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

Ladies and gentlemen, good day, and welcome to Harsha Engineers International Limited Q1 FY '27 Analyst and Investor Earnings 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, Mr. Rangwala.

Thank you. Dear friends, welcome to all for our quarter 1 FY '27 post results update call. As per the normal practice, our CFO, Mr. Maulik Jasani, will take you at length through our key numbers. However, I'm assuming that most of you would have had a chance to go through the same. At the outset, I'm happy to inform that our quarter 1 FY '27 performance has remained highly satisfactory in line with management plan and expectation, except for some minor aberrations, which I will talk about shortly. As you would have seen on a consolidated basis, we have posted a 25% growth in quarter 1 on year-over-year basis. This growth is largely due to a consistent strong top line growth on around 21% posted by our India Engineering business, which comprises of company HEIL and our wholly owned subsidiary company, Harsha Advantek. It is also noteworthy to mention that in spite of historically established fact that our last quarter performance is generally the strongest. In quarter 1, our India Engineering business, we have posted a strong 6% growth even on a quarter-over-quarter basis. At the same time, you would have seen that while there is an EBITDA and PAT growth in our India Engineering business in quarter 1 on Y-o-Y basis, there is some degrowth in margin on quarter-over-quarter basis. This is attributable to three specific factors. Firstly, in quarter 1 of this year, our average raw material costs have gone up by around 8%. And as you are aware, we have -- we follow a pass-through mechanism in major -- major -- most of our customers. However, there will be a lag of one or two quarters. Thus, we should be able to pass through this cost increase in the subsequent quarters. Another factor which has impacted the margin of India Engineering business is a foreign exchange loss of around INR 4 crores, which is due to certain technical accounting reasons. To offset, as per Ind AS provisions, foreign currency fluctuations relating to FX cash flow hedges are part in other comprehensive income till they are realized and settled. The FX losses of around INR 4 crores is due to this accounting effect of realization of cash flow hedges loss in the current quarter. However, going forward, we do not expect the same to have a material adverse impact on the company. Third specific reason is also an increase in our indirect material costs like oil, chemical, packing material due to inflationary pressure. As you're aware, war broke out during first quarter, and we all saw that. So this has increased our cost in quarter 1 by approximately INR 3 crores. However, the most significant impact is the raw material cost increase pending pass-through, as explained above, which will be normalized going forward. Now talking about our specific growth components. I'm happy to state that our primary product, which is cages, we are continuing to see good demand traction and uptake both in India and outside India. In India, this is driven by a good demand for cages from our customers whose offtake has increased matching with their own growth plans. This includes cages demand for facilities recently set up by our MNC customers in India. Over and above this, we are also seeing a good traction from other major Indian bearing players. We believe this reflects a continued strong growth in the Indian domestic market, aided by good industrial demand as well as demand from automobile sector. As part of this also -- a part of this also is attributable to increased global demand witnessed by our key bearing customers. We are also seeing a strong traction in export from India. Our export from India in quarter 1 FY '27 stood at INR 139 crores. We have reported almost 22% growth on Y-o-Y basis and 11% growth on quarter-over-quarter basis. We are also seeing a good growth in Europe, U.S. and all other key markets backed by continued increase in industrial demand in these geographies. Now talking of our key growth driver, first and foremost, sales of Bushing in quarter 1 stood at around INR 34 crores, reflecting almost 35% growth year-over-year basis. We have clearly or we have a strong visibility on this order and have a good pipeline. So fairly confident of achieving our targeted sales growth of pushing around 30% this year against last year's INR 127 crores. Equally encouraging is the stamping sales, which stood at around INR 19 crores in quarter 1 FY '27. So it's showing year-over-year basis about 31% growth, and we have quite a few products which are either developed or under development, specifically in the category of white goods things like AC compressor components and so on as well as railway seal inserts and other stamping, automotive stamping products, which we have been developing over the past few months, which gives us confidence that we should achieve about 30% growth this year as well and dispensing against the sales of INR 60 crores we achieved last year FY '26. We are also witnessing a strong demand uptake in the segment of large-size cages. Though quarter 1 sales appear to be lower at around 10 crores, we believe that the order book on hand and pipeline in this segment of this, we should achieve a good 50% growth in spite of first quarter numbers and current financial year over last year, we did about INR 49 crores. Talking of Japanese customer, our quarter 1 FY '27 sales stood at around INR 21 crores, showing about 25% year-over-year growth. However, on a full year basis, we expect only a modest 10% growth in sales of INR 72 crore in this segment given the fact that entire process of development and conversion is quite slow, but it is reassuring positive. Talking of our wholly owned subsidiary, Harsha Advantek, although quarter 1 sales at around INR 30 crores appears to show only a modest growth of 7% on Q-o-Q basis, we have a good visibility of sales increase progressively coming through every quarter. And our annual sales target in Advantek be in the region of about INR 140 crores plus this year against INR 43 crores achieved last year in FY '26. So as the scale of operations go up, we expect Advantek to be PAT positive by the end of current financial year FY '27. It has reported a loss of about INR 4 crores in first quarter FY '27. As you might be aware, we have already announced the CapEx plan in Advantek for the second phase of expansion, which is for basically expanding the capability in machines as well as stampings and large-size cages. Now turning to our foreign subsidiaries. First, talking about Harsha China, things are looking quite stable and satisfactory. We believe that Harsha China should report an overall growth of around 10% in current financial year as against sales of about INR 120 crores achieved in FY '26 with an EBITDA margin in the range of about 12% to 14% and a decent PAT range of around 6%. We have already commenced the implementation of brownfield expansion project in China after securing required debt funding at a very attractive rate. This expansion is focused on creating capabilities for our steel cages as best to expand the product portfolio as well as market reach in time. This project should be commissioned by quarter 3 of next financial year, and we should see a full impact from FY 2029 onwards. Lastly, talking about our aberration, which I hinted earlier, Harsha Romania continues to be negative territory, though it has reported a slight growth in top line. However, quarter 1 FY '27, there was a onetime foreign exchange loss of around INR 2 crores because of the adverse currency movement between the local currency and euro. Still the operating losses continue, but we are putting strong efforts in improving the product mix by pushing more cages, trying to get new customer and also reducing the cost. We have also made a strategic change in the top management by bringing in a CEO for our [indiscernible] subsidiary. While our endeavor will be to try and see that Russia-Romania achieves breakeven, we still feel there could be some losses in the current financial year. However, the combined loss between the two foreign subsidiaries should reduce to much lower single-digit figure, if not become fully positive. I will end my presentation with a reaffirmation that we are confident of continuing to grow strongly in India in the range of higher teens and also achieving a consolidated sales growth of low to medium teens, and we expect the bottom line to grow more strongly because of the combined impact of all the positive factors we have noted about. I would like to thank you for your continued confidence and support in Harsha, and I wish -- I think I'll ask Maulik to take us through his presentation and the numbers before we take some questions.

