around 3%, 3.5% at EBITDA level. But this quarter specifically, it's come back down to -- it seems like less than 1% as per the calculation that we're seeing. So is that -- is there any reason why this particular quarter, we've seen a jump even though it had been -- I understand the commentary is still weak from the Romania perspective. But even sequentially from the last 3 quarters to now this quarter specifically, we've seen the decline. So any particular thing that's happened this quarter that's further impacted the profitability in the subsidiaries?

So basically, you rightly said, Shirom, as said in the commentary, mainly on account of Europe slowdown, including the Romania performance and also because of the price pass-through mechanism because the last quarter, we get a benefit of the lower price consumption procurement, which has been passed through in this quarter and which has been squared off.

[Operator Instructions]

Maybe moderator, if we don't have any further questions, you may consider closing the call.

Certainly, sir. We do not have any questions in the queue at this moment. I would like to hand the conference over to Mr. Vishal Rangwala for closing comments, sir. Over to you, sir.

Right. So thank you. So again, ladies and gentlemen, I really appreciate you joining this call today to get an update about Harsha's quarter 2. And we hope you have a good day and good evening. Thank you very much.

Thank you, sir. Thank you very much.

Thank you. On behalf of Harsha Engineers International Limited, that concludes this conference. Thank you all for joining us. You may now disconnect your lines.