High profit margin and low equity base warrant higher discounting, though revenue concentration on just one customer and export dependence on China and Russia are fraught with risk.
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DIVGI TORQTRANSFER OFFER AT A GLANCE |
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| Offer Type | Book Built |
| Platform | Main Frame |
| Fresh Issue | Rs 180 Cr (30,50,847 equity shares) |
| Offer for Sale | 39,34,243 equity shares (Rs 232 Cr) |
| Face Value | Rs 5 |
| Price Band | Rs 560 – 590 |
| Mkt/Bid Lot | 25 Nos. |
| Implied Market Cap | Rs 1,804 Cr |
| Implied Equity Cap | Rs 15.29 Cr |
| Implied Free Float | 39.52% |
| Lead Manager | Inga Ventures and Equirus Capital |
| Registrar | Link Intime |
| Listing At | BSE, NSE |
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INDICATIVE ISSUE SCHEDULE |
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| Opening : 01-Mar-2023 | Closing : 03-Mar-2023 |
| Allotment : 09-Mar-2023 | Refunding : 10-Mar-2023 |
| Demat Credit : 13-Mar-2023 | Trading : 14-Mar-2023 |
The Offer
Pune-registered Divgi TorqTransfer Systems Ltd is floating an IPO of 69,85,090 shares valued about Rs 412 Cr at the cap price. The IPO consists of, a Fresh Issue of Rs 180 Cr (30,50,847 equity shares) and an offer for sale of 39,34,243 equity shares (Rs 232 Cr) from seven public category shareholders. The offer is being made through the book-building route with a price band of Rs 560-590 for Rs 5 paid-up share.
Applicants should bid for a minimum lot of 25 shares and multiples thereof. The shares are proposed to be listed on the main frame of BSE and NSE on March 14, 2023. Inga Ventures and Equirus Capital are acting as the lead managers to the offer and Link Intime has been roped in as registrar to the issue. The bidding opens on Wednesday, March 01 and closes on, Friday, March 03, 2023.
The company proposes to utilize the net proceeds of the fresh issue to the tune of Rs 150.70 Cr towards purchase of equipment/machineries. The balance amount net of issue expenses is earmarked for general corporate purposes.
Lineage
A BIFR case in 2002 but one of the most profitable auto ancillaries now – that is the sum and substance of Divgi TorqTransfer Systems Ltd (DTTSL). The profit potential might have attracted Rs 30 Cr investment in 2016 from the family trust of one the founders of Infosys, Nandan Nilekani. Through the IPO Nilekani’s trust is offloading about 60% of its holdings for a value of Rs 85 Cr. In other words, post offer for sale, Nilekani’s trust would be holding more than 9.53 lakh shares at a negative cost as against the IPO price band of Rs 560-590. Does the association of Nilekani’s trust guarantee attractive returns to the IPO investors? Well, the uncommon track of DTTSL and its promoters cannot be completely ignored.
For its age, the size of the company’s operation certainly looks small. DTTSL was originally incorporated as Divgi Metalwares Private Ltd in December 1964 by Maghanahali Basettappa Swami Rao, Ramrao Narsingrao Divgi, Bhaskar Divgi, Bhalchandra Narsingrao Divgi and Mohan N Divgi. Subsequently, the sons of Bhaskar Divgi have taken control of the company. In July 1996 the company’s name was changed to Divgi Metalwares Ltd and two years later the name was changed back to Divgi Metalwares Private Ltd!
In fiscal 2000 the company started incurring cash losses attributing to higher rate of interest on term loan and working capital, lower price realization, competition in the market, recession in the automobile sector and the lock out at its Sirsi manufacturing facility. The net worth of the company had become negative in 2002 and the company was declared a ‘sick company’ by the Board for Industrial and Financial Reconstruction (BIFR).
The BIFR sanctioned a rehabilitation scheme in October 2008 under which the outstanding borrowing of the company at that time was rescheduled and the company was provided with an extended period to pay its statutory liabilities related to provident fund and employee state insurance. The company attained a positive net worth and was discharged from the purview of the Sick Industrial Companies (Special Provisions) Act from February 24, 2010.
Meanwhile in 1995 Divgi Metalwares Private Ltd entered into an agreement with BorgWarner for a joint venture for the manufacturing and sale of transmission components, transfer cases and certain other components. Divgi Transmission Private Ltd was thus incorporated in September 1995 which was changed to Divgi Warner Private Ltd in November 1995. The name was further changed to Divgi TorqTransfer Systems Private Ltd pursuant to the buyout of shares from BorgWarner in 2016. Divgi Metalwares Private Ltd amalgamated its subsidiary Divgi TorqTransfer Systems Private Ltd in 2017 and changed its name to Divgi TorqTransfer Systems (DTTSL).
