Hem Securities has issued a "Subscribe" recommendation for Diffusion Engineers Limited's IPO, suggesting investors consider this opportunity within the price band of ₹159-₹168 per share. The company is valued at a post-issue P/E multiple of 20x based on FY24 projections. Diffusion Engineers, a market leader in welding consumables and heavy engineering machinery, has demonstrated consistent financial growth, strong forward integration, and long-standing relationships with industry leaders. With a Compound Annual Growth Rate (CAGR) of 11.14% in PAT from FY13 to FY24 and a diverse clientele, the company offers potential for solid returns.

IPO Details

- **Price Band**: ₹159-₹168 per share - **Issue Size**: ₹150-₹158 crore - **Fresh Issue**: 9,405,000 equity shares - **Opening Date**: September 26, 2024 - **Closing Date**: September 30, 2024 - **Bid Lot**: 88 shares
The IPO is structured with 50% allocation to Qualified Institutional Buyers (QIBs), 15% to Non-Institutional Investors (NIIs), and 35% to Retail Investors.

Company Overview

Diffusion Engineers Limited specializes in manufacturing welding consumables, wear plates, and heavy engineering machinery, catering to core industries such as cement, steel, power, and mining. With over four decades of expertise, the company provides specialized repairs, reconditioning services, and surface treatment solutions that enhance wear resistance, reduce stress, and improve the longevity of machinery.

Financial Performance

The company’s financial performance showcases steady growth: - **Revenue Growth**: ₹878.37 million in FY13 to ₹2,571.26 million in FY24, achieving a CAGR of 10.26%. - **PAT Growth**: ₹73.22 million in FY13 to ₹233.95 million in FY24, with a CAGR of 11.14%. - **EBITDA Margin**: 13.97% in FY24, reflecting improved operational efficiency.
Among its peers from FY21 to FY24, Diffusion Engineers recorded the third-highest CAGR of 21% in operating income, second-highest in PAT at 38%, and third-highest EBITDA growth at 33%.

Synergistic Business Model and Forward Integration

Diffusion Engineers has expanded its product portfolio from manufacturing welding electrodes to flux-cored wires, wear plates, and heavy engineering equipment. The company’s forward integration strategy has enhanced its value chain, resulting in reduced production costs, increased efficiency, and a competitive edge in the market.

Target Market and Industry Outlook

The welding consumables market in India is estimated at ₹51 billion in FY24, with projections to grow to ₹64-66 billion by FY27, driven by infrastructure development. Additionally, the wear plates market is expected to grow at a CAGR of 8-9%, reaching ₹28 billion by FY27. With rapid industrialization and infrastructure projects underway, Diffusion Engineers is well-positioned to capitalize on these growth trends.

Key Strengths

1. **Consistent Financial Growth**: Demonstrating consistent revenue and PAT growth, the company stands out for its strong financial performance over the past decade. 2. **Synergistic Business Model**: Forward integration has allowed the company to enhance efficiency, reduce reliance on external suppliers, and optimize production costs. 3. **Strong Customer Relationships**: Over 500 long-standing relationships with key players across industries demonstrate the company's reliability and ability to retain and attract clients. 4. **Strategic Manufacturing Facilities**: Centrally located manufacturing units in Nagpur ensure cost-effective logistics and easy access to key markets.

Investment Risks

The company has experienced negative cash flows in certain fiscal years, which could adversely affect its financial stability if such trends continue. Investors should be aware of this potential risk when considering the stock.

Conclusion

Hem Securities recommends a "Subscribe" for the Diffusion Engineers IPO. The company’s forward integration, steady financial performance, and strong market presence in the growing sectors of welding consumables and heavy engineering machinery make it a promising investment for long-term growth. With infrastructure investments expected to drive demand for its products, the IPO presents an attractive opportunity for investors seeking exposure to India’s industrial growth.
Target Price: Based on the company’s strong financial performance and growth prospects, Hem Securities projects a target price in the range of ₹200-₹220 over the next 12 months, offering significant upside potential from the IPO price band.