Detailed Rationale

Crisil Ratings has reaffirmed its rating on the long-term bank facilities of Happy Forgings Limited (HFL) at 'Crisil AA/Stable'

 

The rating reaffirmation takes into account the sustenance of the healthy business risk profile of the company with revenue growth of 4% in the first nine months of fiscal 2025 on-year followed by 14% growth in fiscal 2024. Revenue growth of 4% in the first nine months of fiscal 2025 over corresponding period last fiscal was driven by volume growth of 2% and improvement in realisations by 2% driven by better product mix despite a drop in steel prices. Further share of non-auto segment like the industrial segment - which is a higher margin segment - increased to 14% in 9MFY2025 compared to 12% in fiscal 2024. The growth is also attributable to the company’s increasing penetration into the passenger vehicle segment to 4% in the first nine months of fiscal 2025 from 1% in fiscal 2024. Revenue grew at a compound annual rate of 31% during the past three fiscals and is expected to grow at 10-12% in in the near-to-medium term supported by increasing penetration in the export segment and the non-industrial segment. Furthermore, increase in product and customer diversification across the commercial vehicle (CV), passenger vehicle (PV), farm equipment, Off highway segments also insulate the company from cyclicality in any particular end user segment. Operating margins are expected to sustain at a healthy ~28-29% over the medium term, led by the company’s ability to pass on fluctuations in raw material prices to original equipment manufacturers (OEMs), cost rationalization measures like setting up of solar rooftop plant to reduce power expense, increasing proportion of higher-margin machined products and increasing exports. Exports have risen significantly since fiscal 2018, and the growth momentum is expected to sustain over the medium term.

 

The financial risk profile will remain healthy, driven by an increase in net cash accruals and sustenance of a strong capital structure driven by healthy networth, nil long-term debt and moderate short term debt. Debt protection metrics will remain comfortable with interest coverage expected at above 35 times over the medium term. Crisil Ratings notes that despite sizeable capital expenditure (capex)  plans of Rs 650-700 crore over fiscals 2026 and 2027, the financial risk profile will continue to remain healthy as capex is expected to be funded majorly through internal accruals and cash surplus (estimated at above Rs 300 crore as on 31st March, 2025). Higher-than-expected debt on account of the planned capex will remain a key monitorable.

 

The rating continues to factor in the established position of the company in the forging and machining segment, sustained increase in scale of operations, strong clientele in the auto and industrial segments across geographies, and established relationships with OEMs. These strengths are partially offset by vulnerability of performance to cyclical slowdowns. 

Analytical Approach

Crisil Ratings has combined the business, financial and management risk profiles of HFL and its wholly owned subsidiary, HFL Technologies Pvt Ltd.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

Healthy business risk profile supported by strong relationships with customers: The company has a track record of more than four decades in the forged and machining components business and is the main supplier to several leading domestic OEMs. It has added customers and products to diversify its business risk profile. Strong demand for CVs and tractors has supported growth in revenue. The company will benefit from strong linkages with customers as well as addition of new customers and increased machining products proportion, which will support profitability over the medium term. While demand from the domestic market has remained stable, exports have risen backed by higher penetration in the overseas markets. Revenue contribution from the overseas market increased to 19% in the first nine months of fiscal 2025 from ~6% in fiscal 2020.

 

Diversified segment and customers: HFL has a diverse revenue profile with established presence in domestic sales (~80% of revenue) and export segments (~20%). The company caters to the CV segment (~32% of revenue), tractors (~41%), Off-highway (~12%), industrial ( ~14%) and PV  segments (~4%). In the industrial segment, it caters to diverse end users, including oil and gas and wind turbine industries. In the nine months of fiscal 2025, in line with the company’s plans of diversification, the industrial segment contributed to 14% of revenues, as against 3% in fiscal 2023. The diversified revenue profile mitigates the risk of demand slowdown in a market segment or industry. The company has healthy customer diversification, with its largest customer accounting for 12% of revenue in fiscal 2024 and the top five accounting for around 47%.

 

The company benefits from being one of the largest manufacturers of crankshafts and axle beams, which is supported by superior growth vis-à-vis industry. It is adding a new line in the forging segment with installation of 6,300 MT and 10,000 MT press lines, which will complete the entire value chain in the forging lines from 2,500 MT to 14,000 MT. Over the next 2-3 years, the company is also planning to incur capex of Rs 650 cr-Rs 700 crore to establish advanced forging capabilities to serve requirements of heavy forged and machined components (above 250 Kgs) in the non-auto segments. This will further help the company in diversifying its product and customer base. However, any cost or time overrun of capex will remain a key monitorable.

 

Strong financial risk profile: Financial risk profile is expected to remain strong driven by a healthy capital structure and strong debt protection metrics. Company has a healthy networth estimated at over ~ Rs 1800 crore as on March 31, 2025 as against debt of Rs 130 crore (only Working Capital debt) resulting in gearing of 0.07 times. Despite sizeable capex plans, gearing is estimated to sustain at below 0.1 times over the medium term. Debt protection metrics such as interest cover and Net cash accruals to total debt are also estimated at over 30 times and 1.8 times respectively over the medium term.

 

Weaknesses:

Moderate working capital requirement: Operations are working capital intensive, as reflected in gross current assets (GCAs) of 196 days as on March 31, 2024, owing to sizeable inventory, given the large product range and high lead time for manufacturing. Also, an increasing proportion of export may keep receivables stretched. Receivables stood at 85-110 days in the past five fiscals. However, prudent management of the working capital leads to lower utilization of working capital limits which stood at ~51% for the last months ended Dec-24.

 

Susceptibility to cyclicality in the CV and tractor segments: The CV segment is vulnerable to growth in industrial and agricultural production, freight movement, share of road transport in freight movement, changes in freight rates and fuel prices, profitability of truck operators, state transport undertakings and government policies. Also, tractor demand is vulnerable to the vagaries of monsoon and farm income. Capex coinciding with weak demand may pose risk of slower ramp-up of capacities and will remain a key monitorable.

Liquidity: Strong

Net Cash accrual is expected at ~Rs 260-280 crore in fiscal 2025 against nil term debt obligation. Utilisation of fund-based limit of Rs 210 crore was moderate at 51% on average during the 12 months through December 2024. Steady accrual, unutilised bank lines and cash surplus of above~ Rs 300 cr as on March 31,2025 will sufficiently cover working capital requirement and planned capex over the medium term.

Outlook: Stable

HFL will continue to benefit over the medium term from the initiatives it has taken to increase business from existing domestic and overseas customers and to enhance opportunities in both markets. Furthermore, improving cash accrual should help sustain the healthy financial risk profile over the medium term despite the capex.

Rating sensitivity factors

Upward factors:

• Growth in revenue, driven by sustained diversification in product and customer base, and increase in share of industrials and other new end user industries to above 30% 
• Significant growth in revenue and Sustenance of operating margin above 28%  

 

Downward factors:

• Revenue de-growth coupled with decline in EBITDA margins below 23-25%  impacting cash generation.
• Time and cost over-runs in planned capex leading to sizeable increase in debt levels impacting financial risk profile

About the Company

Established in 1979 by Mr Paritosh Kumar Garg (Chairman cum  Managing Director) and his father, Mr Channan Ram Garg & and further well supported by Mr. Ashish Garg, Managing Director (son of Mr. Paritsoh Kumar Garg), HFL manufactures forged and machined components, primarily crankshafts, for the automotive and non-automotive segments. Facility in Ludhiana has forging capacity of 1,27,000 TPA and machining capacity of 57,000 TPA.

Any other information: Not Applicable