What you must know about Happy Forgings IPO?

About the Happy Forgings Ltd business model

Happy Forgings Ltd was incorporated in 1979 and specializes in designing and manufacturing heavy forgings and high-precision machined components. Its product portfolio includes crankshafts, front axle carriers, steering knuckles, differential housings, transmission parts, pinion shafts, suspension products and valve bodies. It caters to design, manufacture, and testing of all the above products for its entire range of clients.  Some of its marquee clients, inter alia, include Ashok Leyland, Dana India, IBCC Industries, International Tractors, JCB India, Liebherr CMCTEC, Mahindra & Mahindra, Meritor HVS AB, SML ISUZU, Swaraj Engines, and many more. In terms of geographical reach, Happy Forgings caters to clients across Brazil, Italy, Japan, Spain, Sweden, Thailand, Turkey, UK, and the US; apart from its strong India franchise. Happy Forgings has 3 manufacturing facilities. All the three facilities are located in Ludhiana, Punjab; with two of them located at Kanganwal and one in Dugri. In the last 40 years, Happy Forgings has emerged as a preferred supplier to OEMs.

Happy Forgings Ltd is the fourth largest engineering led manufacturer of complex and safety critical, heavy forged and high precision machined components in India in terms of forgings capacity. The business model and the operations of Happy Forgings are vertically integrated; spanning engineering, process design, testing, manufacturing, and supply of a variety of components. The company essentially caters to the domestic and global original equipment manufacturers (OEM) manufacturing commercial vehicles (CVs). In the non-automotive sector, Happy Forgings supplies to manufacturers of farm equipment, off-highway vehicles and manufacturers of industrial equipment and machinery for oil & gas, power generation, railways, and wind turbine industries. The company, over the years has transformed from a product driven company to a solutions driven company, covering the entire forging lifecycle.

The fresh issue portion will be utilized for purchase of plant & machinery and to repay outstanding borrowings of the company. Some portion of the fresh funds will also be used for general corporate purposes. The IPO will be lead managed by JM Financial, Axis Capital, Equirus Capital and Motilal Oswal Investment Advisors. Link Intime India Private Ltd will be the registrar to the issue.

Highlights of the IPO issue of Happy Forgings Ltd

Here are some of the key highlights to the public issue of Happy Forgings IPO.

• The IPO of Happy Forgings Ltd will be open from December 19, 2023 to December 21, 2023. The stock of Happy Forgings Ltd has a face value of ₹2 per share and the price band for the book building IPO has been set in the range of ₹808 to ₹850 per share. The final price will be discovered within this band via the process of book building.

• The IPO of Happy Forgings Ltd will be a combination of a fresh issue and an offer for sale (OFS). While the fresh issue tends to bring in fresh funds into the company, is also EPS and equity dilutive. However, OFS is just a transfer of ownership and does not entail dilution of equity or of EPS.

• Let us start with the fresh issue portion. The fresh issue portion of the IPO of Happy Forgings Ltd comprises the issue of 47,05,882 shares (47.06 lakh shares approximately), which at the upper price band of ₹850 per share will translate into a fresh issue size of ₹400.00 crore.

• What about the Offer for Sale (OFS). The offer for sale portion of the IPO of Happy Forgings Ltd comprises the sale of 71,59,920 shares (71.60 lakh shares approximately), which at the upper price band of ₹850 per share will translate into a fresh issue size of ₹608.59 crore.

• Out of the 71.60 lakh shares offered in the offer for sale (OFS), Paritosh Kumar Garg HUF, a promoter shareholder of the company, will offer 49.22 lakh shares. The balance 22.38 lakh shares will be offered by India Business Excellence Fund III, an investor shareholder of Happy Forgings Ltd.

• As a result, the total issue size of the IPO of Happy Forgings Ltd will comprise of the issue and sale of 1,18,65,802 shares (118.66 lakh shares approximately), which at the upper price band of ₹850 per share translates into total IPO size of ₹1,008.59 crore.

The IPO of Happy Forgings Ltd will be listed on the NSE and the BSE on the IPO mainboard.

