Divgi TorqTransfer Systems IPO: Detailed Analysis

Divgi TorqTransfer Systems IPO opens for subscription on 1st March. The company looks to raise up to Rs 412 crore through the public issue. Here are the details: 

Divgi TorqTransfer Systems IPO Details:

• Divgi TorqTransfer Systems IPO Date: 1 March - 3 March 2023
• Divgi TorqTransfer Systems IPO Price band: Rs 560 - Rs 590
• Divgi TorqTransfer SystemsIPO Issue Size: Rs 412.00 crore (Fresh Issue of Rs 180 crore and remaining OFS)
• Reservation: QIB 75%, Retail 10%, NII 15%
• Minimum Investment: Rs 14,750
• Post Issue Implied Market Cap: Rs 1,722 crore – Rs 1,804 crore
• Bid lot: 25 shares, and in multiples of 25 shares

Divgi TorqTransfer Systems Limited IPO: Issue objective

Divgi TorqTransfer Systems proposes to utilize the Net Proceeds of the fresh issue towards funding the following objects:

• Funding capital expenditure requirements for the purchase of equipment/machinery of manufacturing facilities/
• General corporate purposes.

Divgi TorqTransfer Systems IPO: About Divgi TorqTransfer System

• The company was incorporated in 1964 and is amongst a few automotive component entities in India.
• They can develop and provide system-level transfer cases, dual-clutch automatic transmission (DCT), and torque coupler solutions.
• They are one of the leading players supplying transfer case systems to automotive OEMs and the largest supplier of transfer case systems to passenger vehicle manufacturers in India.
• The company has the capability to develop and provide transmission systems for electric vehicles. 
• They are in the process of designing and developing prototypes of transmission systems for EVs under the receipt of a business award for this purpose.
• Their diverse capabilities enable them to service customers across segments of the automotive industry, including utility vehicles, passenger vehicles, and commercial vehicles.

Divgi TorqTransfer Systems IPO: Product range

They manufacture and supply of a variety of products under the broad categories of:

• Torque transfer systems which include four-wheel-drive (4WD) and all-wheel-drive (AWD) products)
• Synchronizer systems for manual transmissions and DCT.
• Components for the above-mentioned product categories for torque transfer systems and synchronizer systems in manual transmission, DCT, and EVs. They also develop transmission systems for EVs, DCT systems, and rear-wheel drive manual transmissions.

Divgi TorqTransfer Systems IPO: Industry Overview

• Passenger vehicle production in India contracted at 1% CAGR - from 3.8 million in FY17 to 3.7 million in FY22. However, the industry witnessed significant highs and lows during the period.
• India’s car market is highly underpenetrated compared with that of most developed economies and some developing nations.
• CRISIL expects production growth of the passenger vehicle industry to be 21-23% in FY23. Domestic sales and exports are likely to grow at 23-25% and 12-14% on year respectively.
• CRISIL estimates the size of the transfer case market (catering to OEM demand) at 89 thousand units by volume and Rs 3.6 billion in terms of value in FY22. The passenger vehicle (PV) segment occupies the primary share of 71%, followed by the small commercial vehicle (SCV) segment contributing the rest.

Divgi TorqTransfer Systems IPO: Listed Peers

The company has many listed peers and faces competition from them. The listed peers include names like Sona BLW Precision forgings Ltd, Bosch Ltd, ZF Commercial Vehicle Control Systems India Ltd, Sundaram Fasteners Ltd, and Endurance Technologies Ltd. Below is the comparison with listed peers:

• In terms of Earning Per Share (EPS, Basic), Divgi is towards the bottom, while Bosch Ltd tops the table.
• All players have high PE. Among all listed peers, Divgi has the lowest PE, while ZF Commercial Vehicle Control Systems has the highest PE.
• For Return on Net Worth (RoNW), Divgi is third on the list behind Sona BLW and Sundaram Fasteners.
• Except for Divgi, all other companies have small Debt to Equity ratio - Divgi has a zero debt-to-equity ratio.

