Divgi TorqTransfer Systems
Divgi TorqTransfer Systems is coming out with a 100% book building; initial public offering (IPO) of 71,48,528 shares of Rs 5 each in a price band Rs 560-590 per equity share.
Not less than 75% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not less than 15% of the issue will be available for the non-institutional bidders and the remaining 10% for the retail investors.
The issue will open for subscription on March 1, 2023 and will close on March 03, 2023.
The shares will be listed on BSE as well as NSE.
The face value of the share is Rs 5 and is priced 112 times of its face value on the lower side and 118 times on the higher side.
Book running lead managers to the issue are Inga Ventures and Equirus Capital.
Compliance Officer for the issue is Satish Chandrashekhar Kadrolli.
Profile of the company
The company is amongst the very few suppliers in India who have the capability to develop and provide system level transfer case, torque coupler and DCT solutions. It is one of the leading players supplying transfer case systems to automotive OEMs in India and the largest supplier of transfer case systems to passenger vehicle manufacturers in India. 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.
The company also has the capability to develop and provides transmission systems for electric vehicles (EVs). It is in the process of designing and developing prototypes of transmission systems for EVs pursuant to receipt of a business award for this purpose. The company has been awarded a contract for the supply of EV transmission systems for one of the leading providers of EVs in India. Further, it has been awarded a contract for supply of components for Hybrid Vehicles for a global OEM, however, this does not constitute as one of the top five customers of the Company. The company actively collaborates with Europe’s transmission engineering consulting firms like FEV and Hofer.
The company 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. It has also developed (i) transmission systems for EVs; (ii) DCT systems; and (iii) rear wheel drive manual transmissions. It is one of the few companies who serve both as systems level solution provider as well as component kit supplier to global OEMs and Tier I transmission systems suppliers.
Proceed is being used for:
Industry Overview
Passenger vehicle production in India contracted at 1% CAGR - from 3.8 million in fiscal 2017 to 3.7 million in fiscal 2022. However, the industry witnessed significant highs and lows during the period. Production of passenger vehicles (PVs) in India recorded a 3% CAGR between fiscals 2017 and 2019 amidst the growth in domestic and export demand. Domestic demand was driven by expansion in the addressable market, development of infrastructure, and the stable cost of vehicle ownership, as crude oil prices remained low except in the few months when output was reduced due to sanctions imposed on Iran. During the time period, demonetisation and implementation of the Goods and Services Tax (GST) resulted in the weakening of the economy. This, coupled with enhanced emission and safety norms introduced by the government resulted in sluggish growth in the PV industry after fiscal 2018. Production in fiscal 2019 remained flat, with India producing 4.03 million PVs, of which 3.38 million vehicles were sold in the domestic market and 0.68 million were exported.
In fiscal 2020, lower private consumption and inventory adjustment because of a change in emission norms from BS IV to BS VI, the liquidity crisis, and the onset of COVID-19 resulted in a 15% decline in production. Domestic sales fell 18%, whereas exports remained almost flat. As COVID-19 spread through close contact, the use of public transportation and shared mobility services were heavily affected, giving a boost to personal mobility. However, the disruption in supply chain limited the vehicle production during the year & PV production declined 9% in fiscal 2021 - domestic sales declined by 2%, while exports declined sharply by 39%. The semi-conductor shortage dented passenger-vehicle production in the first three quarters of fiscal 2022. However, due to an improvement in supply of chips and agile production strategies adopted by OEMs, the fourth quarter of fiscal 2022 saw an improvement in volumes. Accordingly, production volumes grew 17% in fiscal 2022 from a low base of fiscal 2021.
