PL Stock Report: Harsha Engineers International (HARSHA IN) - Q1FY24 Result Update - Muted result; foreign subsidiaries underperform - Accumulate

Harsha Engineers International (HARSHA IN) - Amit Anwani - Research Analyst, Prabhudas Lilladher Pvt Ltd

Rating: ACCUMULATE | CMP: Rs432 | TP: Rs474

Q1FY24 Result Update - Muted result; foreign subsidiaries underperform

Quick Pointers:

♦ Traction remains strong in large-size bearing cages and business with Japanese customers, which grew ~19% and ~20% QoQ respectively.

♦ Sequential decline in India Engineering EBITDA margin due higher raw material costs, wage hikes and increased power costs.

We revise our FY24E EPS estimate by -2.2% to factor in losses in China & Romania and one-off expenses incurred. Harsha Engineers International (HARSHA) reported a 12.5% YoY fall in revenue owing to weak demand in Europe and China, with EBITDA margin declining by 43bps YoY due to higher operating costs. Bronze bushes market saw early signs of revival and should perform well from H2 onwards. Romania & China operations should also recover in H2. The Indian market remains robust, driven by a healthy opportunity in Railways and rising capex by bearing players due to China+1.

We remain positive on HARSHA given its 1) market leadership in bearing cages, 2) strong wallet share with leading bearing players, 3) expected turnaround in Romania, and 4) multiple levers for long-term growth viz. i) bearing cage outsourcing, ii) significant capex by global bearing customers in India, iii) growing opportunity in large-size cages, iv) Japan wallet share gains, and v) long-term demand for bronze bushes. We estimate FY23-25E Revenue/EBITDA/PAT CAGR of 12.7%/21.8%/26.1%. The stock is currently trading at a PE of 25.9x/20.1x FY24/25E. We maintain ‘Accumulate’ rating with a TP of Rs474 (Rs475 earlier), valuing it at 22x on FY25E EPS (same as earlier).

Soft quarterly performance as revenue and margins fall: Consolidated revenue fell 12.5% YoY to Rs3.5bn (PL estimate of Rs3.7bn), owing to weak demand in Europe and China. Gross margin expanded by 348bps YoY to 44.8% in Q1FY24 (vs 41.3% in Q1FY23), despite a Rs24mn exchange rate loss incurred upon consolidating foreign subsidiaries. EBITDA fell 15.5% YoY to Rs418mn (PL estimate of Rs551mn), with EBITDA margin declining by 43bps to 12.0% in Q1FY24 (vs 12.5% in Q1FY23), on account of higher employee costs (due to wage hikes) and other expenses (higher power costs), up 191bps and 201bps YoY respectively as a % of sales. PAT slid 20.3% YoY to Rs246mn, (PL estimate of Rs365mn), due to sizeable losses in foreign subsidiaries (Rs51mn loss) and Solar EPC business (Rs24mn loss), higher effective tax rate (+125bps YoY), and lower other income (down 35.5% YoY to Rs40mn, given Rs36mn loss on exchange rate fluctuation).

Healthy profitability in India Engineering, dragged down by subsidiaries: Consolidated Engineering revenue fell 7.7% YoY to Rs3.3bn, India Engineering fell 11.1% YoY to Rs2.4bn, International (Romania & China) Engineering rose 2.7% YoY to Rs918mn, and Solar EPC slumped 56.6% YoY to Rs170mn. In terms of EBITDA margins (including other income), Consolidated Engineering came in at 14.7% (-67bps YoY), India Engineering at 20.8% (+217bps YoY), International Engineering at -1.2% (vs +5.6% in Q1FY23), and Solar EPC at -17.2% (vs +1.3% in Q1FY23). India Engineering saw PAT growth of 6.5% YoY to Rs321mn.

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