IPO Size: Rs. 1,009 cr

• Fresh issue of Rs. 400 cr for purchase of machinery (Rs. 187 cr) and debt repayment (Rs. 153 cr, of total Rs. 259 cr)
• Offer for sale (OFS) of Rs. 609 cr by the promoters (88% to drop to 79%) and PE Fund India Business Excellence (12% to 9%)

Price band: Rs. 808-850 per share

M cap: Rs. 8,008 cr, implying 13% dilution

IPO Date: Tue 19^th Dec to Thu 21^st Dec 2023, Listing Wed 27^th Dec 2023

Grey Market Premium (GMP): We are strongly against ‘grey market premium’ as it is an unofficial figure, against SEBI guidelines.

High-End Machined Components Manufacturer

Happy Forgings is India’s 4th largest (in terms of forging capacity) engineering led manufacturer of complex and safety critical, heavy forged and high precision machined components. It manufactures crankshafts, front axle beams, steering knuckles, differential cases, transmission parts, pinion shafts, suspension products and valve bodies for automobile sector (heavy commercial vehicles - HCV) and non-automobile sector (farm equipment, off highway vehicles, industrial equipment for oil and gas, power generation, railways, wind turbine). Company is India’s leading crankshaft maker, having the 2^nd largest production capacity for CV and high horse-power industrial crankshafts.

Topline Doubled between FY21-23

In line with the growth of domestic HCV industry, company’s revenue grew at 43% CAGR between FY21-23, to Rs. 1,197 cr in FY23. This growth was equally split between volume and price realization. Present revenue mix comprises 43% HCV, 37% farm equipment, 16% off-highway and 4% industrial.

Highest Operating Margin among Peers

Company has vertically integrated operations in Ludhiana (Punjab) and makes components that are both margin accretive and value additive. Share of higher-margin machined components (as against forged products) has also increased to 84% of revenue, from 73% in FY21. This is duly reflected in company’s gross margin of 54% and EBITDA margin of 29%, much higher than peers Craftsman, Ramkrishna and MM Forgings’ 20-22% EBITDA margin.

On FY23 PAT of Rs. 209 cr, Happy Forgings clocked net margin of 17.4%, with an EPS of Rs. 23. For H1FY24, PAT rose to Rs. 119 cr, with net margin and EPS expanding to 17.7% and Rs. 13 respectively. Post IPO, debt equity ratio will reduce from 0.23:1 to barely 0.06:1.

Healthy Growth Visibility

As of 30.9.23, Happy Forgings had net fixed assets of Rs. 700 cr (up 1.5x from Rs. 450 cr, eighteen months ago), with capital work in progress of Rs. 101 cr. Additionally, it is looking to add machinery worth Rs. 187 cr in FY25E, from fresh issue proceeds. Applying a fixed asset turnover ratio of 1.75x, incremental capacity from both of the above can contribute about Rs. 450-500 cr additional revenue, post FY25E. It also plans to diversify into light-weight aluminum forged and machined components, as also, new products for electric passenger vehicles, providing healthy growth outlook.

Valued at Discount to Peers

Based on annualized H1FY24 EPS of Rs. 26.5, shares are being offered at a PE multiple of 32x, on current year basis, which is inexpensive, compared to peers Craftsman (31x) and Ramkrishna Forging (38x). Company’s high double digit margin and 80% exposure to domestic market, which is witnessing robust HCV and overall demand on Government’s infrastructure push, are key attractions.