Pros and strengths
One of the very few suppliers in India having the capability to develop and provide system level transfer case, torque coupler, DCT solutions and transmission systems for EVs: The company is amongst the very few suppliers in India who have the capability to develop and provide system level transfer case, torque coupler and DCT solutions as it has in-house software development capability. It has designed, developed, manufactured and supplied software embedded electronically controlled transfer cases and torque couplers for OEMs like Tata Motors, Mahindra & Mahindra, amongst others. It has, in the past worked with Indian OEMs as development partners for new projects. It has recently also been awarded a contract for the supply of EV transmission systems for one of the leading providers of EVs in India, however supply pursuant to the contract has not started as on the date of this Red Herring Prospectus. It has entered into a product development agreement as well as technology transfer agreement with a German automotive company for DCT systems, and is engaged with a German engineering and digital mobility company for validation of its design prototypes. These agreements are entered into, on a product to product basis. The validity of the contracts is longer in duration, owing to the fact that product development is an extensive process, and the products are still in the development phase.
Strategically located manufacturing facilities capable of producing high precision components meeting system-level design intent: The company’s facilities are equipped with advanced machinery and certain of its facilities are located in close proximity to its key customers to enable meeting its customers’ demand schedules and logistical advantages for its customers, and to insulate them from local supply or other disruptions. It 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. As on February 3, 2023, the construction of its facility at Shirwal, Maharashtra is 80.00% completed, and is expected to be fully completed by Fiscal 2024. It strives to ensure that its manufacturing facilities are aligned with emerging trends in automation and premiumization which is demonstrated in its on-going contracts for supplying components for EVs and Hybrid Vehicles. Its manufacturing facilities are capable of handling varying production volumes and the multipurpose nature of infrastructure, enabling it to use its machinery for manufacturing various precision automotive drive train systems.
Experienced board of directors and senior management team supported by skilled and qualified workforce: The company is led by a highly experienced board of directors, and a professional and experienced management team with extensive experience in the automotive industry. Its Promoters Jitendra Bhaskar Divgi and Hirendra Bhaskar Divgi, are mechanical engineers with considerable experience in the automotive industry. Jitendra Bhaskar Divgi, its Managing Director and Promoter, has a Master of Science degree in manufacturing from the University of Massachusetts, USA. Hirendra Bhaskar Divgi, its Whole-Time Director and Promoter, has over 30 years of experience in advanced gear manufacturing processes and their influence in drive train products while working as the development manager in its Company. Its Chairman, Praveen Purushottam Kadle has considerable experience in the automotive industry, and it is benefitted from his extensive experience. It is further supported by an experienced board of directors with diversified expertise, which actively contributes to and participates in its strategy. A large number of its senior management personnel have worked with it for a significant period of time, resulting in effective operational coordination and continuity of business strategies.
Consistent financial performance with focus on innovation and R&D capabilities: The company’s focus on continuous efficiency improvements, improved productivity and cost rationalization has enabled it to deliver consistent and strong financial and operational performance. Its business model is supported by stable and recurring revenues, with a consistent track record of revenue growth and profitability. It has established a track record of growth and financial performance with steady cash flows from its operations. Between Fiscal 2020 and Fiscal 2022, its profit after tax increased at a CAGR of 28.30%, as per its Restated Financial Statements. Its strong balance sheet and positive operating cash flows enable it to fund its strategic initiatives, pursue opportunities for growth and manage unanticipated cash flow variations.
Risks and concerns
Geographical constrain: The company’s overseas sales are primarily dependent on two countries, China and Russia, which exposes it to risks of concentration. Loss of all or a substantial portion of sales to any of its customers from these two countries, for any reason (including, due to any materially adverse social, political or economic development, civil disruptions, or changes in the policies of the state government or state or local governments in these countries, occurrence of COVID-19 infection and strict curbs), could have an adverse effect on its business, results of operations, financial condition, cash flows and future business prospects. Further, the company serve a broad range of customers both in the Indian and overseas markets. The reduction in exports from USA and Korea in Fiscal 2022 was due to the end of the program with BorgWarner, USA, certain programs in South Korea and the increase in domestic business due to the launch of Mahindra Thar. Further, given the recent Russian invasion of Ukraine and the consequent sanctions imposed on Russia, there has been a reduction in imports from Russia, as a result, it may be unable to sell its products to these Russian customers in the future. There can be no assurance that it will be able to offset the loss of its Russian customers, which may adversely affect its business.
