IPO Analysis: Divgi TorqTransfer Systems Limited

IPO Rating: Invest for long term

About the issue:

After a lull of almost two months, the IPO market seems to have activated now. A Pune-based company is taping the primary capital market. Divgi TorqTransfer Systems Limited is engaged in the business of an automotive component entity. The company is coming out with its initial public offering (IPO) of equity shares with a face value of Rs 5 per equity share. The price band of the issue has been fixed at Rs 560 to Rs 590 per equity share. The issue size is Rs 412 crore at a higher price band. Out of this fresh issue constitutes Rs 180 crore and rest is offer for sale. Primarily PE investors are exiting partially. 

The IPO opening date is March 01, 2023, and it will be closing on March 03, 2023. The issue is likely to be listed on the exchange on March 14, 2023. The IPO market lot size is 25 Shares and in multiple thereof. A retail-individual investor can apply up to a maximum of 13 lots (325 shares or Rs 191,750) at upper price band.

Objects of the Issue

The company proposes to utilize the Net Proceeds from the Fresh Issue towards the following objects:

1. Funding capital expenditure requirements for the purchase of equipment/machineries of our manufacturing facilities;
2. General corporate purposes.

Promoter holding

The pre-issue shareholding is 67.18 per cent, post the IPO the promoter stake will be 59.8 per cent.

Company profile

Divgi TorqTransfer Systems Ltd (DTTL) is one of the few Indian suppliers capable of developing and supplying system-level transfer cases, torque couplers, and DCT solutions. DTTL is a leading supplier of transfer case systems to automotive OEMs in India, as well as the largest supplier of transfer case systems to passenger vehicle manufacturers in the country.

The company is also the only one in India that manufactures and exports transfer cases to global OEMs, as well as the only one that manufactures torque couplers. It is also capable of developing and supplying transmission systems for electric vehicles ("EVs"). Following the receipt of a business award for this purpose, the company is in the process of designing and developing prototypes of transmission systems for EVs. DTTL has been awarded a contract for the supply of EV transmission systems for one of India's leading EV providers as of the date of this Red Herring Prospectus. However, supply under this contract has not begun as of the date of this Red Herring Prospectus.

Also, it has been given a contract for the supply of components for Hybrid Vehicles for a major OEM, however, this does not constitute one of the top five customers of the Company. The company works closely with transmission engineering consultancy businesses in Europe such as FEV and Hofer. It manufactures and sells a wide range of products under the broad categories of I torque transfer systems (including four-wheel-drive ("4WD") and all-wheel-drive ("AWD") products); (ii) synchronizer systems for manual transmissions and DCT; and (iii) components for the aforementioned product categories of torque transfer systems and synchronizer systems in manual transmission, DCT, and EVs.

It has also created electric vehicle transmission systems, DCT systems, and rear-wheel drive manual transmissions. DTTL is one of the few organisations that provides both systems-level solutions and component kits to worldwide OEMs and Tier I transmission system suppliers.

It is also one of the first companies to supply steel and carbon-based synchronizer systems to the Indian market. It is a prominent manufacturer of steel synchronizers and will be India's exclusive manufacturer of DCT systems. Few component suppliers and OEMs worldwide have the in-house competence to develop system integration software solutions.

DTTL has three production and assembly plants in India: Sirsi in Karnataka, Shivare and Bhosari in Pune in Maharashtra. As of September 30, 2022, it had 606 employees including trainees and contract labour.

Financial

On the financial performance front, for the last three fiscals, Divgi TorqTransfer Systems Ltd has (on a consolidated basis) posted a revenue/net profit of Rs 159.07 crore/Rs 28.04 c crore (FY20), Rs 186.58 crore/Rs 38.04 crore (FY21), and Rs 233.78 crore /Rs 46.15 crore (FY22). For Q2 of FY22, company earned a net profit of Rs 25.66 crore on a turnover of Rs 137.55 crore. Thus, for the last 3 years, it has marked sharp improvements in its top and bottom lines.

Valuation and Outlook

The issue is priced at a P/BV of 3.37x based on its post-IPO NAV of Rs. 175.33 per share and a P/BV of 4.57 based on its NAV of Rs. 129.38 as of September 30, 2022 (at the upper price band). If we annualized H1FY23 earnings and attribute them to post-IPO fully diluted paid-up equity capital, then the asking price is at a P/E of 33.32x. The company has a dividend payout of 2 per cent (FY20), 30.82 per cent (FY21) and 66.80 per cent (FY22). It will adopt a prudent dividend policy post-listing, based on its financial performance and future prospects.   The company has achieved a 3-year average ROE and ROCE of 14.1 per cent and 19.9 per cent, respectively. The compounded sales and profit growth between FY20-22 stands at 21.2 per cent and 28.3 per cent, respectively.

DTTL has established a position in the industry by offering a wide range of OEM products under one roof. Despite the issue tends to be fully priced based on its current financial data, it has a strong future prospect with growth opportunities across its business segments. The company has paid dividends for the last three fiscals.

Owing to these factors we recommend investors to apply for long term.