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Divgi

By Geetanjali Kedia
about 2 years ago

IPO Size: Rs. 412 cr  

  • Fresh Issue of Rs. 180 cr for funding Rs. 151 cr capex
  • Offer for Sale (OFS) of Rs. 232 cr, mainly by 2 financial investors (Oman India and Nandan Nilekani’s family office, halving the 30% combined shareholding).

Price band: Rs. 560-590 per share

M cap: Rs. 1,804 cr, implying 23% dilution

  • Only 10% reserved for retail, as cash equivalents of Rs. 173 cr on Rs. 340 cr net worth (31.3.22)

IPO Date: Wed 1st Mar to Fri 3rd Mar 2023, Listing Tue 14th Mar 2023

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

 

Pune-based Auto Component Maker

Divgi manufactures torq transfer systems, gears, components for passenger SUVs (4-wheel drive, all-wheel drive) at 3 plants in Karnataka and Maharashtra, with 4th facility under-construction at Pune, at Rs. 150 cr capex, to be operational by FY24-end.

 

74% revenue from M&M

Between FY20-22, company’s revenue grew at 21% CAGR to Rs. 234 cr, but single largest customer M&M accounted for 53% of revenue in FY22, which rose to 74% in H1FY23’s Rs. 134 cr revenue. Infact, between FY20-22, company’s non-M&M revenue fell 7% from Rs. 117 cr to Rs. 109 cr, with only Rs. 35 cr non-M&M revenue in H1FY23.

Thus, it won’t be incorrect to say that company’s success is linked to performance of M&M passenger vehicles, making it a second derivative on M&M. In that case, isn’t a direct exposure to M&M better from an investors’ point of view, share of which is ruling at a historic PE multiple of 14x, while Divgi IPO is priced at 31x H1FY23 annualised earnings?  

 

Russia Sales Reduced to Nil

Exports, a higher-margin segment, slowed down, due to Russia-Ukraine war, with Russia revenue reduced to zero in H1FY23, from Rs. 29 cr in FY21, and US business also down to Rs. 5 cr in H1FY23 from Rs.23 cr in FY20. Pressure on international business further highlights risk of dependence on a single customer.

 

High Margin Business

Given company’s product profile, it earns 30% EBITDA margin. As it is debt free (Rs. 160 cr surplus cash), net margins are also high at 19%. FY22 EPS of Rs. 16.8 rose to Rs. 9.3 in H1FY23, with RoE of 14%.

 

Capability for ICE, Hybrid and Electric

Over 90% of present revenue comes from ICE (internal combustion engine) and some from hybrid (supplier to Toyota). Revenue from electric (EV) will commence from April 2023, when supply of transmission products to Tata Motors begins, but sales potential for the same is not yet disclosed. Thus, at present, Divgi has negligible exposure to EV, while some listed peers like Sona already have 30% revenue coming from EV.

 

Valuation

Even after factoring in an optimistic 34-35% profit growth for FY24E, PE multiple on one-year forward basis comes to 24x, which makes the IPO fully-priced. While strong margin is attractive, but high dependence on a single customer and new products in future (DCT and EV transmission) being more mainstream and hence lower margin, versus niche and complex ICE products at present, are some of the concerns.