IPO

Diffusion Engineers, promoted by Prashant Garg, is engaged in the business of manufacturing welding consumables, wear plates and wear parts and heavy engineering machinery for core industries. It also provides specialized repairs and reconditioning services for heavy machinery and equipment as well as involved in trading of anti-wear powders and welding and cutting machinery.

The company also provide super conditioning process at its manufacturing facilities, a surface treatment solution for machine components that enhances wear resistance, eliminates stress and improves their repairability ultimately extending their lifespan and reducing production costs.

Its products and services portfolio can be classified into welding and Anti-wear consumables[special purpose electrodes, flux cored wires, cold repair compounds]; wear plates / wear parts [includes Welding service job work], heavy engineering equipment [air separator, high pressure grinding rollers, FD fan, mill body, RAPH rotter] and trading [thermal spray powder, welding equipment]. Of FY2024 consolidated revenue, 30.4% was from welding and Anti-wear consumables; 34.9% from Wear plate/wear parts; 26% from heavy engineering equipment and 8.7% from trading.

A special purpose electrode (SPE) is specially formulated maintenance purpose welding electrodes that ensure the enhancement of working performance with minimum heat input. The company manufactures a range of electrodes using alloys such as tungsten, nickel, chromium, cobalt, molybdenum, niobium, vanadium, etc. Flux-cored wire (FCW) is a type of welding consumable used in various welding processes. Of the total volume of SPE and FCW manufactured by the company in FY2024 about 20.25% and 77.01% is captively (in-house) consumed and balance is sold to customers in domestic and international market. Of the FY2024 standalone revenue, the SPE and FCW accounted for 20.27% and 7.9% respectively.

Wear plates are used to reduce wear and tear on equipment surface caused by harsh working environment prevalent in industries and are used across various industries and find its application where abrasion, wear, tear and impact requirements are particularly critical. Wear plates and wear parts accounted for 13.28% and 14.2% of the FY2024 standalone revenue from operations.

The company in India sells its products through a network of distributors, who further distribute its products to the end-use customers. It sell its products under various brand labels including but not limited to 'DIFFUSION', 'DIFFCOR', 'CORODUR' and 'SOP'.

The company sells its products in Asian, APEC, Africa, Middle East, Europe and US regions also. Thus the company gets sizeable revenue from exports i.e. about 9.47% of revenue in FY2024 with balance 90.53% coming from domestic market. Of the FY2024 standalone revenue about 36.66% come from cement, 13.92% from engineering, 12.92% from steel, 7.31% from power, 4.47% from sugar and balance 24.72% from others.

Currently operates four manufacturing units all located in Nagpur, Maharashtra. While Unit I engaged in manufacture of special purpose welding electrodes (700 MTPA installed capacity); the Unit II manufactures flux cored wires, wear plates and wear parts through fabrication and machining (3204 MTPA installed capacity); Unit III produces coatings for abrasion and corrosion resistance (810 MTPA installed capacity); and Unit IV manufactures flux cored wires (444 MTPA), wear plates and heavy engineering machinery (9000 MTPA). It also has overseas presence through its Subsidiaries in Singapore, Turkey and Philippines, and Joint Ventures/ Associates in United Kingdom and Malaysia.

The company intends to venture into manufacturing of nickel, cobalt and iron-based powders to cater to the growing demand for these powders within its customer base and the industry at large. To facilitate this endeavor, it intends to enter into a technical collaboration agreement with its associate, LSN Diffusion Ltd. (UK), from whom it currently source thermal spray powders for trading.

It also looks to extend its anti wear solutions and heavy engineering equipment business beyond its current focus on cement, steel and power sectors into new industries such as mining, defence etc. It also looks at strategic leasing of heavy equipment for pre determined leasing and maintenance fees from customers.

The Issue and Object of the Issue

The IPO comprises fresh issue of equity shares of 9405000 equity share of Rs 10 face value.

Of the net proceeds from the fresh issue, about Rs 71.38 crore will be used for funding capital expenditure requirements towards expansion of its existing manufacturing facility Unit IV at Khapri (Uma) in Nagpur; Rs 30.385 crore towards setting up of a new manufacturing facility located at Hingna in Sonegaon District of Maharashtra; Rs 22 crore towards funding working capital requirements of the company and balance for general corporate purposes.

On completion of expansion project the installed capacity of Unit IV for wear plates and heavy engineering fabrication will increase the to 16920 Metric Tons/ annum [4920 MTPA of Wear plates; 12000 MTPA of heavy engineering fabrication] from current 9000 MTPA and that for FCW to 1080 MTPA from current 444 MTPA. The expansion of Unit IV is expected to commence production by November 2025.

The proposed new plant at Hingna will have the capacity to manufacture SPE and wire strips which are utilized in the production of FCW signaling backward integration. This plant will have installed capacity to produce 600 MTPA of SPE and 1200 MTPA of CR Coil Slitting Line and expected to commence production by November 2025.

Strengths

Decades of experience in welding consumables and wear plates with expertise to design, develop and manufacture complex and specialized industrial equipment and components for OEMs and end-user industries such as cement, steel and power sector. Revenue contribution from OEMs stand at 27.75% in FY2024 total operational revenue and balance 72.25% from direct end customers.

Synergistic business models focused on forward integration

Have a diversified customer base with which it has long standing relationship. It has served 503, 500 and 444 customers for the Fiscals 2024, 2023 and 2022, respectively. Top 10 customers contribute just 29.43% of FY2024 standalone revenue.

Weakness

Operate in a competitive and fragmented industry with low barriers to entry and may be unable to compete with a range of unorganized sector.

Had negative operating cash flows in FY2023 and may incur negative cash flow in the future also.

All of its four manufacturing facilities are located in Nagpur, Maharashtra.

Made allotment of equity shares in the past to more than 49 investors, which may have been in non-compliance with the Companies Act, 1956.

Group Companies namely Mecdiff Sdn Bhd and Benvira Forward Algorithms Private Limited and certain subsidiaries of the company are engaged in a business similar to that of the company. It have not entered into any non-compete agreements with such Group Companies and Subsidiaries.

There have been some instances of incorrect filings with the Registrar of Companies and other non-compliances under the Companies Act in the past which may attract penalties.

Cyclical nature of industrial capex in the country

Valuation

Consolidated re-stated revenue stood higher by 9% to Rs 278.14 crore in FY 2024. But with the OPM expand by strong 310 bps to 14% on the back of better product mix, OP jumped up by 39% to Rs 38.87 crore. Eventually, Pat after MI stood higher by 39% to Rs 30.80 crore.

At the upper price band, the PE works out to 20.2 times of its FY24 EPS, the P/BV works out to 1.8 times and EV/Sales works out to 2.4 times.

In comparison, welding consumable players such as Ador Welding, Esab India, GEE, D&H India quotes at a PE of 29.3 times, 59.9 times, 36.3 times and 44.6 times and at a P/BV of 5.1 times, 31.5 times, 3.6 times and 2.8 times. AIA Engineering and Tega Industries who are into mill liners and other related consumables quotes at a PE of 36.8 times and 62.5 times respectively and P/BV of 6.3 times and 10.2 times. Ador Welding, Esab India, GEE, D&H India, AIA Engg and Tega Industries in comparison quotes at a EV/sales of 18.2 times, 13.6 times, 32.6 times, 101.7 times, 3.6 times and 2.8 times respectively. But these companies are not apple to apple comparisons.

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