IPO: Happy Forgings

Happy Forgings, a forged components manufacturing company, is coming out with its IPO (initial public offering) on December 19, 2023. Here's a breakdown of the company's strengths, weaknesses, and growth prospects to help investors make an informed decision.

In a nutshell

• Quality: Its three-year average ROE and ROCE are 17.5 and 19.9 per cent, respectively.
  
• Growth: Its revenue and PAT grew annually by 43 and 55 per cent, respectively, between FY21 and FY23.
  
• Valuation: The stock is valued at a P/E and P/B of 37.8 and 5.3 times, compared to its peers' median and average of 58.9 and 8.5 times.
  
• Overview: Growth of the automotive and infra industries should help it scale up. In addition, the China +1 policy should provide new opportunities. However, the high competitive intensity of the forging industry poses a threat. Also, its business is highly cyclical and sensitive to macro factors.

About Happy Forgings

Incorporated in 1979, Happy Forgings is a leading heavy forgings and high-precision machined components manufacturer. It is the fourth-largest player in its segment by manufacturing capacity (as of FY23). It has four revenue verticals:

• Automotive (43.7 per cent of FY23 revenue)
  
• Farm equipment (36.8 per cent)
  
• Off-highway vehicles (15.9 per cent)
  
• Industrials (3.7 per cent)

Strengths of Happy Forgings

• Long-standing relationships with clients. Its efforts to adhere to strict quality standards have helped it retain top clients. As of September 30, 2023, its top 10 customers have remained with the company for at least 10 years.
  
• Its top clients include reputed auto manufacturers, such as Ashok Leyland, JCB India, Mahindra & Mahindra, etc.

Weaknesses of Happy Forgings

• Revenue concentration. Its top ten clients accounted for around 70 per cent of FY23 revenue. Additionally, its largest client accounted for nearly 15 per cent of FY23 revenue.
  
• Lack of bargaining power. It sources most of its raw material from a limited number of suppliers. In fact, it secured 53 per cent of its steel from a single supplier in FY23.
  
• Cyclicality. Its performance is tied to the performance of several cyclical industries, particularly commercial vehicles, farm equipment and off-highway vehicles.
  
• The forging industry is highly competitive.

Risk report

Company and business

• Are Happy Forgings' earnings before tax more than Rs 50 crore in the last 12 months?
  Yes. Its profit before tax for FY23 was Rs 209 crore.
• Will Happy Forgings be able to scale up its business?
  Yes. Growth of the infra and automobile industries should help it scale up. The China +1 policy also stands to present new opportunities.
• Does Happy Forgings have recognizable brands with client stickiness?
  Yes. As of September 30, 2023, its relationship with its top 10 customers ranged from 10 to 21 years.
• Does the company have a credible moat?
  No. It faces significant competition from Indian and international players.

Management

• Do any of the company's founders still hold at least a 5 per cent stake? Or do promoters have over a 25 per cent stake in the company?
  Yes. Post IPO, promoters' stake will be 78.6 per cent.
• Do the top three managers have over 15 years of combined leadership at Happy Forgings?
  Yes. Narinder Singh, Chief Executive Officer and Whole-time Director, has been with the company since 2006.
• Is the management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
  Yes. There is no information to suggest otherwise.
• Is the company's accounting policy stable?
  Yes. There is no information to suggest otherwise.
• Is Happy Forgings free of promoter pledging of its shares?
  Yes. No shares have been pledged.

Financials

• Did the company generate a current and three-year average return on equity of more than 15 per cent and a return on capital employed of more than 18 per cent?
  Yes. Its three-year average ROE and ROCE are 17.5 and 19.9 per cent, respectively. Its ROE and ROCE were 21.1 and 24.2 per cent, respectively, in FY23.
• Was the company's operating cash flow positive during the last three years?
  Yes. It generated positive cash flows from operations in the last three years.
• Is the company's net debt-to-equity ratio less than one?
  Yes. Its net debt-to-equity ratio stood at 0.2 times as of September 2023.
• Is Happy Forgings free from reliance on significant working capital for day-to-day affairs?
  No. Its business has high working capital requirements. Its cash conversion cycle stood at 174 days as of September 30, 2023.
• Can the company operate its business without relying on external funding in the next three years?
  Yes. It has generated positive cash flows consistently. Besides, it has negligible debt levels and is efficient in asset utilisation.
• Is Happy Forgings free from meaningful contingent liabilities?
  No. As of September 30, 2023, contingent liabilities as a percentage of equity stood at around 0.4 per cent.

Valuations

• Does the stock offer an operating earnings yield of more than 8 per cent on its enterprise value?
  No. The stock offers an earning yield of 3.5 per cent.
• Is the stock's price-to-earnings less than its peers' median level?
  Yes. It is valued at a price-to-earnings ratio of 37.8 times compared to peers' median level of 58.9 times.
• Is the stock's price-to-book value less than its peers' average level?
  Yes. It is valued at a price-to-book ratio of 5.3 times compared to peers' average of 8.5 times.

Disclaimer: This is not a stock recommendation. Do your due diligence before investing.

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