Happy Forgings IPO Opens On December 19 | NDTV Profit
Happy Forgings announced that its initial share sale will open for public subscription on Dec 19. Sajeet Manghat speaks to the management to know more about the IPO.
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00:00 Hello and welcome to NDTV Profit. You are watching IPO Adda and the company in today's
00:04 IPO Adda is Happy Forging Limited. It is one of the leading players in the forging segment
00:10 in the country. The company is coming out with an IPO which opens on December 19th and
00:16 closes on December 21st. Price between 808 and 850 per share. The IPO consists of a fresh
00:23 issue of 400 crores and OFS of 608 crores. So total of over 1000 crores the size of the
00:31 IPO and joining me today is Ashish Garg who is the managing director of the company. Ashish
00:36 thank you very much for joining us on NDTV Profit. My first question to you is with respect
00:41 to the fresh issue of 400 odd crores that you are raising from the market. Where are
00:46 you going to deploy these funds? So the major use of the funds you know will be for the
00:57 expansion purposes and the proceeds will also be used for the repayment of the debts and
01:03 for general corporate purposes. Give me a sense of Ashish the kind of operation scale
01:09 that you work on, how many factories are there and what kind of capex requirement is needed
01:14 for you? So today we have three plants spread across 74 acres in Ludhiana. All three plants
01:24 are in Ludhiana and today the total block is around 1200 crores. Almost 500 crores of
01:31 capex is done in the last four years. So company requires, it's a capital intensive business
01:36 and we require to do regular capex and company is in a mode we are seeing a lot of strong
01:42 tailwinds and company will maintain this trajectory going forward as well. Can you just maybe
01:50 briefly touch upon the kind of tailwinds that your company is facing as of today because
01:55 as you said around 500 crores of capex you have undertaken in the last four years or
02:01 five years. What kind of tailwinds are you seeing, where is the demand coming from, which
02:05 segments are the ones which are growing very fast which require you to constantly put a
02:10 capex? So company has consistently grown in the last 10 years. So if you look at, you
02:16 know, we have grown at a cargo of 18% in the last 10 years and in terms of top line, that
02:22 is despite of COVID and going forward we feel that, you know, company will be able to maintain
02:28 a better trajectory and growth with the primary fundraising company in the company. We will
02:34 be accelerating our growth going forward as well. So capex that company will be seeing
02:39 because company is looking at a very strong cash accruals going forward as well. So definitely
02:43 we will be deploying around 900 crores in capex in the next three years. Can you give
02:50 us a sense of the tailwinds which are there, means which sectors are you seeing a lot of
02:55 demand coming from because you are primarily into commercial farm equipment of highways
03:00 and industrials? So currently we operate into all four sectors, but on industrial space
03:10 we see a very strong growth coming in. The business which was 3.7% of our revenue last
03:15 year has grown almost 14% in H1 of this financial year. So going forward we see industrial sector
03:21 to accelerate and grow at a faster pace than the other sectors, probably hit a 20% level,
03:27 you know, for us in next financial year. And we see a major set of growth coming in from
03:32 Europe for us and we have added almost 30 large clients in the last couple of years.
03:39 In the last five years we have added 36 large clients across the sectors out of which 24
03:44 industrial clients are added in the last six years which are in a phase where we are ramping
03:48 up with all these customers. So we see this industrial sector doing well for us going
03:53 forward. Even on the commercial vehicle space we have added some large client base within
04:00 India and even in farm equipment sector we have added few more names in customers. So
04:05 we see even these sectors doing well for us going forward.
04:10 You know you spoke about the fact that how industrials are going to be a large portion
04:14 of your revenues going forward. Where is this, what kind of activity or production that you
04:22 do for the industrial segment, what kind of equipment do you manufacture for this segment
04:26 and as you said that in European markets and other global markets are the ones which are
04:31 you know seeing quite a few demand for you. Can you give an elaboration on you know the
04:37 kind of work you do and as we speak today and maybe going forward will the business
04:44 make change for you in that way?
