Diffusion Engineers IPO review (May apply)

• IPO Details
• Docs
  • RHP
  • DRHP
  • Anchor Investor Link
• Reviews
• Subscription
• Calculator
• News
• GMP
• Allotment
• BoA
• Messages

Review By Dilip Davda on September 23, 2024

•    The company is engaged in the business of manufacturing welding consumables, wear plates, wear parts and heavy engineering machinery for core industries.
•    It marked steady growth in its top and bottom lines for the reported fiscals.
•    Based on FY24 earnings, the issue appears fully priced. 
•    It is poised for bright prospects amidst mega spending on infra and industrialization.
•    Though issue appears fully priced, investors may park funds for medium to long term.

ABOUT COMPANY:
Diffusion Engineers Ltd.  (DEL) is engaged in the business of manufacturing welding consumables, wear plates and wear parts and heavy engineering machinery for core industries. With over four decades of experience, the Company is dedicated to providing specialized repairs and reconditioning services for heavy machinery and equipment. Additionally, it is also involved in trading of anti-wear powders and welding and cutting machinery. It provides super conditioning process at its manufacturing facilities, a surface treatment solution for machine components that enhances wear resistance, eliminates stress and improves their reparability ultimately extending their lifespan and reducing production costs. 

The company has developed a synergistic system of forward integration whereby it manufactures special purpose electrodes and flux cored wires which are utilized for manufacturing wear resistance plates (commonly known as wear plates). These wear plates then become an integral part of majority of large industrial equipment which are made in its heavy engineering division and are significant contributor in manufacturing of industrial equipment used in core industries like cement, steel, power, mining, engineering, oil & gas, sugar, etc. This forward integration helps DEL in achieving efficiency in the production process and gaining competitive advantage, reducing product costs, enhancing supply chain control and reducing dependency on third-party suppliers for its operations.

Welding consumables market in India is estimated at around Rs 51 billion in fiscal 2024, with fiscal 2027 projections around Rs 64-66 billion. Due to the rise in demand for improved infrastructure, a lot of investment is happening in infrastructure development, such as construction of roads, bridges, ports and airports. The wear plates market in India is estimated at around Rs 22 billion in fiscal 2024 and is expected to grow at a CAGR of 8-9% to Rs 28 billion in fiscal 2027. Wear plates are essential part of the industries such as power plants, steel mills, quarrying, cement etc., as these plates protect key components of these industry. 

As India continues to undergo rapid industrialization, each of these industries would grow and require wear plates to protect their equipment and machinery. India's heavy engineering capital goods industry is estimated to be Rs 3,100-3,200 billion as of fiscal 2024, and is projected to clock a CAGR of 7.5-8.5% over fiscals 2023-27 to reach Rs 3,800-3,900 billion. Heavy electrical engineering, earthmoving, construction and Mining Machinery, and Process Plant Equipment are the largest segments of the industry.

Amongst the players considered for the industry between fiscal 2021-2024, DEL recorded third highest CAGR of 21% in operating income, second highest CAGR of 38% in profit after tax and third highest CAGR of 33% in EBITDA. (Source: CRISIL Report)

It invests in R&D activities to create a differentiating factor and sustainability in its welding consumables products vis-à-vis its competitors and to meet company's clients' specific requirements. Its dedicated DSIR-approved R&D facility at Unit I is equipped with laboratory infrastructure for various developmental activities, including process refinement, finished products testing and other raw materials analysis. As of July 31, 2024, it had 654 employees on its payroll and additional 564 contract workers in various departments.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden book building route IPO of 9405000 fresh equity shares of Rs. 10 each worth Rs. 158.00 cr. (at the upper cap). The company has announced a price band of Rs. 159 - Rs. 168 per share. The issue opens for subscription on September 26, 2024, and will close on September 30, 2024. The minimum application to be made is for 88 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. The IPO constitutes 25.13% of the post-IPO paid-up equity capital of the company. From the net proceeds of the fresh equity issue, the company will utilize Rs. 71.38 cr. for capex on proposed expansion of its manufacturing facility at Unit IV, Rs. 30.39 cr. for capex on new manufacturing facility at Hingna, Nagpur, Rs. 22.00 cr. for working capital, and the rest for general corporate purposes. 

The company has reserved 50000 equity shares for its eligible employees and offering them a discount of Rs. 8 per share. From the rest, it has allocated not more than 50 for QIBs, not less than 15% for HNIs and not less than 35% for Retail investors. 

The sole Book Running Lead Manager (BRLM) to this issue is Unistone Capital Pvt. Ltd., while Bigshare Services Pvt. Ltd. Is the registrar to the issue. 

Having issued initial equity shares at par, the company issued/based on Rs. 10 FV) between March 1992 and October 2023. It has also issued bonus shares in the ratio of 1 for 1 in February 1991, 2 for 5 in March 1992, 2 for 5 and 1 for 2 in April 1992, 1 for 1 in August 1993, 1 for 2 in September 1994, 1 for 4 in November 2003, 1 for 4 in November 2006, 1 for 5 in November 2008, and 6 for 1 in November 2023. The average cost of acquisition of shares by the promoters is Rs. 3.31, Rs. 6.07, Rs. 6.55, Rs. 10.11, and Rs. 18.48 per share. 

Post IPO, company's current paid-up equity capital of Rs. 28.02 cr. will stand enhanced to Rs. 37.43 cr. Based on the upper cap of IPO pricing, the company is looking for a market cap of Rs. 628.76 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has (on a consolidated basis) posted a total income/net profit of Rs. 208.75 cr. / Rs. 17.05 cr. (FY22), Rs. 258.67 cr. / Rs. 22.15 cr. (FY23), and Rs. 285.56 cr. / Rs. 30.80 cr. (FY24). 

For the last three fiscals, the company has reported an average EPS of Rs. 9.12, and an average RoNW of 17.40%. The issue is priced at a P/BV of 2.47 based on its NAV of Rs. 68.06 as of March 31, 2024, but the RHP and the IPO price band ad is missing its post-IPO NAV data.

If we attribute FY24 annualized earnings to its post-IPO fully diluted paid-up equity capital, then the asking price is at a P/E of 20.41, and based on FY23 earnings, the P/E stands at 28.38. The issue relatively appears fully priced.

The company reported PAT margins of 8.17% (FY22), 8.56% (FY23), 10.79% (FY24), and RoCE margins of 17.30%, 18.46%, 20.63% for the referred periods, respectively. 

DIVIDEND POLICY:
The company paid a dividend of 40% (FY22), 40% (FY23) and 5% (FY24). It will adopt a prudent dividend policy, based on its financial performance and future prospects. 

COMPARISION WITH LISTED PEERS:
As per the offer document, the company has shown Ador Welding and AIA Engg. as their listed peers, they are trading at a P/E of 27.7 and 36.0 (as of September 23, 2024). However, they are not truly comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORD:
The BRLM associated with this issue has handled 16 issues (8 mainboard + 8 SME) in the past three fiscals (including the ongoing one), out of which no issue closed below the offer price on the listing date.

Diffusion Engineers IPO FAQs