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Harsha Engineers International (HARSHA IN) - Q4FY23 Result Update - Revival in margins
Better product mix, lower commodity costs & reduced losses in Romania drive margin expansion. Healthy order book for Bronze Bushes; revival expected in H2FY4.
We revise our FY24/25E EPS estimates by +6.1%/+8.0% to factor in Romania & China’s improving profitability over the medium to long term, but downgrade the rating to ‘Accumulate’ from Buy with a TP of Rs475 (Rs439 earlier) valuing it at 22x on FY25E EPS (same as earlier) given the recent run-up in the stock price. Harsha Engineers International (HARSHA) reported a 6.8% YoY decline in revenue, while EBITDA margin expanded by 172bps YoY due to falling material costs. The presently weak bronze bushes market should recover in H2FY24, while we expect margins in China and Romania to significantly improve this year. The company has multiple levers for future growth, including i) bearing cage outsourcing, ii) significant capex by global bearing players in India, iii) opportunity in large-size cages, iv) wallet share gains in Japan, and v) long-term demand for wind bronze bushes.
We remain positive on HARSHA given 1) market leadership in bearing cages, 2) strong wallet share with leading bearing players, 3) multiple levers for long-term growth, and 4) expected improvement in operations in Romania. We estimate FY23-25E Revenue/EBITDA/PAT CAGR of 13.3%/22.4%/26.3%. The stock is currently trading at a PE of 25.5x/20.2x FY24/25E. Downgrade to ‘Accumulate’.
Revenue declines but margins improve: Consolidated revenue fell 6.8% YoY to Rs3.4bn (PL estimate of Rs3.1bn) due to pass-through of falling commodity prices and a weak demand environment in Europe. Gross margin expanded by 284bps YoY to 46.6%, owing to a better product mix and lower material costs. EBITDA grew 5.5% YoY to Rs508mn (PL estimate of Rs448mn), with EBITDA margin increasing by 172bps to 14.8%, on account of lower other expenses (down 397bps YoY as a % of sales), despite employee costs rising 63.5% YoY (up 509bps YoY as a % of sales). PAT rose 8.7% YoY to Rs326mn, (PL estimate of Rs275mn) aided by healthy profitability in India and considerable reduction in losses in Romania.
Engineering margins increase while Solar EPC segment lags: Consolidated Engineering revenue dipped 2.5% YoY to Rs3.2bn, India Engineering revenue fell 4.8% YoY to Rs2.3bn, and Solar EPC revenue slid 46.9% YoY to Rs189mn. In terms of EBITDA margins (including other income), Consolidated Engineering came in at 17.4% (+106bps YoY), India Engineering at 24.6% (+161bps YoY), and Solar EPC at 0.8% (-78bps YoY).