Divgi TorqTransfer Systems IPO: Financials

• For FY20, FY21, and FY22, the company has reported a revenue of Rs 159.07 crore, Rs 186.58 crore, and Rs 233.78 crore, respectively. The revenue has grown at a CAGR of 21.3% over this period.
• The EBITDA for FY20, FY21, and FY22 was Rs 36.94 crore, Rs 51.90 crore, and Rs 65.61 crore, respectively. The EBITDA margin for the same period was 23.22%, 27.82%, and 28.07%, respectively. The EBITDA margin has grown every financial year.
• For the last three financial years, the company has reported an average EPS of Rs 14.68 and an average RoNW of 13.30%. 
• On annualizing FY23 earnings and attributing them to post-IPO fully diluted paid-up equity capital, the asking price is at a P/E of 35.16. 
• In FY20, the company had a debt-to-equity ratio of 0.24 which has been ZERO since FY21.
• ROCE for FY20, FY21 and FY22 was 16.2%, 17.8% and 18.3%.
• Their top 5 customers accounted for 92.66%, 91.28%, 92.86%, and 86.94% of their revenue from operations for the 6 months ended September 30, 2022, FY22, FiY21, and FY20, respectively.

Divgi TorqTransfer Systems IPO: Unique Selling Propositions

Unique offering: they are one of the very few suppliers having the capability to develop and provide system-level transfer cases, torque couplers, DCT solutions, and transmission systems for EVs across a wide array of automotive vehicles and geographies, with leadership across select product categories. They are one of the few companies that serve as a systems-level solution provider and component kit supplier to global OEMs and Tier I transmission systems suppliers.

Strategically located manufacturing facilities: Their facilities are equipped with advanced machinery, and certain of its facilities are located close to their key customers to enable meeting customers’ demand schedules and logistical advantages for customers and to insulate them from local suppliers or other disruptions.

Long-term relationships with customers: they have strong and well-established relationships with several marquee domestic and global OEMs in the automobile sector, such as Tata Motors, Mahindra & Mahindra, and with global suppliers, such as BorgWarner. They are engaged with a few of the leading OEMs in India, right from the stage of design and development, and also providing product development support in the process.

Focus on innovation and R&D capabilities: The company has made investments in R&D and in building production capacities for future growth. They believe they have developed in-house capabilities to deliver evolving technologies for future mobility solutions.

Divgi TorqTransfer Systems IPO: Growth Potential

Capturing new market opportunities: The market opportunities in the growing EV space are ample, as the global trend towards electrification of vehicles continues to surge. The market for EV transmission is expected to increase by a CAGR of 77-82% from FY22 and FY27 in volume terms and value terms. They plan to focus on the EV space to benefit from the growth. They also plan to further leverage their presence in yet another fast-developing trend, which is the increasing demand for automatics observed across the entire UV segment.

Improve market share: They intend to strengthen their relationships with existing customers and explore opportunities to grow along the value chain by expanding the array of existing products and solutions that they supply to their customers across geographies, and to win new customer contracts by developing products and solutions aligned with their needs.

Cost optimization: They intend to continue enhancing their operational efficiencies, increase economies of scale, better absorb fixed costs, reduce other operating costs, and strengthen their competitive position. They would focus on improving capacity utilization at production facilities, through the increase in overall production volumes.

Divgi TorqTransfer Systems IPO: Risks

Dependency on top 5 customers: The business largely depends upon the top five customers. For FY22, the top 5 customers contributed 91.28% of their total revenue, with the top customer contributing 53.71%. The loss of such customers or a significant reduction in purchases by such customers will have a significant impact on its business.

Geographical concentration of export: Their overseas sales are primarily dependent on two countries, China and Russia, which exposes us to risks of concentration. Their inability to operate and grow business in these countries may have a material adverse effect on the business, financial condition, results of operations, cash flows, and future business prospects.

Volatility in raw material cost: They use a variety of raw materials and commodities and materials purchased in various forms. There is no certainty that they may not experience volatility in the cost or availability of such raw materials and commodities. The business could be adversely affected by volatility in the price or availability of raw materials and components.

Foreign currency fluctuation: They face foreign exchange rate risk to the extent that a part of revenue, expenses, assets, or liabilities are denominated in a currency other than the Indian Rupee.

This is not investment advice. Investments in the securities market are subject to market risk, read all the related documents carefully before investing. Past performance is not indicative of future returns.