Diffusion Engineers coming with an IPO to raise Rs 158 crore

Diffusion Engineers 

• Diffusion Engineers is coming out with a 100% book building; initial public offering (IPO) of 94,05,000 shares of Rs 10 each in a price band Rs 159-168 per equity share. 
• Not more than 50% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not less than 15% of the issue will be available for the non-institutional bidders and the remaining 35% for the retail investors.
• The issue will open for subscription on September 26, 2024 and will close on September 30, 2024.
• The shares will be listed on BSE as well as NSE.
• The face value of the share is Rs 10 and is priced 15.90 times of its face value on the lower side and 16.80 times on the higher side.
• Book running lead manager to the issue is Unistone Capital.
• Compliance Officer for the issue is Chanchal Jaiswal. 

Profile of the company

The company is engaged in the business of manufacturing welding consumables, wear plates and wear parts and heavy engineering machinery for core industries. With over four decades of experience, the company is dedicated to providing specialized repairs and reconditioning services for heavy machinery and equipment. Additionally, it is also involved in trading of anti-wear powders and welding and cutting machinery. It provides super conditioning process at its manufacturing facilities, a surface treatment solution for machine components that enhances wear resistance, eliminates stress and improves their repairability ultimately extending their lifespan and reducing production costs. It has developed a synergistic system of forward integration whereby it manufactures special purpose electrodes and flux cored wires which are utilized for manufacturing wear resistance plates (commonly known as wear plates). These wear plates then become an integral part of majority of large industrial equipment which are made in its heavy engineering division and are significant contributor in manufacturing of industrial equipment used in core industries like cement, steel, power, mining, engineering, oil & gas, sugar, etc. This forward integration helps it in achieving efficiency in the production process and gaining competitive advantage, reducing product costs, enhancing supply chain control and reducing its dependency on third-party suppliers for its operations.

The company focuses on alloy and process development, quality and design to tailor-make products as per its customers’ needs. With a team of over 130 qualified engineers deployed across various departments as of February 29, 2024 and decades of experience in welding consumables and wear plates, it possesses the expertise to design, develop and manufacture complex and specialized industrial equipment and components for OEMs and end-user industries. It presently operates from four manufacturing units, out of which Unit I, II and III are located in Nagpur Industrial Area, Hingna, Nagpur, Maharashtra and Unit IV is located in Khapri (Uma), Nagpur, Maharashtra for processing and manufacturing of its products. Each Unit is supported by necessary infrastructure for storage of raw materials, manufacturing of its products, storage of finished goods, together with quality control measures. 

Proceed is being used for:

• Funding capital expenditure requirements towards expansion of the company’s existing manufacturing facility at Khasra, Khapri (Uma), Nagpur, Maharashtra, India. 
• Setting up of a new manufacturing facility located at Hingna, Sonegaon District, Nagpur, Maharashtra.
• Funding working capital requirements of the company.
• General corporate purposes. 

Industry overview

Manufactures in India heavily rely on welding consumables as a primary technique for joining metals, as no other method offers such wide-ranging benefits. Welding consumables, which are materials that facilitate the joining of two metal or alloys, are critical components of welding operations, as the quality and strength of the joint in welding is dependent on them. As different welding consumables have different properties and characteristics, selection of consumables vary according to the type of metals that are being welded, the process used in welding, and the application of the final products. Welding consumables market in India is estimated at around Rs 51 billion in fiscal 2024, with fiscal 2027 projections around Rs 64-66 billion. Due to the rise in demand for improved infrastructure, a lot of investment is happening in infrastructure development, such as construction of roads, bridges, ports and airports. This investment in infrastructure is one of the key growth drivers for the welding consumables sector, because welding is indispensable in the construction industry, as it provides strong and reliable joining solutions for structural components. Also, expansion of industries such as heavy engineering, energy, oil & gas, shipbuilding, railways, power, transportation, and automotive, promotes growth of the welding consumables sector due to construction and maintenance of plants in these industries. 

Wear plates serve as a safeguard to vulnerable surfaces from harsh abrasion or impact, when encountering other surfaces. Key application of wear plates is where friction between two components or material leads to deterioration. As these plates are replaceable components, they protect value equipment against excessive wear and potential damage. Wear plates are used in a variety of industries, such as construction, mining, energy and power, railways, and quarries, as these plates reduce downtime from damaged equipment, cost of part replacements and maintenance for the uninterrupted use of equipment and machines. Key players operating in the wear plates market in India are Jindal Steel, AM/NS and Diffusion Engineers. The wear plates market in India is estimated at around Rs 22 billion in fiscal 2024 and is expected to grow at a CAGR of 8-9% to ~Rs 28 billion in fiscal 2027. Wear plates are an essential part of various industries, such as power plants, steel mills, quarrying and cement, as these plates protect key components of these industry. As India continues to undergo rapid industrialisation, each of these industries would grow and require wear plates to protect their equipment and machinery. Additionally, as investments in the Indian infrastructure market will grow, the construction industry will promote the consumption of wear plates for long and durable equipment and machines. Also, increased focus by the mining industry to improve the lifespan of mining equipment will also lead to a stronger the wear plates sector. 

