IPO Size: Rs. 158 cr, Entirely Fresh Issue  

• For Rs.102 cr capex and Rs. 22 cr working capital  

Price band: Rs. 159-168 per share

M cap: Rs. 629 cr, implying 25% dilution

IPO Date: Thu 26^th Sep to Mon 30^th Sep 2024, Listing: Fri 4^th Oct 2024

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

Engineering Company

Diffusion Engineers is a Nagpur based manufacturer of welding and anti-wear consumables, wear plates and heavy engineering fabrication / machining (like air separator, mill body, grinding roller) for cement, steel, power, engineering, mining, oil and gas, sugar sectors. Each of these 3 product categories contribute equally to company’s Rs. 278 cr revenue  

Expansion to Double Capacity in 14 months

Current capacity comprises 9,000 MTPA heavy engineering fabrication, 3,240 wear plates and wear parts, 2,220 MTPA flux cored wire and 700 MTPA welding electrode, which are over 80% utilised. Company is undertaking an expansion worth Rs. 111 cr, of which, Rs. 17 cr has been invested, mainly towards land purchase. Rs. 102 cr from IPO proceeds will fund balance capex, which is seen substantial, as net fixed assets stood at Rs. 91 cr, as of 31.3.24.

It plans a greenfield plant with an estimated installed capacity of 600 MTPA welding electrodes and 1,200 MTPA CR coil slitting and brownfield expansion for 12,000 MTPA heavy engineering fabrication, 4,920 MTPA wear plate and 1,080 MTPA flux cored wires is being planned. Thus, capex will more than double current capacity, likely to come on stream by Nov 2025.  

Financials

FY24 revenue grew 9% YoY to Rs. 278 cr, with EBITDA at Rs. 47 cr, leading to 16.6% EBITDA margin. It clocked Rs. 31 cr PAT leading to 11% net margin and an EPS of Rs. 10.94, on an equity of Rs. 28 cr (FV Rs. 10 each). Company’s net worth stands at Rs. 191 cr, with net debt of Rs. 27 cr. Company’s working capital requirement is high, at over 5 months sales locked in Inventory and debtors. Yet RoE stood at 18.5% for FY24.  

Attractive for Long Term

On FY25E EPS of around Rs. 11, the PE multiple stands at over 15x, on current year basis. While company has double digit net margin and high teen RoE, there are no short-term growth triggers.

For the long term though (i.e. Q4FY26E onwards once the capex is completed), company’s valuation is seen attractive in relation to peers, despite being a micro-cap stock. Ador Welding and industrial consumable maker AIA Engineering are both ruling above 25x, although much larger in size, with AIA’s margins high too.