IPO Size: Rs. 755 cr 

• Rs.455 cr is fresh issue for debt repayment (Rs. 270 cr), capex (Rs. 78 cr)
• Rs.300 cr is offer for sale (OFS) by promoters (99.7% to drop to 74.6% post listing)

Price band: Rs. 314-330 per share

M cap: Rs. 3,004 cr, implying 25% dilution

IPO Date: Wed 14^th Sep to Fri 16^th Sep 2022, Listing Mon 26^th Sep 2022

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

Precision Bearing Cage Maker

Harsha Engineers makes precision bearing cages (1 of the 4 components used to make bearings) in brass, steel and polyamide, commanding 50% market share of the organized bearing cage market in India and ~6.5% market share globally, serving all the top 6 global bearing makers like Schaeffler, JTEKT, SKF, Timken among others. It derives 2/3rd of Rs. 1,300 cr revenue from exports (including 35% from Europe and 13% from China). It has capacity to manufacture 1,100 million bearing cages per annum (mainly at 2 plants in Gujarat) and 4,600 MTPA castings in Romania (accounting for 15-18% of revenue).

Strong Financials

Revenue grew at 9% CAGR between FY19-22, with EBITDA CAGR higher at 11%. For FY22, capacity utilization stood at 62%, with EBITDA of Rs. 186 cr, leading to 14.1% margin on revenue of Rs. 1,321 cr. PAT for FY22 stood at Rs. 91 cr, leading to EPS of Rs. 11.9 and 7% net margin. With 17% RoE for FY22, company’s present net debt to equity ratio of 0.65:1 will decline to 0.07:1 post IPO, as equity expands to Rs. 91 cr (from Rs. 77 cr) and Rs. 270 cr of total debt of Rs. 378 cr is repaid.

Attractive Pricing

On FY23E EPS of about Rs. 14, IPO is priced at a PE multiple of 23.5x on current year earnings, which is attractive, since bearing makers like Schaeffler and SKF, although with higher EBITDA margins of 16-18% over 14% for Harsha, are ruling at rich multiples of over 45x. Another bearing component maker Rolex Rings, manufacturing bearing rings and clocking 20%+ EBITDA margin, is also trading at a PE of 29x. Thus, although Harsha’ margins are slightly lower than some of the closest comparables, IPO pricing has left money on the table.