Pros and strengths

Synergistic business models focused on forward integration: In 1993, the company started manufacturing welding electrodes, gradually expanding its offerings to include flux cored wire in the year 1997. Subsequently, it also started manufacturing wear plates and wear parts using flux cored wire. These wear plates are further being utilized for manufacturing of wear parts and heavy engineering equipment. It has embarked on forward integration journey, transitioning from a manufacturer of welding electrodes to producing flux-cored wires, wear plates, wear parts, and now to heavy engineering, broadening its scope and expertise in the industry. Over the years, it has expanded its capabilities to offer not only quality welding consumables but also comprehensive welding services for core industries. Its commitment in manufacturing and welding services ensures that its clients receive a comprehensive and streamlined approach to meet their welding and anti-wear needs, ultimately contributing to the longevity and optimal performance of their heavy equipment. Further, the manufactured special purpose electrodes and flux cored wire are consumed in-house as well as sold to its customers (domestic and international) ensuring economies of scale and minimal wastage. This forward integration helps in achieving efficiency in the production process and gaining competitive advantage, reduction in product costs, control over supply of raw materials and reduce its dependency on third parties for its operations. 

Serving industry major players directly as well as through OEMs: The company serves diverse clientele, which includes both OEMs who service major players in the cement, steel, and power sectors, as well as direct customers. These OEMs, in turn, service major players of their respective industry. This intricate network positions it as a vital link in the OEM ecosystem of some of the major players in core industries. In addition to its relationships with OEM customers, it also directly engages with the end customers in these core sectors. This direct interaction with established customers in cement, steel, and power industries underscores its capability to serve and meet the distinctive needs of major players in these industries. 

Long-standing relationships with customers across industries: The company has, through over 4 decades of business operations, established long-standing relationships with several Indian and global customers across industries. It has a diversified customer base and it has served 503, 500 and 444 customers for the Fiscals 2024, 2023 and 2022, respectively. Its focus on quality, providing customized solutions to its customers and timely delivery of its product offerings have helped it establish and maintain long term relationships with its customers, retain existing customers and attract new customers. Further, its diversification of revenue across multiple customers allows it to minimize any adverse impact from customer specific challenges. 

Strategically located manufacturing facilities: The company’s business operations in Nagpur, Maharashtra, boast a strategic location at the heart of the country, providing significant advantages for its business operations. Its central location ensures easy access to industries across the entire country, streamlined logistics for procurement and timely delivery to its customers. With its manufacturing units centrally located, it can efficiently serve diverse industries and segments, reaching both urban and remote areas alike. This central location minimizes transit times for shipments, enhances its operational efficiency and supports prompt responses to customer demands. Additionally, the location contributes to cost-effective logistics as transportation costs are optimized due to the reduced distances to various regions, positively impacting its overall cost structure.

Risks and concerns

Depends on a few customers: The company’s sales are concentrated to a few customers for a portion of its revenues. It generally does not have any long-term or exclusive arrangements with any of its customers and it cannot assure that it will be able to sell the quantities it has historically supplied to such customers. In the event its competitors’ products offer better margins to such customers or otherwise incentivize them, there can be no assurance that its customers will continue to place orders with it. Most of its transactions with its customers are typically on a purchase order basis without any commitment for a fixed volume of business. There can also be no assurance that its customers will place their orders with it on current or similar terms, or at all. Further, its customers could change their business practices or seek to modify the terms that it has customarily followed with them, including in relation to their payment terms.  

Do not have long-term agreements with supplier: The company’s ability to remain competitive, maintain costs and profitability depend, in part, on its ability to source and maintain a stable and sufficient supply of raw materials at acceptable prices. Its major raw materials include ferro alloys, metal powders, EQMS and alloyed wires, chemicals used in consumables manufacturing, steel plates, pipes, stainless steel, or strips of steel, nickel among many others. It depends on external suppliers for all the raw materials required and typically purchase raw materials on a purchase order basis and place such orders with them in advance based on its requirements. As a result, the success of its business is significantly dependent on maintaining good relationships with its raw material suppliers. The absence of long-term supply contracts subjects it to risks such as price volatility caused by various factors viz. commodity market fluctuations, currency fluctuations, climatic and environmental conditions, transportation cost, changes in domestic as well as international government policies, regulatory changes and trade sanctions. Some part of its raw materials are also imported China, United Kingdom, Germany, Italy, Spain, Singapore Switzerland and Hong Kong constitute the countries from where major portion of the raw materials were imported during the last three Fiscal years. As a result, it continues to remain susceptible to the risks arising out of foreign exchange rate fluctuations as well as import duties, which could result in a decline in its operating margins. If it cannot fully offset the increase in raw material prices with increase in the prices for its products, it will experience lower profit margins, which in turn may have a material adverse effect on its results of operations, financial condition and ultimately lead to a liquidity crunch. 