04:49 So for us within industrial sector we supply to windmill, wind power, we supply to oil
04:57 and gas railways and in the wind sector especially for wind turbine, gear boxes we are seeing
05:05 a very strong traction, very strong growth in this sector and so majorly we have customers
05:13 like Bonfiglioli, Lieber, Comer which are in this field and we will be growing this
05:19 business going forward especially in the wind turbine sector.
05:23 You know that is interesting because you know renewable is having a big play as we speak.
05:31 Do you see a good opportunity in the Indian market also for the industrial segment?
05:40 Some of these large clients they also have their factories and investments within India.
05:45 So we are suppliers to their Indian locations as well and we are also exporting to their
05:51 facilities in Europe. So basically we started our 14,000 ton press line in last financial
05:57 year which is the second largest line in the country where we are able to forge components
06:02 up to 250 kg. So we have expanded our range from 90 kg to 250 kg and the heavy sector,
06:09 heavy range of products that we are forging on our 14,000 ton press line are towards the
06:14 industrial sector which includes the wind turbine sector as well.
06:20 Give me a sense of how your balance sheet is geared towards this CAPEX program because
06:24 you are raising fresh capital as well. How big is your balance sheet and as you said
06:29 that you know you have a good CAPEX requirement over the next 3 to 4 years. So is your balance
06:37 sheet generating enough cash to take care of it?
06:44 So despite of being in a capital intensive business where asset terms are fairly low,
06:49 today we work at a debt equity of 0.22 which is best in the industry and despite of doing
06:56 the CAPEX of almost, despite of doubling our block in the last 4 years, we stand at a balance
07:03 sheet which is very light at the moment and you know we are at 0.22 debt equity and going
07:10 forward as well we are looking at rich cash accruals, 80% of that is deployable in the
07:17 CAPEX and with the primary fundraising coming in the company, we are looking at a very strong
07:23 cash accrual going forward out of which 75 to 80% will be deployed towards CAPEX. So
07:29 even with the type of CAPEX we are seeing going forward, we feel that the debt equity
07:34 levels will stay range bound.
07:39 Give me a sense, you know you are dependent on your top 10 customers, nearly 71% of that
07:44 of your revenues are coming from the top 10. How do you bring down that dependency on the
07:48 top 10 customers?
07:55 So for us we are not into a sector specific business and like many auto component companies
08:00 we have not grown with one godfather. So it is fairly diversified even today and we have
08:06 you know 70% of the revenues coming from 10 large clients. Going forward we see the client
08:13 concentration will get reduced. This was 80% last year in FY22 and it was 70% in FY23 and
08:21 going forward we are seeing around 65-67 in FY24 and we see that it will be around 60%
08:29 in next financial year. So it is going to you know in terms of concentration it is going
08:33 to get reduced going forward.
08:37 Can you give us a mix up?
08:38 Within the same clients we have also started, but between the same clients we have also
08:47 started exports to some of our clients facilities and so basically in terms of we have added
08:54 more and more locations even though the number of clients, the top 10 clients still holds
08:59 a large position, but we have started exporting to their multiple plants now.
09:06 Can you give us a break out of this top 10 clients in terms of the sectors they are in
09:09 maybe commercial vehicles, farm equipment, industrials or off highways?
09:18 So for us our top client is Shokliland that is a commercial vehicle client. Second largest
09:25 client is JCB that is for earth moving sector and then we have Dana where we supply for
09:31 off highway sector and then we have a lot of clients in a range of 3-5% spread across
09:38 commercial vehicles, farm as well as off highway customer range.
09:43 You know I see from your RHP that you have nearly 48 Indian customers which account for
09:49 90% and with now industrial growing going forward and you are going to export more of
09:57 that. Do you see the concentration of the Indian clients coming down and more of an
10:01 export led growth coming in for you?