Thank you. Thank you, Vishal bhai. Hello, everyone, and good afternoon. For the quarter ended June '26, our Engineering business at consolidated level has achieved a top line of INR 421 crores against INR 382 crores in the immediate previous quarter and INR 349 crores in the same quarter last year. We have achieved consolidated EBITDA for Engineering business of INR 69.8 crores in the current quarter against INR 77 crores in the immediately previous quarter and INR 65.3 crores in the last year same quarter. We have witnessed a good demand across all revenue segments, while EBITDA margin having the impact on account of the material pass-through as well as exchange rate impact as discussed. In solar business, we have achieved revenue of INR 36.3 crores and positive EBITDA of INR 2.82 crores for the current quarter. Overall working capital cycle at consolidated level is around 116 days against 130 days in the previous quarter. The company has incurred a CapEx of INR 37 crores in quarter 1 at consolidated level. For the quarter 1 FY '27, our revenue from Bushing was around INR 34 crores, stamping INR 19 crores, LSC INR 10 crores and Japanese customers, INR 21 crores as already discussed. With this brief on the financial numbers, I request operator to take the Q&A from the participants one by one. Thank you.

[Operator Instructions] First question is from the line of Varun Jain from Dolat Capital.

Congratulations on a very strong growth numbers. So just on this, sir, I wanted to understand how this growth came, like which segments performed so well, where did we see a broad-based demand recovery in Europe? Or was it India? How did such great numbers come?