Promoter holdings and investor quota allocation quota

The promoters of the company are Paritosh Kumar, Ashish Garg, Megha Garg, Ayush Capital & Financial Services Private Limited, Garg Family Trust, Paritosh Kumar Garg (HUF) and Ashish Garg & Sons (HUF). Currently the promoters hold 88.24% stake in the company, which will get diluted post the IPO to 73.05%. As per the terms of the offer, 50% of the net offer is reserved for the qualified institutional buyers (QIBs), while 35% of the total issue size is reserved for the retail investors. The residual 15% is kept aside for the HNI / NII investors. The table below captures the gist of the allocation to various categories.

It may be noted here that the Net Offer above refers to the quantity net of employee quota, if any. The anchor portion, will be carved out of the QIB portion and the QIB portion available to the public will be reduced proportionately.

Lot sizes for investing in the IPO of Happy Forgings Ltd

Lot size is the minimum number of shares that the investor has to put in as part of the IPO application. The lot size only applies for the IPO and once it is listed then it can be even traded in multiples of 1 shares since it is a mainboard issue. Investors in the IPO can only invest in minimum lot size and in multiples thereof. In the case of Happy Forgings Ltd, the minimum lot size is 17 shares with upper band indicative value of ₹14,450. The table below captures the minimum and maximum lots sizes applicable for different categories of investors in the IPO of Happy Forgings Ltd.

It may be noted here that for the B-HNI category and for the QIB (qualified institutional buyer) category, there are no upper limits applicable.

Key dates for Happy Forgings Ltd IPO and how to apply?

The issue opens for subscription on 19th December 2023 and closes for subscription on 21st December 2023 (both days inclusive). The basis of allotment will be finalized on 22nd December 2023 and the refunds will be initiated on 26th December 2023. In addition, the demat credits are expected to happen on 26th December 2023 and the stock will list on 27th December 2023 on the NSE and the BSE. Happy Forgings Ltd will test the appetite for market proxies the organization of the forgings sector in India. The credits to the demat account to the extent of shares allotted will happen by the close of 26th December 2023 under ISIN (INE330T01021). Let us now turn to the more practical issue of how to apply for the IPO of Happy Forgings Ltd.

Investors can apply either through their existing trading account or the ASBA application can be directly logged through the internet banking account. This can only be done through the authorized list of self-certified syndicate banks (SCSB). In an ASBA application, the requisite amount is only blocked at the time of application and the necessary amount is debited only on allotment. Investors can apply in the retail quote (up to ₹2 lakh per application) or in the HNI / NII quota (above ₹2 lakh). Minimum lot sizes will be known after pricing.

Financial highlights of Happy Forgings Ltd

The table below captures the key financials of Happy Forgings Ltd for the last 3 completed financial years. 

Data Source: Company RHP filed with SEBI (FY refers to Apr-Mar period)

There are few key takeaways from the financials of Happy Forgings Ltd which can be enumerated as under  

a) In the last 3 years, revenue growth has been strong and showed a growing trend, of around 40% CAGR. However, what stands out about Happy Forgings Ltd is that the net profits have more than doubled in the last two years, showing substantial traction in its top line and bottom line.

b) While the company has a leadership position in the niche it operates in, the PAT margins have been very healthy at a consistent clip of above 15%, among the highest in the peer group. In addition, the ROE at over 20% and ROA at above 15% are also supportive of premium valuations on the counter.

c) The company has low sweating of assets, but that should happen in the next few quarters as a lot of the investments have to be front-ended. However, the strong ROA would more than make up for that.
Let us turn to the valuations part. On the latest year diluted EPS of ₹23.32, the stock is available in the IPO at a P/E of 36.45 times. That is P/E ratio slightly on the higher side, but looks reasonable in PEG terms. Also, these are FY23 numbers, so ideally if you look at the P/E ratio in terms of FY24 or FY25 forwards, then the valuations should look a lot more reasonable. However, other financials like ROE and PAT margins are relatively robust and should be able to hold valuations. Now, for some qualitative aspects.    

• Holds niche leadership position in the heavy forgings space and catering to the exclusive CV space, which gives it niche valuations

• Diversified business model with backward and forward integration in the forgings space with deep relationships with customers

• Track record of capital efficiency and timely and efficient delivery to customers in the OEM space
Investors must appreciate that the IPO does have a higher valuation but that can be easily justified by the unique positioning and the more than robust margins on sales and profits that the company has consistently maintained in the last three years. Ideally, this is a long term play on the forgings sector getting more organized so investors in the IPO should take a 2-3 years perspective on the company to reap maximum tipping point benefits.