10:08 Yes, so exports in terms of exports we have grown almost 6x, exports in FY21 was almost
10:16 60 crores which will be around close to 300 crores in this financial year. We have already
10:21 clocked 21% direct exports revenue in H1 and 11% as indirect exports. So going forward
10:28 we see exports sector to grow. So the businesses which are in pipeline today around 700 crores
10:33 of annual business which is in pipeline, 60% of that business comes from exports. So exports
10:39 is definitely going to grow going forward for us.
10:41 So you are saying your order book is around 700 crores, is that the thing or the total
10:47 domestic and international order book?
10:49 In addition to what we, so 700 crores in addition to what we are going to do this year is what
10:58 I am discussing. So we have already done 676 crores of revenue in the first half and so
11:09 in terms you see the additional incremental order book that we see is close to 700 crores.
11:16 Give me a sense of how do you book orders Ashish in the sense are they short term orders
11:23 or is a long term order that you get from this client because your clients are across
11:28 verticals?
11:33 These are very long term businesses is a very clear barrier to enter in the business because
11:39 the testing and the gestation period is too long. So normally when the customer floats
11:43 an inquiry and once the business starts, once the development process starts it typically
11:48 takes around 3 years to actually onboard the client and start the ramp up process. So customer
11:53 has to spend a lot of money on R&D and testing. So basically initial 3 to 4 years goes in
12:01 you know testing phase. So the ramp up activity typically starts from 4th year and the peak
12:06 revenue from these customers normally we see in 8 to 10 years scenario. So if you typically
12:10 see our top 10 customers the relationship is between 11 to 21 years old and it is growing
12:18 as well and the business is also growing with them. So it is very large contracts typically
12:24 based on the production levels and a fixed share of business.
12:28 And you are part of the R&D of many of the clients and so you know you are the preferred
12:34 partner once they go into production right?
12:41 Yes we are a major source in certain areas we are also single source to some of these
12:46 clients and a lot of the R&D and lot of new developments we have seen a fastest migration
12:53 in India from BS3 to BS6. Now we are talking about hydrogen fuel, hydrogen combustion engines,
13:00 flex fuels. So definitely the new developments which are going on we are part of it.
13:06 And these segments are going to be a future drivers for you going forward? Maybe not now
13:10 maybe 3 years down the line as companies go for commercial production of hydrogen fuel
13:15 engines or flex fuel engines?
13:21 Yes so you know if you see our sector our domain it typically requires a long testing
13:27 period as already explained. So we are already there so if it happens even by 2030 or even
13:35 later we are already there our products are already in testing with these clients.
13:40 Give me a sense of the kind of outstanding borrowing that you have you are planning to
13:44 pay off some of the borrowings once you pay off the borrowings what is the kind of debt
13:49 that will be there on the books both short term and long term?
13:58 So we currently have total outstanding of 250 crores on H1 of this financial year and
14:06 out of which if you see we have a long term debt which is relatively a very small portion
14:14 around 25 crores. So basically the money that will be raised out of which 150 crores will
14:21 be used towards working capital limit. And in terms of the business today the payables
14:30 for us because company enjoys a very strong reputation with steel mills and the payables
14:36 are around 20-25 days and we can also utilize to have a better purchase on steel prices.
14:46 But you know I am seeing that your trade cycle trade receivables are around 300 odd crores
14:53 or 323 crores in the H1 and the credit cycle is around 83 days. So is there an attempt
15:00 to bring it down further? It is a typical cycle in our industry. In
15:08 fact if you compare with some of our peers it is best in the industry today because for
15:13 exports is around 100-110 days whereas for domestic it is between 60-90 days. So I think
15:20 it will be range bound it is not much we can do on it but it is one of the best today amongst
15:25 the peers. But since a large portion of it.
15:27 We are not currently discounting any bills. Okay. Go on.
15:33 We can anyways discount the bills anytime that we want but the type of finance cost
15:39 that we have the discounting is expensive. So currently we do not see any need for any
15:44 discounting of these bills. But if we want we can liquidate this anytime because we are
15:49 suppliers to OEMs so we can discount these bills anytime.