Yes. So it was more broad-based as we mentioned -- as I mentioned earlier, we see industrial demand overall strengthening and as well as European demand also recovering. So a combination of both those and we are -- and actually, the growth we are seeing across. So it is very encouraging in that sense.

Okay. And for FY '27, what kind of overall growth rate do we see? Like will 20% be possible with this momentum?

We are -- I think 20% is a very tough stretch. We definitely expect mid- to high-teen numbers in India and then low teens for FY '27 overall is our general expectation.

Okay, sir. And year-on-year, gross margins have fallen by 150 bps. So this RM increase is happening in which material? Like is it in steel, brass, polyamide and -- or is it mostly overheads?

So the raw material for specifically last quarter, it happened across material we use, brass, copper, zinc, steel as well as polyamide. So we are seeing that impact visible across all the material.

But last year, the major focus was on the higher metal prices on the brass front, which is a combination of copper and zinc. But yes, this year starting, we have witnessed that across the board, maybe part of the impact of the global conditions and scenarios.

But we should be through as this year.

Got it. And sir, on the foreign front, we grew well this quarter also. But still the margins for the EBITDA margins for the foreign business fell from 1.5% to 0.3% year-on-year, even though we grew revenues 20%. So why is the operating leverage not coming? And are we able to move from casting to cage, especially in Romania?

So we are working to do that, increasing more additional cages revenue. At the same time, there was a big impact of raw material prices continuing to increase and actually negating some of the improved -- I mean, improving situation on the revenue side.

And as Vishal mentioned in the initial speech, there is an impact in Romania on the exchange rate fluctuations between the Romania and local currency RON versus the borrowings we did in euro. So it's more of an accounting impact considering that majority operation in Romania is also backed by euro.

[Operator Instructions] Next question is from the line of Amit Anwani from PL Capital.

Congratulations for the good set of numbers. First question, sir, again, a follow-up on Romania. So you said probably collectively, the two subsidiaries will have lower losses. So what kind of loss we are building in for Romania? That is one. Second, you said there was a ForEx impact also this quarter. So even keeping aside the ForEx, how is the performance there in terms of volumes? Are we able to move with our objective from moving from semi-finished to the large cages? Are we really on track to improve that subsidiary or it remains still the status quo?

So on the overall operation, if we ignore the ForEx, I think we did not significantly improve. We did have a little bit of improvement. Again, I mentioned in the earlier answer, we also saw an adverse effect of increasing copper prices and that had some impact on the result. And on moving towards more cages, we are getting -- so we are working towards it. Right now, we don't have a significant numbers to show for it. However, we are seeing a pipeline in Romania improving towards cages. So that's what I think. And we have said that the lower single digit, maybe INR 2 crores, INR 3 crores, INR 4 crores range, combined losses could be there as against INR 10 crores we did last year.

Okay. But is it like the China will improve further and Romania will deteriorate further? Is it? Or what's the...

Both will. So both will improve. That means Romania losses run rate will reduce. China is continuously profitable. So offset. Let us see. We have to wait for a couple of quarters. If things improve much better, we may say that they will turn into positive, but it's a bit early. Wait for one, maybe two quarters, and we should be able to give you a much better picture.

Yes. And now sir, on the other businesses like bushing, stamp components, you talked about 30-plus percent growth. So is it the wallet share, new customer? And will this momentum is something which should continue? You have done a CapEx in the past in bushings and stamp components also. So just wanted to have a color whether this is something which will continue at this rate? And is it a wallet share increase, new business? Yes, that would help.

Yes. So on the bushing side, it's a conversion, which is supporting the growth. And we are not sure how long this will continue, but we expect at least a couple of years for this conversion effect to continue. Part of it always will be wallet share as well. And then on the stamping side, we are adding a lot of new products, which increases -- which is one of the reasons we are seeing growth there. And we have a very strong pipeline of new products coming in or have started but are will be matured over the next one year or so.

Right. And lastly, on the large cages, which the revenue was about INR 10 crores and kind of flattish still, we are talking about 30% growth. And I recollect we have been focusing to have a very strong growth from the large cages in the past as well. So just wanted to understand, is it a particular customer where -- or there has been a delays in offtake? What is the reason for Q1 coming so low and still you're confident of 30%. So what is happening in the large cages business?

