Divgi TorqTransfer Systems IPO - Niche Auto Ancillary Player In Transmission System: ICICI Direct

ICICI Direct's IPO Report

Divgi TorqTransfer Systems Ltd. established in 1964 is a marquee auto ancillary player in India having capability to develop and provide system level transfer case, torque coupler and dual clutch transmission solutions. Divgi TorqTransfer Systems is the largest supplier of transfer case system to passenger vehicle original equipment manufacturers in India. It has three manufacturing and assembling facilities in India with one under construction for electric vehicle transmission and DCT and expected to be fully completed by FY24E.

Key triggers, highlights:

• Divgi TorqTransfer Systems is a niche auto component supplier in the transmission space with impressive profit and loss profile i.e. ~60% gross margins, ~28% Ebitda margins and ~20% profit after tax margins.

• Return on capital employed/return on invested capital profile is also healthy at ~15%/30% plus.

• It also has a debt free balance sheet with surplus cash of ~Rs 160 crore as of H1 FY23.

• Technical capabilities to develop and manufacture mission critical components in transmission space namely torque transfer systems, DCT solutions, manual transmission components, synchroniser systems and transmission systems for EVs in PV and small commercial vehicle domain and across geographies.

• Presence across key OEM’s domestically with key clients as Mahindra and Mahindra Ltd., Tata Motors Ltd., among others and penchant to increase share of exports in sales.

• Healthy 20 plus % compound annual growth rate growth prospects in target segments in medium term.

Key risk and concerns:

• Client concentration risk with single largest customer constituting more than 50% of revenues and top five customers constituting 90% plus of sales.

• Continued geopolitical tensions impacting exports which now constituted ~less than 10% of sales in H1 FY23 versus ~25% plus as of FY22.

• High dependence on imported content/raw materials (~25%) impacting production capabilities at times of global supply chain disruption.

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