Harsha Engineers India growth offsets margin pressure as overseas recovery remains pivotal

Investment View and Valuation

Prabhudas Lilladher upgraded Harsha Engineers International to Accumulate from Hold following the correction in the stock price. The broker has set a target price of Rs462, based on a 20x P/E multiple applied to March FY28E earnings, compared with the current market price of Rs410.

PL views Harsha Engineers' market leadership in bearing cages, greenfield capacity expansion, outsourcing of bearing-cage production, capacity additions by global bearing companies in India and rising bronze-bushing demand as long-term growth levers.

Q1 FY27 Financial Performance

Harsha Engineers reported a decent Q1 FY27, with robust growth in India Engineering and broad-based industrial demand. This was partly offset by margin pressure and continuing losses in overseas operations.

EBITDA margin declined as gross margin fell 134 basis points year on year to 47.5%. Adjusted PAT was affected by lower other income and a higher effective tax rate of 29.5%.

Margin Pressure and Raw-Material Costs

Management said average raw-material costs for steel, brass, zinc and polymers increased by around 8% in Q1 FY27. Contractual pass-through mechanisms generally operate with a lag of around four months, and management expects recovery over the coming quarters.

Higher oil, chemical and packaging costs added around Rs30 million to costs, while foreign-exchange losses of approximately Rs40 million also affected India Engineering profitability. India Engineering EBITDA margin was 21.3% in Q1 FY27, compared with 22.0% a year earlier. Management continues to guide to a sustainable margin range of 20-22%, although pass-through effects and ramp-up costs may depress reported margins.

Growth Outlook and Business Drivers

Management expects India Engineering growth in the mid-to-high teens and consolidated revenue growth of around 12-15% in FY27. India Engineering's domestic and export mix was 55% and 45%, respectively, with exports of around Rs1,400 million in Q1 FY27.

Demand was broad-based across industrial and automotive end-markets, supported by outsourcing, customer expansion and exports. Key business opportunities include:

• Bushings revenue was around Rs340 million and stampings revenue was around Rs190 million in Q1 FY27. Management is targeting around 30% growth in both businesses.
• Large-size cage revenue was around Rs100 million, with meaningful demand, order-book and pipeline headroom.
• Japanese-customer revenue was around Rs210 million in Q1 FY27. Management expects this to reach around Rs800 million in FY27, compared with Rs720 million in FY26, reflecting long conversion cycles.

Overseas Operations and Solar EPC

Overseas execution remains the principal monitoring point for the investment case.

• Advantek: Revenue was around Rs320 million in Q1 FY27. Management is targeting revenue of more than Rs1,400 million and EBITDA breakeven by the end of FY27.
• China: The business remained profitable, with management guiding to around 10% revenue growth and a 12-14% EBITDA margin in FY27.
• Romania: The business remained loss-making amid weak operations and foreign-exchange effects. Management is seeking to improve the product mix by increasing the contribution from cages and sees potential breakeven from FY28.
• Combined China and Romania losses: These are targeted at Rs20-30 million in FY27, compared with around Rs100 million in FY26.
• Solar EPC: Revenue is expected to be around Rs2,000 million in FY27, at broadly stable margins.

Capacity Expansion and Financial Estimates

Planned FY27-28 capital expenditure of Rs1,800-2,000 million will cover India Phase II, a China brownfield expansion and capacity additions in large cages, stampings and machines.

Key Risks

• Raw-material price volatility and delays in contractual pass-through.
• Ramp-up costs associated with new capacity and businesses.
• Weaker export demand.
• Sustained losses at overseas subsidiaries, particularly Romania.