15:54 My reason to ask you this question was that nearly 90% is coming from domestic customers
16:01 and around 10% from international customers. So and you said that credit cycle is between
16:07 60-70 days for domestic and you are on a higher end of 83 or 86 days in the H1. So is there
16:20 an attempt to reduce it because the more the higher the credit cycle you will have to keep
16:25 a higher working capital requirement. Actually in terms of working capital I think
16:35 we will not be able to do much because it is a cycle which is kind of pre-decided by
16:40 our customers and but currently where we work today is one of the best in the industries.
16:47 So we are already at a much better level because on exports it is around 100-110 days.
16:56 Ashish can you take us through the kind of growth that you expect across some of the
17:02 key players because since you are the suppliers to the OEMs, commercial vehicles and farm
17:08 equipments. We have seen a recent jump in commercial vehicles and farm equipments have
17:15 been quite in the first half and people are expecting a flat growth in this year. So can
17:21 you give us some perspective from an industry point of view because you are watching the
17:27 players very closely because they are putting in demand for equipments. So can you give
17:33 us shed some light on the kind of growth that you see in these two segments.
17:41 Since you are right farm equipment is down this year and so it is expected to grow next
17:49 year in single digit. Commercial vehicle we are seeing double digit growth this financial
17:57 year and I think definitely going forward as well this growth will continue because
18:03 there is lot of trucks which are being used towards tipper and mining application and
18:09 we are seeing a very strong trend in construction in the domestic sector and JCB one of our
18:17 large clients in construction business is actually doing very well and we are seeing
18:21 a strong traction coming from the construction side. So I think going forward these sectors
18:28 will keep on performing well. In the farm definitely there is a dip but it is something
18:34 that we see that will get recovered in next financial year.
18:38 Do you see enough indications coming from companies that next year could be a better
18:44 one for farm equipments? So sir I am hoping that things will be better
18:51 because the pipeline stocks which OEMs are carrying at this point of time is low and
18:59 so the production figures were less in the last few months and OEMs are getting rid of
19:05 the stocks in production. So hopefully from January onwards we should see a good traction
19:09 going forward. Ashish give me a sense of what is the kind
19:12 of inventories that normally companies keep especially for commercial vehicles and farm
19:16 equipments when the going is good in terms of good growth coming in what is the number
19:21 of days or inventories that they keep normally? So typically OEMs they work on jet they do
19:32 not keep too much inventory within the plants but they invoice it to the retailers and the
19:40 dealers normally carry these inventories and so good part is that even in the commercial
19:47 vehicle sector we have seen OEMs making money and the discounts are removed in the markets
19:54 which shows that the effective sales are happening down the line because for several years we
20:02 have seen major OEMs in commercial vehicle sector selling at large discounts. So at a
20:09 moment these discounts are reduced in the markets which shows that the effective sales
20:15 are happening through these dealers. That is a good sign I guess and that is also
20:21 helps companies like you. That is a good sign.
20:25 You know just a final question on the CAPEX part of it you know you said you are embarking
20:30 on a CAPEX and the fresh funds are going to be used for CAPEX. By when do you expect this
20:35 CAPEX to be completed and what kind of capacity will it add to your overall capacity?
20:44 So we are in a phase where we are regularly adding CAPEX even this year around 250 crores
20:49 of CAPEX is planned for next year CAPEX is around 350 crores and typically we are adding
20:56 15 to 20 percent every year in terms of forging and machining capacities and seeing the businesses
21:02 which are in pipeline and seeing the businesses which are coming I think this growth trajectory
21:08 will be maintained going forward as well so which will require this CAPEX going forward
21:12 as well. Okay.
21:14 So on a long steady basis around 15 to 20 percent forging and machining capacities will
21:19 get added every year. Okay. Ashish it was a pleasure talking to you
21:23 today. Thank you very much for joining us on NDTV Profit. Your IPO is opening on December
21:27 19th and closes on 21st with a price band of 808 to 850 rupees per share. Thank you
21:35 for joining us on NDTV Profit today.
21:36 Thank you.
21:37 Thank you.
21:38 Thank you.
21:39 (dramatic music)