Key Management
Former senior executive of Tata Group, Praveen Kadle (66), a Chartered Accountant and Company Secretary by qualification, is the non-executive chairman of the company since March 14, 2022.
Promoter Jitendra Bhaskar Divgi (60), a Mechanical Engineer who has received a Master’s of Science Degree in Manufacturing from the University of Massachusetts, USA, is the managing director. Before joining Divgi Metalwares in 1994, he reportedly worked at Digital Equipment Corporation, Massachusetts. He served on the Board of Directors of BorgWarner, China in 2000, and was associated with BorgWarner till 2005.
Co-promoter Hirendra Bhaskar Divgi (58), who has a bachelor’s degree in Mechanical Engineering, is designated as a whole-time director. He joined the company in 1988 and has served in various capacities such as the new product development manager and controller operations.
Promoters’ cousin Sanjay Bhalchandra Divgi (61) is designated as a non-executive non-independent director. He has reportedly served the company in various capacities since 1986 which included new product development and managing manufacturing operations.
Another cousin, Bharat Bhalchandra Divgi (64), who had served the company in various capacities since 1981, has also been inducted as non-executive non-independent director.
Stakeholders
Of the pre-IPO equity capital of Rs 13.77 Cr, promoters and their associates control 67.12%. Oman India Joint Investment Fund holds 21.71% and Nilekani’s family trust has 8.7%. The balance (2.39%) is held by five individuals including the two Divgi cousins under the public category.
Post public offer, on the enlarged equity of Rs 15.29 Cr, the promoter group will control 60.48% at an abysmally low cost. Oman India Joint Investment Fund will hold 12.19% at a negative cost of Rs 87.86 and Nilekani’s family trust will have 3.12% at an extremely negative cost of over Rs 577. The existing five `public’ shareholders will hold 1.35% whose average cost of holding will also be negative.
Business
DTTSL is reportedly amongst the very few suppliers in India who have the capability to develop and provide system level transfer case, torque coupler and DCT solutions. The company is claimed to be 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. It also claims to be the only player manufacturing and exporting transfer cases to global OEMs from India, and the only manufacturer of torque couplers in India. The company also claims to have the capability to develop and provide transmission systems for electric vehicles (EVs). DTTSL is said to be one of the few companies who serve both as systems level solution provider as well as component kit supplier to global OEMs and Tier I transmission systems suppliers.
Financial Track
For a 58-year-old company, DTTSL’s top line of Rs 234 Cr may not be that impressive. But, the company’s profitability certainly looks commendable. DTTSL was able to boost its turnover from Rs 159 Cr in fiscal 2020 to Rs 234 Cr in fiscal 2022 with increased profit margin. The company’s OPM, which was at 23.2% in 2020, surged to 27.9% in 2021 and increased further to 28.1% in 2022. This compares very well with the overall auto ancillary industry average of 11%.
The company’s borrowings are virtually nil as against its Net Block of Rs 156 Cr. Against its pre-IPO equity capital of Rs 13.77 Cr, the company’s reserves amounted to Rs 342 Cr of which Rs 224 Cr are earned surplus. What’s more, the company’s existing bottom line (Rs 46 Cr in 2022) is quite attractive compared to the proposed capital base of Rs 15.29 Cr.
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Divgi TorqTransfer Systems Financials (in Cr) |
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| Period Ended |
Sep-22 |
Mar-22 | Mar-21 |
Mar-20 |
| Months |
6 |
12 | 12 |
12 |
| Revenue |
133.72 |
233.78 | 186.58 |
159.07 |
| Operating Profit |
37.09 |
65.61 | 52.12 |
36.94 |
| OPM% |
27.7 |
28.1 | 27.9 |
23.2 |
| Other Income |
3.83 |
8.1 | 8.45 |
11.68 |
| EBIDTA |
40.92 |
73.71 | 60.57 |
48.61 |
| EBIDTA % |
30.1 |
31.2 | 31.9 |
29.2 |
| Interest |
0.14 |
0.17 | 0.18 |
4.46 |
| Depreciation |
6.28 |
11.39 | 7.61 |
6.39 |
| Tax |
9.20 |
16.23 | 14.39 |
11.14 |
| Net Profit |
25.66 |
46.15 | 38.04 |
28.04 |
| Equity (Implied) |
15.29 |
15.29 | 6.88 |
6.02 |
| Reserves (Implied) |
520.91 |
520.91 | 288.99 |
203.51 |
| Borrowing |
0.50 |
0.12 | 0.26 |
50.41 |
| Fixed Assets |
156.20 |
140.30 | 111.60 |
95.50 |
Valuation
Currently, auto ancillary industry enjoys a higher discounting of over 30x as compared to the overall market composite of about 25X. The upper price band of Rs 590 discounts DTTSL’s last fiscal earnings about 39 times which compares well with some leading precision component manufacturers. Perhaps, a negative factor that could adversely influence the stock price after the lock-in period is the negligible or nil cost of holding of the existing shareholders.
