Danish Power IPO analysis

Danish Power IPO will open for subscription on October 22, 2024, and close on October 24, 2024. This SME (small and medium enterprise) IPO is India's largest, raising nearly Rs 200 crore. However, it's important to remember the inherent risks of SME IPOs. These companies are typically less established, with limited operating history, making them more vulnerable to market volatility than larger firms. Their limited financial disclosures make it harder to evaluate their long-term potential. Furthermore, SME stocks often experience lower trading volumes, leading to price volatility during transactions. Additionally, the lighter regulatory framework for SMEs may present governance and compliance risks. While SME IPOs offer growth opportunities, they demand careful evaluation, given their elevated risk profile.

Below is a breakdown of the power equipment manufacturer's strengths, weaknesses and growth prospects to help you make an informed decision.

Danish Power IPO in a nutshell

• Quality: Between FY22-24, Danish Power reported a three-year average ROE and ROCE of 33 and 32 per cent, respectively.
  
• Growth: Between FY22 and FY24, its revenue and net profit grew by 50 and 169 per cent per annum, respectively.
  
• Valuation: After listing, the stock will be valued at a P/E and a P/B ratio of 19.7 and 2.6 times, respectively.
  
• Overview: Sectoral tailwinds support the company's growth prospects. The Indian government's focus on developing power infrastructure and increasing demand for renewable energy will help the company scale up. However, high dependence on a few customers with no long-term agreements remains a threat.

About Danish Power

Incorporated in 1985, Danish Power manufactures transformers, which are used to facilitate efficient transmission and distribution of electrical power. Operating through two manufacturing facilities in Jaipur, it supplies inverter-duty transformers used in solar power plants, wind farms and distribution transformers.

Its client base includes giants like Tata Power Solar System, Waaree Renewable Technologies, Jakson Green, ABB India Limited and Torrent Power. As of Q2FY24, it has an order book of Rs 371 crore.

Strengths of Danish Power

• Strong order book: As of September 2024, Danish Power has an order book of Rs 371 crore, providing revenue visibility in the near future.

Weaknesses of Danish Power

• Revenue concentration : A substantial portion of its revenue comes from its top 10 customers. In FY24, the top 10 customers accounted for 88 per cent of its revenue. Importantly, the company has no long-term agreements with these top clients.
  
• Geographical concentration : Danish Power's entire operations base is in Jaipur, Rajasthan. Any adverse calamity or political disturbance in the region could have a significant impact on the business.

Risk report

Company and business

• Were Danish Power's earnings before tax more than Rs 50 crore in the last 12 months?
  Yes. Its earnings before tax was Rs 51 crore in FY24.
  
• Will Danish Power be able to scale up its business?
  Yes. The government's focus on power infrastructure development, growing share of electrical equipment and rising demand for renewable energy will support its growth. Additionally, the company plans to use its IPO proceeds to increase capacity, which will be key to scaling its operations.
  
• Does Danish Power have recognisable brands with client stickiness?
  Yes. The company manufactures its products based on customer specifications and quality standards, fostering customer loyalty. Customers are unlikely to switch to another vendor unless the products fail to meet their specifications.
  
• Does the company have a credible moat?
  No. There is intense competition in the transformer manufacturing industry, with the company facing strong pressure from both domestic and global players.

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' stake will be 73.6 per cent.
  
• Do the top three managers have over 15 years of combined leadership at Danish Power?
  Yes. Managing director Dinesh Talwar has been with the company since its inception in 1985.
  
• Is the company's management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
  Yes. There is no information to suggest otherwise.
  
• Is the company's accounting policy stable?
  Yes. There is no information to suggest otherwise.
  
• Is Danish Power free of promoters pledging their shares?
  Yes. The company is free of promoters pledging their shares.

Financials

• Did the company generate a current and three-year average ROE of more than 15 per cent and an ROCE of more than 18 per cent?
  Yes. The company's three-year average ROE and ROCE were 33 and 32 per cent, respectively. In FY24, it reported an ROE and ROCE of 60 and 57 per cent, respectively.
  
• Was the company's operating cash flow positive during the last three years?
  Yes. The company reported positive cash flow from operations (CFO) in the last two years.
  
• Is Danish Power's net debt-to-equity ratio less than one?
  Yes. Its net debt-to-equity ratio was 0.01 as of FY24.
  
• Is Danish Power free from reliance on significant working capital for day-to-day affairs?
  No. The company's working capital requirement is very high due to extended payment collection periods. It has reported an average cash conversion cycle of 78 days between FY22 and FY24.
  
• Can the company operate its business without relying on external funding in the next three years?
  Yes. The business is not very capital-intensive, allowing Danish Power to grow its revenue significantly without incurring debt. The company is currently net debt-free as well. Additionally, proceeds from the IPO combined with projected cash flows will support its growth without the need for external funding in the near future.
  
• Is Danish Power free from meaningful contingent liabilities?
  Yes. The company has reported no contingent liabilities as of March 2024.

Valuations

• Does the company's 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 7 per cent.
  
• Is the stock's price-to-earnings (P/E) less than its peers' median level?
  Yes. Post-IPO, the stock will be valued at a P/E ratio of 19.7 times compared to its peers' median of 51 times.
  
• Is the stock's price-to-book (P/B) value less than its peers' average level?
  Yes. Post-IPO, the stock will be valued at a P/B ratio of 2.6 times compared to its peers' median of 11.3 times.

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

Also read: SME IPO frenzy: Opportunity or trap?