Shares of Harsha Engineers have been a boon to their investors. The stock, which got listed in September last year, has jumped almost 40 percent from its IPO price of ₹330. Brokerage house Prabhudas Lilladher, in its recent report, informed that the stock has hit its 12-month target price in less than 3 months of initiation.
Prabhudas Lilladher initiated coverage on Harsha at a CMP of ₹325 with a target price of ₹439 on February 28, 2023. Since its initiation, the stock has advanced 38 percent to currently trade around ₹458.85. It also noted that it was the first broker on the Street to cover Harsha.
The stock surged 27 percent in April 2023 after 4 straight months of decline. It has also added nearly 6 percent in May so far. Just in 2023 YTD, it is up 18 percent. However, the stock was in the red continuously between December 2022 and March 2023, down 17 percent at this time.
The brokerage has listed 4 reasons to continue investing in the stock:
1) Leveraging long-term relationships to gain wallet share: The global bearing market is concentrated, with Schaeffler, Timken, SKF, JTEKT, NTN, and NSK commanding 54 percent of the market and all six of them are Harsha’s long-term clients, informed the brokerage. The average age of Harsha’s relationship with its top five customer groups spans more than a decade. Considering the complexity of the production process for bearing cages, once a customer trusts a reliable vendor, that customer becomes sticky. Harsha is able to win repeat orders from its key clients by being actively involved in their product development process from the design stage, it said.
2) Bearing cage outsourcing to provide growth impetus: Global bearing players are increasingly outsourcing bearing cage production to specialized cage manufacturers due to the critical functions, quality constraints and precision requirements of the cage, noted PL. Currently, 60 percent of global bearing cage production is estimated to be outsourced, and this can rise to 70-75 percent by FY30, indicating a significant market opportunity for companies like Harsha, it predicted.
3) Bronze Bushings – An audacious play on wind energy: Over the past 3-4 years, there has been a rising trend of using bronze bushings in certain wind turbine gearboxes as a substitute for bearings, stated PL. Harsha has recently added bronze bushings to its product portfolio to capitalize on this potentially large opportunity. Out of a ₹300-400 crore total capex plan for its engineering business over the next 3-4 years, a fair chunk will be spent on ramping up bushing capacities at Harsha’s Moraiya plant, it added.
4) Turnarounds and cost efficiencies to aid margin expansion: The brokerage pointed out that Harsha's Romania plant makes semi-finished brass castings and a small volume of large-size bearing cages. Given recent headwinds in Europe, higher energy costs, and low-value castings dominating the mix, this plant has seen weak performance in 9MFY23. The blended EBITDA margin is only 1-2 percent, while volumes have been weak. This is a drag on Harsha’s overall performance as Romania accounts for 20 percent of total revenue. But going forward, it is focusing on growing the share of large-size cages in Romania, which command 12-15 percent EBITDA margins. Thus, it anticipates both the top and bottom lines of Harsha Romania to turn around favourably from FY24 onwards.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.