Prabhudas Lilladher has upgraded its recommendation for Harsha Engineers International (HARSHA) to “Accumulate” from “Hold,” setting a revised target price of Rs 561. Despite a challenging quarter, marked by subdued European and Romanian markets, HARSHA reported a modest 3.9% year-over-year revenue growth. The outlook remains promising, driven by HARSHA’s market leadership in bearing cages, positive momentum in China, and planned capacity expansions. Though export markets face headwinds, resilient domestic demand and China’s improving performance offset the softness in Europe and the U.S. inventory destocking. Prabhudas Lilladher’s positive outlook is supported by a projected recovery in HARSHA’s financials, as the company leverages India’s manufacturing advantage under the China+1 strategy.

Performance Highlights: Mixed Results with Export Pressures

Moderate Revenue Growth amid Export Slowdown
HARSHA posted a 3.9% YoY increase in revenue, achieving Rs 3.5 billion for Q2 FY25, though below the Rs 3.7 billion projected. Despite robust demand in India and China, the company faced a significant slowdown in Europe and the Americas, largely due to inventory destocking and reduced demand. The overall domestic to export revenue mix shifted to 57%/43% from 49%/51% in the previous year, reflecting the contrasting trends in domestic and export demand.

Financial Margins: Resilient EBITDA and PAT Growth

Expansion in Gross and EBITDA Margins
The gross margin expanded by 492 basis points year-over-year to reach 46.9%, supported by cost efficiencies and improved domestic performance. The company’s EBITDA margin rose to 11.9%, an increase of 149 basis points from Q2 FY24. However, higher operating expenses limited the EBITDA growth, which increased by 18.7% YoY to Rs 418 million.

Profit After Tax (PAT) Growth Boosted by Forex Gains
HARSHA’s PAT increased by 42% YoY to Rs 290 million, benefiting from a substantial forex gain of Rs 57 million. The adjusted PAT margin rose to 8.2%, compared to 6.0% in Q2 FY24. This strong PAT growth underscores HARSHA’s ability to maintain profitability amidst global challenges, aided by favorable currency movements.

Segment Analysis: Engineering and Solar EPC Performance

Engineering Segment Shows Resilience in India and China
The engineering revenue rose by 4.1% YoY to Rs 3.1 billion, with domestic sales up 20% to Rs 1.3 billion. While Indian sales benefited from increased outsourcing and the China+1 trend, export sales dropped due to weak demand in the U.S. and Europe. The U.S. market slowdown reflects temporary inventory adjustments, with normalization anticipated by Q4 FY25.

Solar EPC Margins Improve Significantly
Solar EPC sales grew marginally by 1.8% YoY to Rs 426 million, but EBITDA margins in this segment rose to 8.7% from 3.2% in Q2 FY24. The margin expansion was partly driven by one-time gains, though excluding these, adjusted margins still demonstrated strong performance at 5.3%.

Regional Performance: Challenges in Europe and Romania, Progress in China

European and Romanian Markets Remain Subdued
The European market continues to struggle, particularly in the wind and industrial sectors, where demand remains weak. In Romania, where HARSHA has faced persistent losses, efforts to improve the product mix have yet to yield substantial results. A breakeven in Romania is unlikely this fiscal year, though management remains focused on optimizing the product portfolio.

Steady Growth in China Bolsters Overall Outlook
China’s performance continues to improve, with topline growth and profitability showing encouraging signs in Q2 FY25. HARSHA expects sustained growth in the Chinese market, aided by a positive demand environment and localized production advantages.

Investment Plans: Capacity Expansion to Support Growth

Greenfield Project on Track for Completion
The Harsha Advantek greenfield project remains on schedule, with commissioning anticipated by Q4 FY25. This expansion is expected to bolster HARSHA’s production capabilities, with EBITDA margins in line with India Engineering in the medium-to-long term.

Guidance and Revised Estimates

Guidance Downgraded to Mid-Single-Digit Growth
Management has revised its FY25 revenue growth guidance from 10%+ to mid-single digits, factoring in export market challenges. However, high-single-digit growth is projected for the India Engineering segment, driven by increased outsourcing demand and China+1 momentum.

Updated Financial Projections
Prabhudas Lilladher has adjusted its earnings estimates, with FY25/FY26 EPS revised down by -10.0% and -3.6%, respectively. Despite these revisions, the long-term outlook remains positive, supported by anticipated recoveries in export markets and strategic expansions.

Valuation and Investment Outlook

Attractive Valuation Amid Long-Term Growth Potential
At the current market price of Rs 500, HARSHA trades at a P/E of 31.4x for FY25 and 23.8x for FY26. Prabhudas Lilladher values HARSHA at 24x P/E based on Sep’26E EPS, yielding a revised target price of Rs 561. The “Accumulate” rating reflects confidence in HARSHA’s resilient domestic demand and strategic positioning within the global bearing cage market.

Risk Factors

Continued Weakness in Export Markets
Ongoing softness in European and U.S. markets could impact revenue growth and delay recovery timelines. Additionally, further economic slowdowns in these regions may exacerbate the impact on HARSHA’s exports.

Raw Material Price Volatility
Fluctuating raw material prices could compress margins, particularly if price adjustments lag behind input cost changes.

Conference Call Highlights

Domestic Growth Driven by China+1: Increased orders from Indian customers benefitting from the China+1 strategy.
Romanian Struggles: Persisting losses with a focus on product diversification to improve profitability.
Steady China Performance: Growing topline and profitability expected to contribute positively to FY25.
New Capacity Expansion: Greenfield project on track, expected to support medium-term growth.