Depend on some third party suppliers for certain key components: The company is dependent on some global suppliers for key components such as bearings, oil seals, carbon friction lining, ECU, friction discs and shift motor, etc. which are used for manufacturing systems and components in relation to its business. It is required to select suppliers for its customers, except those who specify the source of raw material, by taking into consideration their production capacities and financial condition and expect that they will deliver in accordance with its quality standards and comply with their contractual obligations with it. However, there can be no assurance that capacity limitations, industry shortages, labour or social unrest, weather emergencies, commercial disputes, government actions, riots, wars, pandemic, sabotage, cyberattacks, non-conforming parts, acts of terrorism, “Acts of God”, financial or operational instability of suppliers, or other problems that its suppliers experience will not result in occasional shortages or delays in their supply of raw materials to it.
Faces substantial competition: The company competes globally with a number of other automotive system and component manufacturers and distributors that produce and sell systems and components similar to its. Technology, price, design, quality, delivery, engineering development and program launch support are the primary elements of competition in its markets. Its competitors include manufacturing facilities controlled by OEMs, as well as many other independent domestic and foreign suppliers. In some instances, it also sells to and collaborates with its competitors to develop automotive systems and components, which may adversely affect its competitive situation. In addition to traditional competitors in the automotive sector, the trend towards advanced electronic integration and electrification has led to an increase in the significance of technology to its current and future products and the amount of capital it need to invest to develop these new technologies, as well as an increase in the amount of competition it face from technology focused new market entrants.
Face foreign exchange rate risk: The company faces foreign exchange rate risk to the extent that a part of its revenue, expenses, assets or liabilities are denominated in a currency other than the Indian Rupee. It reports its results of operations in Indian Rupees. A portion of its equipment purchases, a portion of its travelling, shipping costs, commission and spares purchases, a portion of its material costs and third-party warehouse expenses are denominated in foreign currencies, while a significant portion of its revenue is also denominated in foreign currencies. Based on its geographical presence and business operations worldwide, it primarily deals in USD, Euro, CHF and GBP. Its foreign currency exposures, exchange rate fluctuations between the Indian Rupee and foreign currencies, especially the USD, Euro, CHF and GBP, may have a material impact on its results of operations, cash flows and financial condition. It may suffer losses on account of foreign currency exchange rate fluctuations on the sale of its products to its international customers. It does not have any hedging policy in place to cover such losses.
Outlook
Divgi TorqTransfer Systems is engaged in the business as an automotive component entity. It is among the 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. It is one of the leading players supplying transfer case systems to automotive OEMs in India and the largest supplier of transfer case systems to passenger vehicle manufacturers in India. It has achieved leading positions for select products in its portfolio through focus on innovation; offering of customized solutions in distinctive products; in-house software development capability; and product development and production at quality standards acceptable to its clients and at optimized costs. It is in the process of launching domestically manufactured DCT systems for the Indian market. Therefore, it will be the only manufacturer of DCT systems in India. On the concern side, the automotive markets in which the company operates are undergoing significant technological changes, with increasing focus on, among other things, electrification of vehicles, development of Hybrid Vehicles and advanced driver assistance technologies. Its results of operations and financial condition are impacted, in part, by its competitive advantage in developing, engineering and manufacturing innovative and/or improved products.
The company is coming out with an IPO of 71,48,528 equity shares of face value of Rs 5 each. The issue has been offered in a price band of Rs 560-590 per equity share. The aggregate size of the offer is around Rs 400.32 crore to Rs 421.76 crore based on lower and upper price band respectively. On the performance front, the company’s total income increased by 24.02% to Rs 241.87 crore for Fiscal 2022 from Rs 195.02 crore for Fiscal 2021. The company’s profit for Fiscal 2022 increased by 21.32% to Rs 46.15 crore, from a profit of Rs 38.04 crore for Fiscal 2021. Meanwhile, the company intends to further leverage its presence in yet another fast-developing trend, which is the increasing demand for automatics observed across the entire UV segment. The company intends to strengthen its relationships with its existing customers and explore opportunities to grow along the value chain by expanding the array of its existing products and solutions that it supply to its customers across geographies, and to win new customer contracts by developing products and solutions aligned with their needs.
