SGX Nifty down 34 points: Asian markets, dollar movement, FPI flows & more

The initial public offering (IPO) of Divgi Torqtransfer Systems kicks off for subscription on Wednesday, March 1 as the company is looking to raise a little more than Rs 412 crore from its primary stake sale by selling its shares in the range of Rs 560-590 apiece.

Analysts tracking the issue are majorly positive on it and suggest investors to subscribe for it for a longer-term perspective. However, they have flagged a few concerns including client concentration on a few big names and high dependence on imports for raw material as the key risk for the issue.

Divgi Torqtransfer's edge is its ability to develop and provide system level solutions like transfer case, torque coupler and DCT (dual clutch transmission) solutions backed by inhouse software development capability. It intends to leverage its presence in the fast-growing UV automatics segment, said Nirmal Bang Securities.

"With OEMs entirely dependent on imports for DCT, it will be the only manufacturer of DCT systems in India. It has been awarded a contract for supply of EV transmission systems. It is being offered at reasonable valuations at 39.1x FY22 earnings, considering the future growth opportunities," it added with a 'subscribe for a long term' view.

Pune based Divgi TorqTransfer Systems is engaged in the business as an automotive component entity. Incorporated in 1964, the company is among a very few automotive component entities in India with the capability to develop and provide system-level transfer cases, torque couplers, and dual-clutch automatic transmission solutions.

Sales and PAT at Divgi Torque has grown at a CAGR of 21.2 per cent and 28.3 per cent, respectively over FY20-22, led by impressive improvement in EBITDA margin profile. The company clocked EBITDA margins of 28.1 per cent in FY22 with RoCE placed at 16 per cent. At the upper end of the price band, it is valued at 35 P/E on FY22, said ICICI Securities.

"We assign 'subscribe for long term' rating on the issue given that our bet is on future growth trajectory at the company as trailing valuations discount much of its healthy financial profile. We like the company for its technical prowess in
transmission space & incremental revenue streams coming on broad going forward in EV transmission," it added.

The brokerage has flagged client concentration risk with single largest customer constituting more than 50 per cent of revenues and top 5 customers constituting over 90 per cent of sales, high dependence on imported raw materials, and continued geopolitical tensions impacting exports are the key risks for the company.

Investors can make a bid of a minimum of 25 equity shares and the issue can be subscribed till Friday, March 3, 2023. Equirus Capital and Inga Ventures are the book running lead managers, whereas Link Intime India has been appointed as the book running lead manager for the issue.

The issue consists of a sale of fresh equity shares aggregating to Rs 180 crore, along with an offer-for-sale of 39,34,243 equity shares aggregating to Rs 232.12 crore. Net proceeds from the issue will be utilized towards funding capital expenditure requirements for equipment of our manufacturing facilities and general corporate purposes.

The company has established a track record of growth and financial performance. Divgi witnessed ROE and ROCE of 13.57 per cent and 29.47 per cent in FY2022, respectively. The company is virtually debt free as of September 2022, said Canara Bank Securities.

"On the valuation front, the company is quite attractive to industry peers. We recommend subscribing to IPO for listing as well as long term," it said.

Divgi Torqtransfer Systems allotted 31,43,290 equity shares to 12 anchor investors at Rs 590 per share aggregating to about Rs 185.45 crore, the company said in a circular on BSE. Anchors include Matthews Asia Funds, Aurigin Master Fund, ICICI Prudential, Motilal Oswal and some other mutual funds and more insurance companies.

The business model is supported by a consistent track record of revenue growth and profitability with a CAGR of 21.23 per cent and 28.30 per cent between FY20-22. From a valuation standpoint, the issue appears to be attractively priced at a P/E ratio of 35x when compared to its listed peers, said Parul Sharma, Research Analyst, Samco Securities.

"However, the business has high customer concentration risk. Moreover, overseas sale is dependent upon China and Russia which exposes the company to the risks of geographical concentration. With a favorable future growth potential in the long run, we recommend investors to 'subscribe' to this IPO," she said.

Also Read: SBI, BOB, Axis Bank: Adani group exposure, macro concerns hit bank stocks. Is it a good entry point?

Also Read: Vedanta, JSW Steel, SpiceJet: What should be your strategy amid market correction

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Business Today)