Diffusion Engineers IPO analysis

Diffusion Engineers IPO will open for subscription on September 26, 2024 and close on September 30, 2024. We break down the welding equipment manufacturer's strengths, weaknesses, and growth prospects to help investors make an informed decision.

Diffusion Engineers IPO in a nutshell

• Quality : The company's three-year average ROE and ROCE were nearly 17 and 19 per cent, respectively, during FY22-24.
  
• Growth : The company's revenue and profit after tax jumped nearly 17 and 36 per cent per annum, respectively, during FY22-24.
  
• Valuation : Post the IPO, the stock will be valued at a P/E and P/B ratio of around 20 and 2 times, respectively.
  
• Overview: Higher expenditure on infrastructure, along with India's growing manufacturing industry, will help Diffusion Engineers scale its businesses in the long run. However, high competition from organised and unorganised players may hurt its future prospects.

About Diffusion Engineers

Incorporated in 1982, Diffusion Engineers manufactures welding consumables, wear plates, and heavy engineering equipment. These products are integral components in manufacturing industrial equipment used across various core industries like power, cement, mining, oil, sugar, etc. The company operates four manufacturing facilities, all located in Maharashtra and derives the majority of its revenue from domestic business (91 per cent as of FY24).

Strengths of Diffusion Engineers

• Strong client relationships: The company served over 500 clients in FY24, of which nearly 69 per cent have maintained relationships spanning at least five years.
  
• Revenue diversification: The company's presence across multiple industries allows revenue diversification, with its top 10 clients constituting only 29 per cent of the total FY24 revenue.

Weaknesses of Diffusion Engineers

• Geographic concentration: All four manufacturing units of Diffusion Engineers are located in Nagpur, Maharashtra. Hence, the company is vulnerable to any adverse development or calamity in the region.
  
• Industry dependence: The company relies on the growth of the industrial sector, especially cement and steel, which accounted for nearly half of its FY24 revenue. A decline in these industries can impact its financial performance.

Risk report

Company and business

• Are Diffusion Engineers' earnings before tax more than Rs 50 crore in the last 12 months?
  No. The company reported a profit before tax of Rs 41 crore as of FY24.
  
• Will Diffusion Engineers be able to scale up its business?
  Yes. India's growing manufacturing industry will help the company scale its business.
  
• Does Diffusion Engineers have a recognisable brand recall with client stickiness?
  Yes. The company boasts at least a five-year relationship with nearly 69 per cent of its clients.
  
• Does the company have a credible moat?
  No. The company manufactures commoditised products (identical to its rivals) and faces fierce competition in the market.

Management

• Do any of the company's founders still hold at least a 5 per cent stake? Or do promoters have over 25 per cent stake in the company?
  Yes. Post the IPO, the promoters will hold a nearly 70 per cent stake.
  
• Do the top three managers have over 15 years of combined leadership at Diffusion Engineers?
  Yes. The company's Chairman Prashant Garg has been associated with it since 2003.
  
• Is the management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
  Yes. No information suggests otherwise.
  
• Is the company's accounting policy stable?
  Yes. No information suggests otherwise.
  
• Is Diffusion Engineers free of promoter pledging of shares?
  Yes. The company's promoters have not pledged any shares.

Financials

• Did Diffusion Engineers generate a current and three-year average ROE of more than 15 per cent and a ROCE of more than 18 per cent?
  Yes. Diffusion Engineers' three-year average ROE and ROCE were nearly 17 and 19 per cent, respectively. Its ROE and ROCE were nearly 19 and 21 per cent, respectively, in FY24.
  
• Was the company's operating cash flow positive during the last three years?
  No. The company reported negative cash flow from operations in FY23.
  
• Is the company's net debt-to-equity ratio less than one?
  Yes. Diffusion Engineers had a net debt-to-equity ratio of 0.1 as of March 2024.
  
• Is Diffusion Engineers free from reliance on huge working capital for day-to-day affairs?
  Yes. The company does not rely on huge working capital for its daily operations.
  
• Can the company run its business without relying on external funding in the next three years?
  Yes. The proceeds from the IPO, along with low debt on the balance sheet, should ensure that the company runs its business without relying on external funding in the next three years.
  
• Is Diffusion Engineers free from meaningful contingent liabilities?
  Yes. The company is free from any meaningful contingent liabilities.

Valuations

• Does the stock offer an operating earnings yield of more than 8 per cent on its enterprise value?
  No. The stock offers an operating earnings yield of around 5 per cent on its enterprise value.
  
• Is the stock's price-to-earnings less than its peers' median level?
  Yes. The stock will be valued at a P/E of 20 times compared to its peers' median level of around 36 times.
  
• Is the stock's price-to-book value less than its peers' average level?
  Yes. The stock will be valued at a P/B of nearly 2 times compared to its peers' average level of around 6 times.

Disclaimer: This is not a stock recommendation. Do your due diligence before investing.

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