So in the large size, Q1 was aberration, partially driven by the large size capacity at our new facility still struggling, still struggling to ramp up and respond to the demand. We see that demand is there. And that's why the optimism in spite of tough numbers for first quarter that we are fairly confident of even 13% plus I think. There's a good visibility. We have a nice order book pipeline that we can see. That's why.

In the large cage size.

Yes, yes. of course.

And sir, in the large cages, I understand it's a value-add business also, and we are at probably not a very high base. So is it that we're trying to add more customers in the large cages or trying to leverage as we probably were trying in Romania also earlier with the same customer. So what exactly can drive your large cage business in the upcoming quarters?

It's primarily we are trying to grab a bigger wallet share where we do have a very low wallet share when it comes to larger size cages with our customers. And we are trying to grab more of that. That is what in principle is happening. I think that's the driver and makes us feel confident that we can really achieve that.

Next question is from the line of Vaibhav Shah from Equirus Securities.

Congrats on a good set of numbers. I have only one question. So could you share update on how ongoing brownfield CapEx in China and recently announced HEIL Phase 2 CapEx is progressing? And what would be our CapEx guidance for FY '27 and FY '28?

On the China front, our Phase 2 CapEx, we already mentioned in our presentation, it is on the track, and we expect it to go live in the next year Q3 around. And that's where we are on the track and building commissions, building construction has already been coming and is ongoing. While on our Bhalya plant expansion, current season is -- in the current season, we have just hold the building construction, but we expect it to start in this month, and that is also on the track. And we expect our third building construction also to be completed by end of this year or maybe the last quarter of this year. And we will also start -- we have already started procuring the incremental machinery orders for the new building sites also.

Civil construction is on hold because of heavy rain, because Ahmedabad, as you know, Gujarat witnessed very, very heavy rain where it's difficult to do construction. But I think now things are normalizing, should start very soon.

And what is your guidance for CapEx for FY '27 and FY '28.

We will keep on adding the further guidelines. As of now, our focus is to complete the two major expansion, but we still expect in the range of INR 50 crores to INR 80 crores as a year-over-year CapEx, but we will give a better guidelines in the coming quarter.

Next question is from the line of Manish Goyal from Thinqwise Wealth Managers.

Congratulations on very good set of numbers, sir. Sir, on the guidance of for India Engineering, where we are referring to high teens growth. So just would like to know how much would be driven by volume growth and price increase? And related question as to what kind of price increase we have taken or we will take due to this commodity increase? That was the first question. Second question, within India Engineering business, if we were to exclude the bushing, stampings and large cages and Japanese customer, so the conventional cages business would -- can it still grow double digit or probably the numbers what I calculated it shows that it's probably 6%, 7% growth only. So if you can also give that perspective. Sir, there was a lot of echo in the call, so I could not get the Japanese-based customer revenue for the current quarter and the comparative quarter, if you can clarify on that as well. And I'll come back on a couple of more questions.

Yes, let me respond to you. The last question, the Japanese customer in the current quarter was INR 21 crores against the last year same quarter, INR 16.5 crores, okay? On your question about the raw material pass-through and the impact of that raw material on our top line. Usually, as we know, we have a pass-through around four months delay. And here, I will say, as we discussed in the call, the last year was major pass-through happens in the brass, while steel was a range bound, some impact there. And as we have mentioned in our commentary, six to eight days, this quarter of raw material price increase. So maybe around 40% to 50% would be the impact on the raw material side.

Okay. So that is basically 3% to 4% roughly we can expect price increase. So the guidance of high teens growth is factoring this price increase as well. That is what I wanted to clarify.

It accounts for it in a little bit, but not -- we are actually trying to focus on our volume growth.

And right now, I'm not trying to -- we are not trying to predict the value impact, but there could be some impact of that, as you rightly mentioned because of this.

Okay. Okay. And on the caging growth, sir, probably the traditional business what we have, how should we look at the growth for that piece of the business?

