IPO Size: Rs. 418 cr

• Rs. 325 cr Fresh Issue for debt repayment (Rs. 175 cr of Rs. 371 cr net debt), working capital (Rs. 75 cr)
• Rs. 93 cr Offer For Sale (OFS) by the promoter (100% stake to shrink to 70%)

Price band: Rs. 193-203 per share

M cap: Rs.1,402 cr, implying 30% dilution

IPO Date: Wed 19^th Jun to Fri 21^st Jun 2024, Listing: Wed 26^th Jun 2024

Grey Market Premium (GMP): We are strongly against ‘grey market premium’ as it is an unofficial figure, against SEBI guidelines.

Process Piping Manufacturer

Dee Development Engineers manufactures process piping solutions for oil and gas, power, chemicals sector, having 9 facilities in India and Thailand, with consolidated installed capacity of 94,500 MTPA. Capacity utilization stood at 52% in 9MFY24. In Feb 2024 and April 2024, it has commissioned 6,000 MTPA facility in Numaligarh, Assam and 3,000 MTPA facility in Anjar, Gujarat. Anjar capacity is being further enhanced, which will ultimately increase company’s installed capacity to 1,12,500 MTPA i.e. 19% growth from 9MFY24 level.

However, the 2^nd largest plant by installed capacity, Palwal Unit III, was inspected in April 2024 and allegedly found violating provisions of Factories Act, 1948, effects of which is to be factored in.  

Sectors Served

While National Hydrogen Mission can be a kicker in future, that is still a few years away and will be more a counter-balance to oil and gas, which currently accounts for over 50% of revenue. Company fabricates wind turbine towers, but that is only 4-5% of revenue. Hence, it cannot be termed a ‘renewal energy’ player.

Low Margin Business

While revenue stood at Rs. 595 cr in FY23 and Rs. 545 cr for 9MFY24, EBIT margin was only at 8.6%. Moreover, forex gain, interest income, liability written back and capital gain account for a significant part of the profit, excluding which, operational EBIT margin was barely at 6.9% for 9MFY24. Besides, business is very heavy on working capital (3 months debtors outstanding, 6 months inventory) leading to slim margins. Thus, net profit for 9MFY24 stood at only Rs. 14 cr, entailing a paltry 2.6% net margin, despite halve of this comprising non-operating gains.

Even with 45% reduction in interest expense in the future, due to debt repayment from fresh issue proceeds, net margin is not expected to cross 5%, which highlights lack of much value-add in the product or technical expertise. 

High Order Book but Low Return Ratio

Order book, as of 1.1.24 stood at Rs. 828 cr, which is guided to be executed over the next 12 months. Capex of Rs. 81 cr was incurred during 9MFY24, to support growth.

However, annualised return ratio of 9MFY24 was just at 5% at both RoCE and RoE, which is extremely poor. Till EBIT margins don’t improve from mid-single digit levels at present, return ratios will not strengthen, even on a higher capacity or order book. Thus, poor margins overshadow potential optimism.

Fully Valued

Annualising 9MFY24 EPS of Rs. 2.7 leads to a PE multiple of 56x on FY24 basis. Even if all positives of new facilities, operating leverage and lower interest expenses are baked in, expected FY25E EPS is estimated at  about Rs. 5.80. This leads to a PE multiple of 35x, making the IPO fully priced, even in the best case scenario.

Past Exit to PE Investor at Significantly Lower Value

In May 2021, company bought-back PE investor Carlyle’s 32.38% stake for Rs. 51 cr, valuing itself then at an equity value of only Rs. 156 cr and an enterprise value of Rs. 381 cr. For FY21, revenue was at Rs. 495 cr, with operating EBIT of Rs.25 cr, implying 0.8x revenue multiple and 15x operating profit multiple. Current IPO valuation of Rs. 1,402 cr market cap and Rs. 1,366 cr enterprise value, leads to revenue multiple increasing to 1.9x and operating profit multiple to 25x, on 9MFY24 annualised basis. This more than fully accounts for the subdued covid conditions 3 years ago.