Happy Forgings

Happy Forgings achieved its highest-ever quarterly gross margin of approximately 60% and an EBITDA margin of 30.7% in Q2 FY26. This strong profitability, which saw a 150 basis points expansion in both gross and EBITDA margins, was primarily attributed to a favorable product mix, with value-added machining accounting for around 88% of the share. Additionally, new business wins totaling INR 80 crores in H1 FY26 contributed to better realizations, enabling the company to maintain stable realizations of INR 251 per kg despite falling raw material costs.

While the domestic market served as a robust growth engine across commercial vehicles, farm equipment, and passenger vehicles, export markets faced significant challenges. The company's direct and indirect business to the US, which constitutes about 10% of its revenue, experienced a substantial decline of 35-40% in Q2 FY26 due to global market weaknesses, customer destocking, and US tariffs. Despite these headwinds, overall Q2 FY26 revenue grew 4.5% YoY to INR 377 crores, supported by a 5.2% operational growth in volumes.

The company's INR 650 crores strategic capex program is advancing as planned, aiming to establish state-of-the-art forging infrastructure for heavy segments and precision components. The first phase of this capex, totaling INR 550 crores, includes INR 150 crores allocated for wind and farm equipment and INR 400 crores for a heavy hammer line. Happy Forgings has already secured INR 350 crores in annual orders for these new lines, with PV machining lines expected to commence operations by Q4 FY26, and the overall infrastructure anticipated to be in place within the next 2-3 quarters.

Happy Forgings maintains a robust financial position, characterized by nearly 100% operating cash flow conversion in H1 FY26 and approximately INR 315 crores in cash liquidity as of September 30, 2025. The company's total net worth stands at around INR 1,900 crores, with a debt-equity ratio remaining below 0.1. Concurrently, the management is actively exploring inorganic growth opportunities, evaluating 2-3 options, with a hopeful outlook to finalize a deal within the next 6-8 months, focusing on niche businesses that offer higher machining content and new technologies.

The company's diversified segment portfolio continues to be a key strength. Commercial Vehicles contributed 37% and Farm Equipment 34% to H1 FY26 revenues, with the PV segment expected to grow from 5% to 8-10% of total revenues within two years, supported by an INR 80 crores capex. While Off-Highway (10% of H1 revenue) saw a decline, Industrials (13% of H1 revenue) showed strong domestic demand. The long-term product mix is projected to be 50% from CV and Farm, and 50% from PV, Industrial, Off-Highway, and other new areas.

Management expressed cautious optimism regarding the recovery of export markets, anticipating an easing of conditions in the coming months, particularly for US-related business, and a potential return to track for European CV markets from January onwards. A key UK customer is expected to see a 50% improvement in volumes next year, reaching 36,000 units. However, the sustainability of the current high margins remains a watch item, with management indicating a need for 1-2 more quarters to assess their long-term viability, as they are sensitive to product mix and raw material cost fluctuations.