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Review By Dilip Davda on February 27, 2023

•    DTTL is one of the largest players in system-level transfer case systems to OEMs.
•    The company has been reporting growth in its top and bottom lines.
•    It is a dividend-paying company with strong fundamentals.
•    The issue appears fully priced based on its valuations.
•    Investors may lap it up with a long-term perspective. 

ABOUT COMPANY:
Divgi TorqTransfer Systems Ltd. (DTTL) is amongst the very few suppliers in India who have the capability to develop and provide system-level transfer cases, torque couplers and DCT solutions (Source: CRISIL Report). DTTL is one of the leading players supplying transfer case systems to automotive OEMs in India and the largest supplier of transfer case systems to passenger vehicle manufacturers in India (Source: CRISIL Report). 

The company is also the only player manufacturing and exporting transfer cases to global OEMs from India, and the only manufacturer of torque couplers in India (Source: CRISIL Report). It also has the capability to develop and provide transmission systems for electric vehicles ("EVs"). The company is in the process of designing and developing prototypes of transmission systems for EVs pursuant to the receipt of a business award for this purpose. As of the date of this Red Herring Prospectus, DTTL has been awarded a contract for the supply of EV transmission systems for one of the leading providers of EVs in India. However, supply pursuant to this contract has not started as of this Red Herring Prospectus date. 

Further, it has been awarded a contract for the supply of components for Hybrid Vehicles for a global OEM, however, this does not constitute one of the top five customers of the Company. The Company actively collaborates with Europe's transmission engineerings consulting firms like FEV and Hofer. It manufactures and supplies a variety of products under the broad categories of (i) torque transfer systems (which includes four-wheel-drive ("4WD") and all-wheel-drive ("AWD") products); (ii) synchronizer systems for manual transmissions and DCT; and (iii) components for the above-mentioned product categories for torque transfer systems and synchronizer systems in manual transmission, DCT, and EVs. 

It has also developed (i) transmission systems for EVs; (ii) DCT systems; and (iii) rear-wheel drive manual transmissions. DTTL is one of the few companies that serve both as a systems-level solution provider as well as a component kit supplier to global OEMs and Tier I transmission systems suppliers (Source: CRISIL Report). 

It is also one of the first few suppliers of steel and carbon-based synchronizer systems for the Indian markets. It is one of the leading manufacturers of steel synchronizers and will be the only manufacturer of DCT systems in India (Source: CRISIL Report). Very few component suppliers as well as OEMs globally have the capability to develop system integration software solutions in-house (Source: CRISIL Report). 

DTTL has three manufacturing and assembling facilities across India located at Sirsi in Karnataka, and Shivare and Bhosari near Pune in Maharashtra. As of September 30, 2022, it had 606 employees including trainees and contract labour. 

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden IPO via a book-building route consisting of fresh equity shares worth Rs. 180.00 cr. (approx. 3050850 shares) and an Offer for Sale of 3934243 shares. It has announced a price band of Rs. 560.00 - Rs.  590.00 per share having a face value of Rs. 5 per share. At the upper cap of the IPO price, DTTL mulls raising Rs. 412.12 cr. The issue opens for subscription on March 01, 2023, and will close on March 03, 2023. The minimum application to be made is for 25 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. The issue constitutes 22.84% of the post-IPO paid-up capital of the company. The company has allocated 75% for QIBs, 15% for HNIs and 10% for Retail investors. From the net proceeds of the fresh issue, it will utilize Rs. 150.71 cr. for capex on the purchase of equipment/machinery for its manufacturing unit, and the rest for general corporate purposes. 

The joint Book Running Lead Managers (BRLMs) to this issue are Inga Ventures Pvt. Ltd. and Equirus Capital Pvt. Ltd. while Link Intime India Pvt. Ltd. is the registrar of the issue. 

Having issued/converted initial equity shares at par, the company issued further equity shares in the price range of Rs. 250.55 to Rs. 394.35 (based on Rs. 5 FV) between August 2016 and October 2020. It has also issued bonus shares in the ratio of 1 for 1 in June 1978, 1 for 1 in May 1979, 1 for 1 in October 1982, and 1 for 1 in February 2022. The average cost of acquisition of shares by the promoters/selling stakeholders is Rs. NIL, Rs. 0.31, Rs. 0.33, Rs. 0.38, Rs. 0.69, Rs. 0.74, Rs. 0.82, Rs. 2.34, Rs. 2.50, Rs. 125.28, and Rs. 167.30 per share. 

Post IPO, DTTL's current paid-up equity capital of Rs. 13.77 cr. will stand enhanced to Rs. 15.29 cr. Based on the upper cap of the IPO price, the company is looking for a market cap of Rs. 1804.39 cr. 

FINANCIAL PERFORMANCE:
On the financial performant front, for the last three fiscals, DTTL has (on a consolidated basis) posted a turnover/net profit of Rs. 170.74 cr. / Rs. 28.04 cr. (FY20), Rs. 195.03 cr. / Rs. 38.04 cr. (FY21), and Rs. 241.87 cr. / Rs. 46.15 cr. (FY22). For H1 of FY23 ended on September 30, 2022, it earned a net profit of Rs. 25.66 cr. on a turnover of Rs. 137.55 cr. 

For the last three fiscals, the company has reported an average EPS of Rs. 14.68 and an average RoNW of 13.30%. The issue is priced at a P/BV of 4.56 based on its NAV of Rs. 129.38 as of September 30, 2022, and at a P/BV of 3.37 based on its post-IPO NAV of Rs. 175.33 per share (at the upper cap).

If we annualized FY23 earnings and attribute them to post-IPO fully diluted paid-up equity capital, then the asking price is at a P/E of 35.16. 

According to the management, during the Pandemic, it maintained the tempo of growth despite the downturn. It has about 35% exports and 65% domestic turnover. This ratio may differ for a while due to the disturbed situation in Russia, but post-expansion, it is confident of regaining the ground and improving the export/domestic turnover ratio as well as maintaining the margins. As a provider of a variety of system-level transfer cases under one roof, it enjoys a niche place. Its marquee client list includes Tata Motors, Mahindra & Mahindra, Toyota Kirloskar, etc. 

DIVIDEND POLICY:
For the last three fiscals, DTTL has paid a dividend of 26% (FY20), 30.82% (FY21) and 66.80% (FY22). It will adopt a prudent dividend policy post-listing, based on its financial performance and future prospects. 

COMPARISON WITH LISTED PEERS:
As per the offer document, DTTL has shown Sona BLW, Bosch, ZF Commercial Vehicle, Sundaram Fasteners, and Endurance Techno as their listed peers. They are currently trading at a P/E of 73.05, 38.17, 72.39, 48.95, and 42.95 (as of February 27, 2023). However, they are not truly comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORD:
The two BRLMs associated with the offer have handled 10 public issues in the past three fiscals, out of which 3 issues closed below the offer price on the listing date. 

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