Diffusion Engineers Ltd IPO Analysis 2024: Should You Subscribe?

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The IPO (initial public offering) of Diffusion Engineers Ltd (DEL) commences on September 26 and concludes on September 30, 2024. The offering, carrying a Grey Market Premium (GMP) of 48%, attracted significant interest on its first day of bidding. 

However, investors need a clear understanding of both potential rewards and risks before subscribing. This IPO analysis provides a comprehensive review to help make an informed decision.

Diffusion Engineers IPO Details

  • Issue Size: Rs 158 crore
  • Price Band: Rs 159 – Rs 168
  • Lot Size: 88 shares
  • Listing Date: October 04, 2024

Diffusion Engineers IPO Subscription Status

The IPO of Diffusion Engineers Ltd witnessed robust demand on its first day, with subscriptions reaching 7.16 times by 5 p.m. Non-institutional investors subscribed 6.79 times their allocation, while retail investors subscribed 11.25 times. Meanwhile, qualified institutional buyers subscribed just 0.03 times their reserved portion.

Overview of Diffusion Engineers

DEL produces welding consumables, wear plates, parts, and heavy machinery for core industries, and also trades in anti-wear powders and welding equipment. It provides specialized repair and reconditioning services, including a super conditioning process that enhances durability and lowers production costs of machine components.

Between 2021-2024, DEL achieved the third highest operating income CAGR, the second highest profit after tax (PAT) CAGR, and the third highest EBITDA CAGR at 33% among its industry peers.

Diffusion Engineers Key Strengths

  • Strong Financial Growth: DEL has demonstrated significant growth, with its operational revenue and net profit achieving compounded annual growth rates (CAGRs) of 17% and 34%, respectively, from FY22 to FY24.
  • Healthy Return Metrics: DEL’s financial efficiency is highlighted by impressive return metrics, with a Return on Equity (RoE) of 18.52% and a Return on Capital Employed (RoCE) of 20.63% in FY24.
  • Improving Margins & Financial Health: The EBITDA margin has consistently risen from 13.45% in FY22 to 17.04% in FY24, while the Net Profit margin has increased from 8.17% to 10.79% over the same period. Additionally, the Debt:Equity ratio has markedly decreased from 0.34 in FY23 to 0.18 in FY24.
  • Strong Client Relationships: Boasting over 40 years of industry presence, DEL has established long-standing relationships with both OEMs and direct customers across vital sectors. In FY24, it catered to 503 clients, 233 of whom have been with the company for more than five years.

Diffusion Engineers Risk Factors

  • Cash Flow Issues: DEL has recorded negative cash flows in the past. Continued negative cash flows may jeopardize the firm’s operational efficiency and financial outcomes.
  • Client Concentration: DEL's top five customers contribute to 21% of its FY24 revenue. The loss of these existing arrangements could negatively impact the company’s operations and financial results.
  • Legal Risks: DEL is currently entangled in certain legal disputes involving its promoters. Adverse rulings in these legal matters could damage the company's reputation and financial stability.

Diffusion Engineers Valuation & Recommendation

In terms of valuations, the IPO is reasonably priced with a price-to-earnings (P/E) ratio of 15x based on FY24 earnings, which is below the industry average. A positive grey market premium (GMP) also suggests a solid market debut on the bourses.

DEL has shown significant growth in its financial metrics over recent years, setting a positive trend for the future. It operates in a sector poised for significant growth due to increased infrastructure and industrial spending. The Indian welding consumables market, valued at ~Rs 51 billion in FY24, is expected to expand to Rs 64 – 66 billion by FY27, fuelled by increasing infrastructure projects.

Given its fair valuation, steady financials, and strong industry tailwinds, investors may consider subscribing to this IPO from a medium-to-long term perspective.

For a deep dive into other IPOs, explore: IPO Corner on Liquide

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