PL Stock Report: Harsha Engineers International (HARSHA IN) - Q2FY24 Result Update – Subdued quarter as margins decline sharply - Accumulate Inbox

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

Rating: ACCUMULATE | CMP: Rs393 | TP: Rs415

Q2FY24 Result Update – Subdued quarter as margins decline sharply

Quick Pointers:

§ Soft demand in Europe & China leads to underperformance of foreign subsidiaries and India’s export business.

§ High share of Solar EPC business in overall mix resulted in lower gross margin.

We revise our FY24E/FY25E EPS estimate by –38.5%/-20.0% to factor in continued demand softness in Europe & China and delays in the expected turnaround in Romania & China subsidiaries. Harsha Engineers International (HARSHA) reported a 5.4% YoY rise in revenue as robust growth in Solar EPC cushioned the fall in Engineering. EBITDA margin contracted by 451bps YoY, led by a sharp decline in gross margin due to higher share of Solar EPC in the mix. Despite a minor slowdown in India Engineering business, visibility is healthy for the medium to long-term. Although a revival is expected by Q4, Romania & China businesses are expected to report losses for the full year.

HARSHA’s long term outlook remains positive given its 1) market leadership in bearing cages, 2) turnaround in Romania & China, 3) greenfield capacity expansion plans, 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. The stock is currently trading at a PE of 22.8x/17.6x FY25/26E. We roll forward to Sep-25E and maintain ‘Accumulate’ rating with a revised TP of Rs415 (Rs474 earlier), valuing it at 21x on Sep-25E EPS (22x FY25E earlier).

Weak quarterly performance as margins decline sharply: Consolidated revenue rose 5.4% YoY to Rs3.4bn (PL estimate of Rs3.7bn), aided by a sharp jump in Solar EPC revenue to Rs419mn (vs Rs38mn in Q2FY23), while demand in Europe & China remains soft. Gross margin declined by 628bps YoY to 42.0%, as share of lower margin Solar EPC business increased to 12% of the revenue mix (vs 1% in Q2FY23). EBITDA fell 26.5% YoY to Rs352mn (PL estimate of Rs516mn), with EBITDA margin contracting 451bps to 10.4%, as a 223bps YoY reduction in other expenses as a % of sales partially offset the gross margin decline. PAT slid 27.4% YoY to Rs204mn, (PL estimate of Rs347mn), on the back of continued losses in foreign subsidiaries (Rs85mn loss), lower profitability in India Engineering (PAT down 4.8% YoY to Rs279mn), and a higher effective tax rate (31.2% vs 25.5% in Q2FY23). This was partially offset by higher other income (up 55.7% YoY to Rs67mn) and lower interest costs (down 55.6% YoY to Rs25mn).

Decline in engineering business across geographies: Consolidated Engineering revenue slid 6.5% YoY to Rs3.0bn, with India Engineering declining by 5.0% YoY to Rs2.3bn and International (Romania & China) Engineering falling 10.8% YoY to Rs711mn. In terms of EBITDA margins (including other income), consolidated Engineering came in at 13.6% (-258bps YoY), India Engineering at 19.8% (-102bps YoY), and International Engineering at -6.0% (vs +2.5% in Q2FY23). Solar EPC margin fell to 3.2% (vs a high base of +18.2% in Q2FY23).

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