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The maiden public issue of Harsha Engineers International continued to attract a healthy premium in the grey market as it opened for subscription on Wednesday, September 14, the first day of bidding.
The shares traded at more than 60 percent premium in the grey market, analysts said.
Generally, investors look at the grey market premium to get an idea of the expected listing price of a particular initial public offering (IPO). Such trading starts after the company announces the price band and continues till the actual listing of the shares on the bourses.
Notably, the public issue was fully subscribed on its first day of bidding, indicating good demand from all classes of investors.
Harsha Engineers aims to raise Rs 755 crore through its public issue, of which Rs 455 crore will be utilised by the company and the rest will go to promoters who are the selling shareholders. The price band is Rs 314-330 per share.
The proposed reduction of debt via IPO proceeds, a focus on the electrical vehicle segment, strong financials, healthy market share in the precision bearing cages segment, a growing trend of outsourcing by global bearings manufacturers and strong relationship with major bearings producer seem to be key reasons for the robust demand, said analysts, who have given the issue a ‘subscribe’ rating.
Harsha Engineering is one of the largest manufacturers of bearings cage globally, competing with Japan’s NKC and China’s Golden Cage, according to its draft red herring prospectus (DRHP).
It develops cages for all bearings categories across steel, brass and polyamide materials. The company commands a 50-60 percent market share in India and 6.5 percent globally.
Also read - Harsha Engineers IPO opens: 10 things to know about the issue
As per the DRHP, the domestic bearings cage market was valued at $272 million in FY22 and is expected to post a compound annual growth rate of 8.3 percent to $516 million, in line with the bearings industry. It will be driven by increased outsourcing of bearings components, a rise in content per vehicle with premiumisation of high-precision bearings with a higher volume of brass and polyamide bearings, and localisation.
“Harsha is the only domestic firm that has the expertise to design and develop advanced tooling in-house, which enables it to manufacture precision bearings cages and complex, specialised precision-stamped components across segments. Further, global bearings companies have steadily increased outsourcing for manufacturing of bearings cages where Harsha stands to benefit due to the lower cost of production than its global peers,” analysts at Elara Capital said.
Further, Harsha has a strong relationship with major bearings producers and has been getting incremental orders for new products, such as bronze bushings, stamping components and sand casting. At the upper of the price band of Rs 330, the company is trading at 27.7 times FY22 earnings per share of Rs 11.90. Analysts at Elara believe the issue is priced attractively and hence they have a ‘subscribe’ rating.
Harsha Engineers recorded revenue from operations of Rs 1,322 crore, growing at a CAGR of 22 percent during FY20-FY22, and profit in the same period grew at a 105 percent CAGR to Rs 92 crore.
The company had an average EBITDA (earnings before interest, tax, depreciation and amortisation) margin of 12.1 percent and a return on equity of 11.4 percent during FY20-22. The margin can be expected to improve due to product expansion, debottlenecking, increasing capacity utilisation (63 percent currently) and reduction in commodity prices in the future, analyst at Geojit Securities said.
As of FY22, Harsha Engineers had a debt-to-equity ratio of 0.7 and debt repayments of Rs 270 crore from IPO proceeds will make this negligible.
“Harsha Engineers will not be impacted by the automotive segment’s shift towards electric vehicles as they are not manufacturing needle bearings cages, which are engine components, while the electric vehicle shift will increase the precision requirements sought by customers, which will help companies like Harsha to further improve their market share,” said analyst at Geojit, who also believe the issue appears reasonably priced compared to peers.
Considering its strong financials and market share, the China-plus-one strategy by major economies and growing outsourcing trend, Geojit analyst assigned the issue a ‘subscribe’ rating on a medium- to long-term basis.
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