Divine Power NSE SME IPO review (May apply)

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Review By Dilip Davda on June 19, 2024

•    The company is engaged in manufacturing of bare copper/aluminium wires, strips etc.
•    While it posted growth in its top lines for reported periods, the sudden boost in bottom line for pre-IPO year raises eyebrows.
•    The company is operating in a highly competitive and fragmented segment. 
•    Based on FY24 super earnings, the issue appears fully priced. 
•    Well-informed investors may park moderate funds for long term.

ABOUT COMPANY:
Divine Power Energy Ltd. (DPEL) is a manufacturer of Bare Copper/ Aluminium Wire, Bare Copper/ Aluminium Strip, Winding Copper/ Aluminium Wire, Winding Copper / Aluminium Strip. Winding wires / strips are manufactured by annealing and insulating wires / strips and covering them with paper, cotton, fiberglass etc. Winding wires/ strips covered with paper, crepe paper and cotton are sold to power distribution companies and transformer manufacturers to manufacture transformers and also to fix normal wear and tear.

In the current calendar year, the company started manufacturing wires / strips covered with fiberglass which are used in manufacturing electromagnetic coils, like the one used in lifting magnets which are used to lift heavy objects like containers, machinery etc. The Company has supplied wires / strips covered with fiberglass to markets like Punjab, Bengaluru, Ahmedabad. In the recent past the Company has started trading in super enamelled wires and strips in an effort to cater customer demand and remain competitive.

DPEL mainly sells winding wires to the power distribution companies and transformer manufacturers. Transformers play a critical role in power distribution by regulating the voltage from generation source to the consumer end. The transformer steps up the voltages to higher voltages before transmission at the generator, reducing the power loss during transmission and steps down the higher voltage to lower as required before transmitting the power to the end user. One of the critical components of a transformer is its coil which plays the role of wires / strips of copper/ aluminium) by paper, cotton, super enamel, fiberglass etc. which are used to make coils of the transformers. Therefore, making its products indispensable for manufacturing transformers and hence power transmission and distribution.

The Company enjoys the patronage of reputed clients such as TATA Power Limited, Pashchimanchal Vidyut Vitran Nigam Limited, BSES, Madhyanchal Vidyut Vitaran Nigam Limited, Dakshinanchal Vidyut Vitran Nigam Limited, Purvanchal Vidyut Vitaran Nigam Limited, Uttarakhand Power Corporation Limited etc., which ensure stable demand for its products. Also, the Company sources its raw material from reliable and reputed suppliers such as NALCO (through National Small Industries Corporation Limited), Birla Copper (through third party), Hindalco etc. 

As on date, its Manufacturing Facility has a total installed capacity to handle 300 metric tonnes per month of Aluminium and 400 metric tonnes per month of Copper. Further, it has a sufficient storage facility at Manufacturing Facility for the purposes of holding inventories of raw material as well as finished products which ensures stability of operations. As of the date of filing this offer document, it had 40 employees on its payroll. 

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden book building route IPO of approx. 5691000 equity shares of Rs. 10 each to mobilize Rs. 22.76 cr. at the upper cap. It has announced a price band of Rs. 36 - Rs. 40 per share. The issue opens for subscription on June 25, 2024, and will close on June 27, 2024. The minimum application to be made is for 3000 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on NSE SME Emerge. The issue constitutes 26.51% of the post-IPO paid-up capital of the company. From the net proceeds of the IPO, it will utilize Rs. 18.00 cr. for working capital, and the rest for general corporate purposes. 

The issue is solely lead managed by Khambatta Securities Ltd., and Bigshare Services Pvt. Ltd. is the registrar to the issue. Nikunj Stock Brokers Ltd. is the market maker for the company. 

Having issued initial equity shares at par value, the company issued further equity shares in the price range of Rs. 11 - Rs. 1000 between October 2004 and March 2023. It has also issued bonus shares in the ratio of 85 for 1 in February 2023. The average cost of acquisition of shares by the promoters is Rs. 2.70, Rs. 5.62 and Rs. 8.99 per share. 

Post-IPO, company's current paid-up equity capital of Rs. 15.78 cr. will stand enhanced to Rs. 21.47 cr. Based on the upper IPO price band, the company is looking for a market cap of Rs. 85.88 cr.  

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has posted a total income/net profit of Rs. 122.90 cr. / Rs. 0.81 cr. (FY22), Rs. 150.84 cr. / Rs. 2.85 cr. (FY23), and Rs. 222.72 cr. / Rs. 6.41 cr. (FY24).  The sudden boost in its bottom lines from FY23 onwards raises eyebrows and concern about its sustainability going forward. Its debt equity ratio of 2.26 as of March 31, 2024 remains a major concern. 

For the last three fiscals, it has reported an average EPS of Rs. 2.91, and an average RoNW of 18.56%. The issue is priced at a P/BV of 2.47 based on its NAV of Rs. 16.20 as of March 31, 2024, but post-IPO NAV data is missing from its price band ad.

If we attribute annualized FY24 super earnings to its post-IPO fully diluted paid-up capital, then the asking price is at a P/E of 13.42. Thus the issue appears fully priced, and it is operating in a highly competitive and fragmented segment. 

For the reported periods, the company has posted PAT margins of 0.66% (FY22), 1.89% (FY23), 2.88% (FY24), and RoCE margins of 8.80%, 13.70%, 16.25% respectively for the referred periods. 

DIVIDEND POLICY:
The company has not declared any dividends since incorporation. It has adopted a prudent dividend policy in January 2024, based on its financial performance and future prospects. 

COMPARISON WITH LISTED PEERS:
As per the offer document, the company has shown Shera Energy, Bhagyanagar India, Rajnandini Metal, Ram Ratna Wires, and Precision Wires, as their listed peers. They are trading at a P/E of 38.2, 7.93, 19.4, 31.4, and 34 (as of June 18, 2024). However, they are not comparable on an apple-to-apple basis.

MERCHANT BANKER'S TRACK RECORD:
This is the 9th mandate from Khambatta Securities in the last three fiscals (including the ongoing one), out of the last 8 listings, all listed with premiums ranging from 0.20% to 181.46% on the date of listing. 

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