Divgi Torqtransfer Systems Limited has Filed DRHP for the IPO with SEBI on 23.09.2022

Divgi Torqtransfer Systems Limited has filed DRHP with SEBI on 23rd, September, 2022 to launch its IPO.

The IPO comprises both Offer for Sale (OFS) and Fresh Issue. The size of Fresh Issue is up to 200 crore whereas OFS is up to 31,46,802 Equity Share. 

Business Model of Company 

The Company manufactures and supplies a variety of products under the broad categories of (i) torque transfer systems which includes four-wheel-drive and all-wheel-drive products, synchronizer systems for manual transmissions and DCT and components for the above-mentioned product categories for torque transfer systems and synchronizer systems in manual transmission, DCT, and EVs. The Company has also developed transmission systems for EVs, DCT systems and rear wheel drive manual transmissions. The Company is one of the few companies who serves both system level solution providers as well as component kit suppliers to global OEMs and Tier I transmission systems suppliers.

The Company is amongst the very few automotive component entities in India who have the capability to develop and provide system level transfer case, torque coupler and dual clutch automatic transmissions (DCT) solutions. The Company 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. The Company 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 has the capability to develop and provide transmission systems for electric vehicles (EVs). The Company is in the process of designing and developing prototypes of transmission systems for EVs. 

The Company has an in-house software development capability which helps in providing system level solutions offering software that controls the vehicle dynamics. The Company is also one of the first few suppliers of steel and carbon-based synchronizer systems for the Indian markets, and is one of the leading manufacturers of steel synchronizers in India.

Who is the Management of the Company?

As on the date of this Draft Red Herring Prospectus, the following is the management of the company:

(i)  Jitendra Bhaskar Divgi is the Managing Director on the Board. He has received a bachelors’ degree in Mechanical Engineering (Honors) from The Birla Institute of Technology & Science, Pilani in the year 1985 and has received a Master’s of Science Degree in Manufacturing from the University of Massachusetts, USA in the year 1986. Before joining Divgi Metalwares in 1994, he worked at Digital Equipment Corporation, Massachusetts. He served on the Board of Directors of BorgWarner, China In 2000, and was associated with BorgWarner till 2005.

(ii) Praveen Purushottam Kadle is an Independent Director on the Board. He has received a bachelors’ degree in Commerce, Accounting and Auditing from the University of Bombay and has qualified as a Chartered Accountant in 1982, received certificate of merit of Cost and Management Accountant in 1983 and qualified as a Company Secretary in 1983. He is the Chairman of Prachetas Capital Private Limited. He was associated with Tata Information Systems (an IBM and Tata Company) as Vice President (Finance) and Secretary in 1992 and as Vice President (Finance) at Tata Engineering and Locomotive Company Limited in 1996. 

Why is the company raising funds via IPO?

The Company will not receive any proceeds from the Offer for Sale. The Selling Shareholders will be entitled to the proceeds from the Offer for Sale after deduction of expenses.

The  Company proposes to utilize the Net Proceeds from the Fresh Issue towards the following objects:

1. Funding capital expenditure requirements for the purchase of equipments/machineries of the manufacturing facilities.
2. General corporate purposes.

In addition, the Company expects to receive the benefits of listing of the Equity Shares on the Stock Exchanges and enhancement of the Company’s visibility and brand image and creation of a public market for the Equity Shares in India.

Is there any OFS in the IPO?

The IPO of Divgi Torqtransfer Systems Limited includes both Fresh Issue and Offer for Sale. The size of Fresh Issue is up to Rs. 200 crore whereas OFS is up to 31,46,802 Equity Share. Details of shareholders who are selling their Equity Shares  in the IPO 

1. Oman India Joint Investment Fund II Up to 17,50,000 Equity Shares 
2. NRJN Family Trust Up to 11,54,000 Equity Shares 
3. Bharat Bhalchandra Divgi  Up to 49,430 Equity Shares 
4. Sanjay Bhalchandra Divgi  Up to 40,460 Equity Shares 
5. Ashish Anant Divgi  Up to 104,020 Equity Shares 
6. Arun Ramdas Idgunji Up to 33,660 Equity Shares 

7. Kishore Mangesh Kalbag Up to 15,232 Equity Shares 

Financials of the company?  

As per the financial statement of the Company, in FY22, the Company has registered 24% growth in its total revenue. The total revenue of the company increased to 242 crore as against Rs. 195 crore in the previous financial year. The total expenses of the Company have increased 27% to 180 crore as against Rs. 142 crore in the previous financial year. The Profit Before Tax of the Company increased 15% to Rs. 62 crore as against Rs. 53 crore in the previous financial year. The Company has reported 21% increase in its net profit in FY22. The net profit of the company increased to Rs. 46 crore in FY22 as against Rs. 38 crore in the previous financial year. 

In FY22, the Company has registered 12% growth in its total assets. The net assets of the Company increased to 405 crore as against Rs. 363 crore in the previous financial year. The total equity and liabilities of the Company also increased 12% to 405 crore as against Rs. 363 crore in the previous financial year. 

In FY22, the net cash inflow of the Company from  operating activities was Rs. 51 crore as against Rs. 27 crore in the previous financial year. The net cash outflow of the Company from investing activities was Rs. 51 crore as against Rs. 25 crore in the previous financial year. The net cash outflow from financial activities of the Company was Rs. 3 crore as against Rs. 3 crore in the previous financial year. The cash and cash equivalents at the end of the year of the Company was Rs. 17 crore as against Rs. 20 crore in the previous financial year. 

Risk in The IPO

Dependent on Very Few Customers

The business of the Company is largely dependent upon its 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 business of the Company. The Company derives approximately 90% of its revenue from its top five customers, namely, Mahindra & Mahindra, Tata Motors, Toyota Kirloskar Auto Parts, BorgWarner and a Russian automobile manufacturer. In case of loss of any of the top five customers, the business of the Company, financial condition and results of operations could be adversely affected.

Risk of Volatility in the Price of Raw 

Materials 

The Company uses a variety of raw materials and commodities (including aluminium, copper, nickel, plastic resins, steel, other raw materials and energy) and materials purchased in various forms such as peeled alloy steel bars, aluminium castings, steel forgings, magnets, steel and brass stampings, and plastic components in the production of the components. The  business of the Company could be adversely affected by volatility in the price or availability of raw materials and components

Company May Not Capture Growing EV Market 

The success of the business of the Company depends on its ability to effectively implement the right business growth strategies. Even if the Company has successfully executed its business strategies in the past, there can be no assurance that it will be able to execute its strategies on time and within the estimated budget, or that it will meet the expectations of targeted customers. The Company may not be successful in implementing  growth strategies, including  strategy to capture market opportunity in the growing EV market and other new initiatives.

Company May Not Timely Respond to New Technology 

If the Company is unable to anticipate, identify, understand and respond timely to rapidly evolving technological and market trends and preferences, develop new products to meet its customers’ demands and to adapt to major changes and shifts in the automotive market, the business of the Company may be materially adversely affected.

The Company was Declared as “Sick Company”

The net worth of the Company had become negative in the Fiscal 2002 and the Company was declared a ‘sick company’ under the Sick Industrial Companies (Special Provisions) Act, 1985, by the Board for Industrial and Financial Reconstruction. In accordance with the provisions of the rehabilitation scheme approved by the Board for Industrial and Financial Reconstruction, the outstanding borrowing of the Company at that time was rescheduled and the Company was provided with an extended period to pay its statutory liabilities in connection to provident fund and employee state insurance. The Company obtained a positive net worth and was discharged from the purview of the Sick Industrial Companies (Special Provisions) Act, 1985.