Evaluating Diffusion Engineers Ltd IPO opportunity; Should you invest?

Between FY22 and FY24, the company recorded a Compound Annual Growth Rate (CAGR) of 17 per cent in revenue and 35 per cent in net profit.

About the Issue  

Diffusion Engineers Ltd is preparing to launch its Initial Public Offering (IPO) for equity shares. See the issue details below.

Objects of the Issue  

Considering that the offer is exclusively a fresh issue, it is important to note that the company will directly profit from the offer proceeds. The company plans to allocate the net proceeds raised from the fresh issue for the following purposes:

1. Funding capital expenditure requirements towards the expansion of the existing manufacturing facility at Nagpur

2. Setting up a new manufacturing facility at Nagpur

3. Funding working capital requirements of the company

4. General Corporate Purposes.

Promoter holding  

Prashant Garg, Nitin Garg, and Chitra Garg are the promoters of the company. The promoters and promoter group currently hold a pre-issue shareholding stake of 93.10 per cent in the company.

Company profile  

The company specialises in manufacturing welding consumables, wear plates, wear parts, and heavy engineering machinery for core industries. It also engages in the trading of anti-wear powders and welding and cutting machinery.

The company has established a forward integration system, producing special-purpose electrodes and flux-cored wires used in manufacturing wear-resistant plates. These wear plates are a key component in most large industrial equipment produced by the company’s heavy engineering division, which plays a critical role in the production of industrial equipment for core sectors such as cement, steel, power, mining, engineering, oil & gas, and sugar.

Currently, the company operates from four manufacturing units based in Nagpur. Its products are exported to several countries, including Singapore, Malaysia, the United Arab Emirates, Sri Lanka, Vietnam, Bangladesh, the United Kingdom, Germany, the United States, and Russia.

Financials  

The company has consistently delivered notable growth in both revenue and profits over the past few years. Between FY22 and FY24, the company recorded a Compound Annual Growth Rate (CAGR) of 17 per cent in revenue and 35 per cent in net profit. In FY24, the company reported an outstanding Return on Equity (RoE) of 19 per cent and a Return on Capital Employed (RoCE) of 21 per cent.

Valuation and outlook  

The issue is priced with a P/BV ratio of 2.47 times, calculated using its Net Asset Value (NAV) of Rs 68.06 as of March 31, 2024.

When we calculate the PE ratio for the company by considering the FY24 earnings relative to the fully diluted paid-up equity capital, the resulting PE ratio stands at 15. In terms of both valuation and returns, the company has significantly outperformed its listed peers.

India's wear plates market is estimated to be valued at approximately Rs 22 billion in fiscal 2024 and is projected to grow at a CAGR of 8-9 per cent, reaching around Rs 28 billion by fiscal 2027.

Considering the sector's growth opportunities, the company’s established customer relationships, strategically positioned manufacturing facilities, and strong financial performance, we recommend subscribing to the issue with a long-term investment perspective, considering its promising growth potential.