Restrictions on import of raw materials: The company currently import some portion of its raw materials from China, United Kingdom, Italy, Singapore, Germany, Switzerland etc. It primarily dependent on a few suppliers from China, United Kingdom, Italy, Singapore, Germany, Switzerland etc. for these products, which cannot be replaced easily. The raw material imports are regulated by certain specific laws and regulations that permit concerned authorities to stop any import if it is deemed that the goods proposed to be imported may be hazardous. While the raw materials it imports may not be hazardous in nature, it cannot assure that such regulations will not be made applicable to it or that such regulations will not evolve into more stringent regulations, which would place onerous requirements on it and consequently restrict its ability to import raw materials. While it has not in the recent past experienced any challenges in importing such materials, it cannot assure that it will not experience any such challenges in the future.

Depends on third-party transportation providers: As a Manufacturing business, the company’s success depends on the smooth supply and transport of the various raw materials required for its manufacturing facilities and of its products from its manufacturing facilities to its customers, or delivery points and further to its distributors, which are subject to various uncertainties and risks. It transports its raw materials and its finished products by road and sea. It uses third-party freight and transportation providers for the delivery of its products. It does not have formal contractual relationships with such logistic companies and freight forwarders, particularly in the export markets. It maintains marine open insurance policy to cover any damage to its products during transit. Its Company, Promoters, Promoter Group, Key Managerial Personnel, Directors and Group Company and its Directors are not related third-party transportation service providers. Transportation strikes, if any, could have an adverse effect on supplies and deliveries to and from its distributors and suppliers. Further, on account of the COVID-19 pandemic, its manufacturing operations were shut down and its third-party transportation providers’ operations were also closed during the lockdown imposed by the Government.

Outlook

Diffusion Engineers is engaged in the business of providing engineering solutions to customers both in domestic and international market. The company has been in existence for over four decades and provides a wide range of products and services including manufacture of special welding consumables, wear plates and heavy engineering equipment for core industries and provide special and customized repairs and reconditioning services of heavy machinery and equipment. It is also involved in trading of anti-wear powders and welding and cutting machinery. It provides super conditioning process at its manufacturing facilities, a surface treatment solution for machine components that greatly improves wear resistance, eliminates stress and increases their repair ability leading to extended life of industrial parts resulting in smoother functioning and economy in production costs. It has developed a synergistic system of forward integration whereby it manufactures special purpose electrodes and flux cored wires which are utilized for manufacturing wear resistance plates (commonly known as wear plates). These wear plates then become an integral part of majority of large industrial equipment which are made in its heavy engineering division are significant contributor in manufacturing of industrial equipment used in core industries like Cement, Steel, Power, Mining, Engineering, Oil & Gas, Sugar etc. On the concern side, the company’s manufacturing activities are labour intensive and expose it to the risk of various labour related issues. Whilst it has not faced any strike by its workforce, it cannot assure that it will not be subject to work stoppages, strikes, lockouts or other types of conflicts with its employees or contract workers in the future. 

The company is coming out with a maiden IPO of 94,05,000 equity shares of Rs 10 each. The issue has been offered in a price band of Rs 159-168 per equity share. The aggregate size of the offer is around Rs 149.54 crore to Rs 158.00 crore based on lower and upper price band respectively. On performance front, the company’s revenue from operations increased by Rs 232.68 million, or 9.13%, from Rs 2,548.76 million in Fiscal 2023 to Rs 2,781.44 million in Fiscal 2024. The company recorded an increase in its profit by Rs 86.58 million or by 39.10% from Rs 221.45 million in Fiscal 2023 to Rs 308.03 million in Fiscal 2024. Meanwhile, in a strategic move to diversify and enhance its portfolio of welding consumables, it intends to venture into manufacturing of nickel, cobalt and iron-based powders to cater to the growing demand for these powders within its customer base and the industry at large. It also intends to enter into a technical collaboration agreement with its associate, LSN, for the transfer of technology integral to the manufacturing process. This strategic move not only strengthens existing customer relationships but also opens avenues to onboard new customers from untapped markets.