Divgi TorqTransfer Systems Limited incorporated in 1964, is one of the leading players in the automotive component entity that develop system-level transfer cases, torque couplers, and dual-clutch automatic transmission solutions. It is also the only player manufacturing and exporting transfer cases to global OEMs from India, and the only manufacturer of torque couplers in India. It also has the capability to develop and provide transmission systems for electric vehicles (“EVs”) and is in the process of designing and developing prototypes of transmission systems for EVs pursuant to the receipt of a business award for this purpose. The company also manufactures and supplies a variety of products under the broad categories of (i) torque transfer systems (which includes four-wheel-drive (“4WD”) and all-wheel-drive (“AWD”) products); (ii) synchronizer systems for manual transmissions and DCT; and (iii) components for the above-mentioned product categories for torque transfer systems and synchronizer systems in manual transmission, DCT, and EVs.
The company has three manufacturing and assembling facilities across India located at Sirsi in Karnataka, and Shivare and Bhosari near Pune in Maharashtra, with the manufacturing facilities at Shivare and Bhosari being strategically located in proximity to its key clients, and one under-construction manufacturing facility located at Shirwal, Maharashtra. The company caters to the next generation of clients like Toyota, Mahindra & Mahindra, and Tata Motors. The company has stamped its global footprint being a trusted supplier to customers in UK and USA in the west to China, Thailand, Korea, and Japan in the east.
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Promoters & Shareholding:
Jitendra Bhaskar Divgi, Hirendra Bhaskar Divgi, and Divgi Holdings Private Limited are the promoters of the company.
| Pre Issue Share Holding | 67.18% |
| Post Issue Share Holding |
Public Issue Details:
Offer for sale: OFS of approx. 3,934,243 equity shares at Rs. 5, aggregating up to Rs. 232 Cr and fresh of approx. 3,050,847 equity shares at Rs. 5, aggregating up to Rs. 180 Cr.
Total FPO Size: Rs. 412 Cr.
Price band: Rs. 560 – Rs. 590.
Objective:
- To purchase equipment/ for manufacturing for maintaining a high level of precision of gears and components required for the manufacture of EV transmissions.
- To upgrade the facilities to meet the demand and to improve productivity to bring down manufacturing costs.
- General corporate purposes.
Bid qty: minimum of 25 shares (1 lot) for Rs. 14,750 and maximum of 13 lots.
Offer period: Mar 1, 2023 – Mar 3, 2023.
Date of listing: Mar 14, 2023.
Pros:
- It is one of the leading players supplying transfer case systems to automotive OEMs in India.
- It is the largest supplier of transfer case systems to passenger vehicle manufacturers in India.
- They are amongst the very few suppliers in India who have the capability to develop and provide system-level transfer cases, torque couplers, and DCT solutions.
- Strategically located manufacturing facilities capable of producing high-precision components meeting system-level design intent.
- Long-term relationships with marquee domestic and global customers.
- Experienced promoters and strong leadership.
Risks:
- The company’s business largely depends upon our top five customers, and the loss of such customers or a significant reduction in purchases by such customers will have a material adverse impact on its business.
- Its business could be adversely affected by volatility in the price or availability of raw materials and components.
- Depends on some third-party suppliers for certain key components and raw materials used for manufacturing.
- Delays or defaults in customer payments and receivables may adversely impact its profits and affect our cash flows.
- Exposed to foreign currency exchange rate fluctuations risk.
Subscribe or avoid?
Sectorial outlook – The Indian PV industry focuses on the domestic market, which accounts for 80 – 85% of the production. During fiscal 2022, domestic demand contributed ~84% of demand. After a consecutive contraction, auto finance disbursement showed a healthy revival in fiscal 2022. Most sub-segments witnessed underlying asset sales recovered to pre-Covid levels. Two-wheeler and passenger vehicle segments gained on account of pent-up demand and increased preference for personal mobility as lockdowns were lifted and people were wary of using public transport. In the CV segment, while sales of medium and heavy commercial vehicles (M&HCV) and buses remain tepid, that of light commercial vehicles (LCV) improved. All of the above are expected to have a positive impact on the sector in which the company is heavily investing. During fiscal 2023, auto industry sales are witnessing healthy growth, thrusting the auto finance disbursements. Disbursements for the PV segment are estimated to witness sharp growth backed by the expectation of a record (24-26%) rise in PV sales. Moreover, increased traction for high-priced UVs coupled with price hikes undertaken to compensate for the increase in commodity prices is expected to provide an additional push to the disbursement levels.
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The financials (revenue and net profit) are shown in the graph below:
Valuation – For the last 3 years average EPS is Rs. 14 and the P/E is around 41.92x on the upper price band of Rs. 590. The EPS for FY22 is Rs. 16.76 and the P/E is around 35.2x. If we annualize Q2-FY23 EPS of Rs. 9.32, P/E is around 31.4x. It has Sona BLW Precision Forgings Limited (69.8x), Bosch Limited (37.7x), ZF Commercial Vehicle Control Systems India Limited (71.8x), Sundram Fasteners Limited (43.7x) and Endurance Technologies Limited (37.5x) as its listed peers as per the RHP. The company’s P/E is between 41.9x and 31.4x. ROA is around 5.9%, ROE and ROCE are currently 7.2% and 11.95% respectively. Revenues and EPS have been growing consistently and the margins have also been consistent and in line with peers.
Recommendation – Divgi TTS is one of India’s leading Tier 1 companies in the design, development, and manufacturing of advanced drivetrain components and systems. It has supplied software embedded electronically controlled transfer cases and torque couplers for top OEMs such as Tata Motors, Mahindra & Mahindra Limited, amongst others.
After considering all the factors the listing still seems to be reasonably priced looking at its current financials hence we would recommend investors to “Subscribe” to this IPO from a medium to long-term perspective.
Disclaimer:
This article should not be construed as investment advice, please consult your Investment Adviser before making any investment decision.
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