So we see that cage growth in India will continue to sustain on a variety of factors. Those factors include our natural growth of Indian economy as well as outsourcing opportunity we are seeing for supply from India to other countries and so on, plus I talked about our customers are already setting up plant to export outside India. So all those factors combined, we are expecting good growth in cage business in India as well. I think it should match the growth of the bearing industry in India. Plus whatever extra we take on the outsourcing. But at least 10% and in that there are about 10% even more actually.

Okay. And sir, what is the CapEx plan for FY '21 entire year, sir?

Current year FY '27, we already announced in the last investor call, our major expansion is coming into the Bhalya. And we expect -- and also in China Phase 2, put together, we expect both the major expansion and our regular CapEx would be in the range of around INR 180 crores to INR 200 crores.

Two years. 1.5 years.

1.5 to 2 years.

Sorry, INR 180 crores to INR 200 crores over two years?

This year and next year. So maybe around INR 50 crores to INR 80 crores this year, remaining next year.

Sure, sir. And sir, in the annual report, we have mentioned about basically that we continue to strengthen capabilities in areas such as wind energy, gearbox, specialized railway applications, aerospace and electric mobility solutions. So maybe if you can a bit elaborate and provide us perspective what are we referring to on this? And second point also within annual report that we see very strong long-term growth by stronger strategic collaborations and carefully evaluating inorganic growth opportunities. So maybe if you can just provide us perspective as to in what context we are seeing this.

So let me start with your first point about wind, rail and aerospace. Aerospace, of course. So within wind, we are approaching it with a multiple perspective. One, we are present in Bushing and we are working to -- I think there is a lot of typing noise. Is it possible to kind of mute that?

Sir, there is a lot of echo from your side. Very difficult to hear you, sir.

Yes, looks like some challenges at our end today.

I'll mute myself, sir.

Sure. Thank you. Appreciate that. Right. So I was talking about on the wind side, we are working on bushing and actually next step of Bushing, within Bushing, we are moving -- we are trying to move to a different set of technology and working with our -- closely with our customer on a variety of upgrades to that. Also on the cage side, we are getting ready to cater to that segment and whatever it pertains in terms of size capability, in terms of geometrical dimensional capability, we are working towards that. So that's what is happening in wind. Similarly, on the rail side, we are working with our primarily either bearing companies or directly a few other companies where we are supplying stamping components for the rail industry. In addition to the cages where also we are working to develop more products, which can cater to the railway market. So those are the things going on in wind and rail. Similarly, in aerospace, defense, we are doing a lot of stamping components, which cater to that industry. And we are working with Tier 1, Tier 2 defense companies in India for those product development. So they are in a very developmental stage where we are taking those and it's a portfolio. So once they start, they could bring in a decent set of revenue. Jumping to the inorganic topic you had requested or what you looked at in our annual report. Basically, we are looking at any opportunity which comes our way, which can really enhance our capability while remaining in that specific space of precision engineering. And we are looking at those as an opportunity if something comes across, but that's not really a mandate. That's not something we are saying that we will go towards that. If right opportunity comes by, we may evaluate and look at it, and that's what we are trying to say.

Sure. And one more thing was mentioned about EV-related products on the -- I think on mobility, we are trying to service that through stamping, sir?

Through a little bit of stamping, but also a whole lot through bearing cables, working with our customers on improving the performance of bearing whatever can be contributed through cages in terms of clean product, dirt-free product or high-performance product and so on.

Next question is from the line of Uttam Purohit from VVD Asset Management.

Congratulations for the great set of numbers. My question is on the Advantek side. So if you could just share what kind of EBITDA margins Advantek did this quarter and what kind of -- because we are planning to close Advantek on PAT positive, what would be the EBITDA figure for the whole year for Advantek?

Logically, Advantek will return lower EBITDA than our blended EBITDA for India business in this year, considering it is in the ramp-up phase. But we expect it to match our India EBITDA margin from next year onwards. Currently, the last quarter, obviously, because of the major impacts we already discussed on the material pass-through and others, it has 9% EBITDA.

Great. And if I look at our stand-alone engineering business, it did quite well even after all the pressures from metals and everything. So if you could just like I think it did a margin of around 24%. So if looking at the price hikes we are going to do, can we look at a better margins going forward?