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How Divgi Torq compares with select auto ancillary stocks |
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Financials |
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| (Amount in Cr) |
Divgi Torq |
Sona BLW | ZF Commer |
Auto Axle |
| Market Cap |
1804 |
26569 | 19642 |
3488 |
| Borrowing |
0.1 |
70.4 | 0 |
14.6 |
| Fixed Assets |
140 |
1356 | 556 |
262 |
| Revenue |
234 |
2131 | 2543 |
1491 |
| Other Income |
8 |
20 | 38 |
4 |
| EBIDTA |
74 |
579 | 290 |
139 |
| Interest |
0 |
18 | 2 |
2 |
| Net Profit |
46 |
335 | 142 |
74 |
| Equity Cap |
15 |
585 | 9 |
15 |
| Reserves |
521 |
1416 | 2105 |
606 |
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Stock Features |
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| Current Price (Rs) |
590 |
454 | 10356 |
2308 |
| Face Value (Rs) |
5 |
10 | 5 |
10 |
| Book Value |
175 |
34 | 1115 |
411 |
| Promoter Stake % |
60.5 |
53.5 | 75.0 |
71.0 |
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Profitability |
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| OPM % |
28.1 |
26.2 | 9.9 |
9.0 |
| Net Margin % |
19.1 |
15.6 | 5.5 |
5.0 |
| Cash EPS |
18.82 |
8.15 | 123.64 |
73.30 |
| Earnings Per Share |
15.09 |
5.72 | 74.90 |
49.20 |
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Return |
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| RONW % |
13.0 |
16.7 | 6.7 |
12 |
| ROCE % |
17.5 |
21.1 | 9.3 |
16.1 |
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Discounting |
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| Price/Earnings |
39.1 |
79.4 | 138.3 |
46.9 |
| Price/Cash EPS |
31.4 |
55.7 | 83.8 |
31.5 |
| Price/Book Value |
3.4 |
13.3 | 9.3 |
5.6 |
| Price/EBIDTA |
24.5 |
45.9 | 67.7 |
25.1 |
| Price/Revenue |
7.7 |
12.5 | 7.7 |
2.3 |
| Price/Fixed Assets |
12.9 |
19.6 | 35.3 |
13.3 |
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Distribution |
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| Dividend % |
26 |
15 | 240 |
150 |
| Yield % |
0.2 |
0.3 | 0.1 |
0.7 |
| Pay-out % |
8.6 |
26.9 | 16 |
30.5 |
Concern
- A significant portion of its revenue come from top five customers and the company is highly dependent on one customer who contributes nearly three-fourths of the revenue.
- One of the top five customers is a Russian automobile manufacturer. Given the recent Russian invasion of Ukraine and the consequent sanctions imposed on Russia, the company may not be able to sell products to Russian customers. In fact, during the six months period ended September 30, 2022, the company did not generate any revenue from the Russian automobile manufacturer as the agreement with the Russian company has expired on June 30, 2022 and DTTSL has discontinued all business with the Russian customer.
- The company is also dependent on China for export of finished products and import of certain raw materials. Given the current situation in the bilateral relationship between India and China, the company may face uncertainties.
- Closely-held company Divgi Transmission Systems and Technologies Private Ltd is also reportedly engaged in related line of business which may be a potential source of conflict of interest and may have an adverse effect on the public company’s business, financial condition and results of operations.
- Management scores poorly on the corporate governance front as some of the corporate records relating to allotments, transfers and acquisitions of shares made by the shareholders, term of whole-time director and initial appointments of directors are not traceable. Also, there were some factual inaccuracies in certain corporate records.