Divgi TorqTransfer Systems Ltd IPO
Published by Sharekhan Education | March 2, 2023
Divgi TorqTransfer Systems Ltd IPO has an issue size of ₹ 400-412 Cr and price band is ₹ 560-590. The issue opens on Wednesday, 1st March 2023 and closes on Friday, 3rd March 2023.
Divgo TorqTransfer Sytems Company Overview:
Divgi TorqTransfer Systems Ltd. is a niche auto-ancillary player with specialized capabilities. The company is a leading supplier of transfer case systems to automotive OEMs in India. It is the only manufacturer of torque couplers in India. They also can develop transmission systems for electric vehicles. They actively collaborate with Europe’s transmission engineering consulting firms like FEV and Hofer. Their manufacturing facilities have been certified by international standards of quality management systems, environmental management systems, safety management systems, and specialized processes such as IATF 16949:2016, ISO 45001:2018 & ISO 14001:2015.
Objectives of the Issue:
The IPO consists of a fresh issue of equity shares aggregating to Rs 180 crores, and an offer for sale (OFS) of up to Rs 232 crores by existing shareholders. The company plans to utilize the proceeds from the fresh issue to fund capital expenditure requirements for purchasing equipment and machinery for the manufacturing facilities. Investors must apply for a minimum of 25 shares and in multiples thereafter. After allotment, the shares will be listed on the stock exchanges.
Industry Overview:
The transfer case market is expected to grow at a CAGR of 24-27% over FY22-27. Demand for transfer cases is expected to be driven by growing demand for 4 Wheel Drive. The torque coupler market is expected to grow at a CAGR of 54-57% over FY22-27. Torque coupler finds application in Front Wheel Drive based All-Wheel Drive vehicles. The market for EV transmission is expected to grow at a CAGR of 77-82% over FY22-27. This exponential growth expectation assumes that the share of Electric Vehicles in total passenger vehicle sales should be 6-8% by FY27 from ~0.7% in FY22.
Competitive Strengths:
They have set up comprehensive production systems across their manufacturing facilities. It helps them improve workmen’s safety, quality control, inventory management, lean manufacturing process, flexibility to handle varying product mixes, and timely delivery. They can serve their global OEM clients both as a systems-level solution provider as well as component kit supplier. Their manufacturing facilities are strategically located in proximity to their key customers as well as the port for export. They have established long-term relationships with marquee domestic and global OEM clients. Their wide product portfolio enables them to retain their existing customers and attract new customers.
Business Strategy:
The company has got a contract for the supply of EV transmission systems from one of the leading providers of EVs in India. They plan to further their efforts in capitalizing on the expanding EV space. The company intends to further leverage their presence in the increasing demand for automatics observed across the entire Utility Vehicle segment. They are in the process of launching domestically manufactured DCT systems for the Indian market and are planning to localize and commercialize 7 Speed Dual Clutch Automatic Transmission. They are evaluating the development or in-licensing of an integrated electric drive unit which will help integrate the powertrain and the drivetrain components.
Key Concerns:
The company suffers from client concentration risk. Their top 5 customers constitute ~90% of sales. They import nearly ~25% of their raw material requirements from countries such as South Korea, the USA, and China. Any disruption in the supply chain could impact time supplies and input costs. They face foreign currency exchange rate fluctuations. They do not hold any patents or any form of intellectual property protection concerning their manufacturing processes.
Financials:
The company has seen a robust 21% CAGR rise in revenues over FY20-22 and a growth of 28% in the bottom-line over the same period. EBITDA margins have shown an improvement from 23.2% in FY20 to 28.1% in FY22. It almost has a debt-free Balance Sheet. The aggregate expenditure on R&D and royalty was around 9.5% of revenues in FY22, higher than most other peers. At the upper end of the price band (₹560-590) the company is valued at 39x FY22 earnings. Considering the future growth opportunities, the company seems to be reasonably valued.
Source: IPO Prospectus
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