Divyadhan Recycling Industries coming with IPO to raise Rs 24.17 crore

Divyadhan Recycling Industries

• Divyadhan Recycling Industries is coming out with an initial public offering (IPO) of 37,76,000 equity shares in a price band Rs 60-64 per equity share.
• The issue will open on September 26, 2024 and will close on September 30, 2024.
• The shares will be listed on SME Platform of NSE.
• The face value of the share is Rs 10 and is priced 6.00 times of its face value on the lower side and 6.40 times on the higher side.
• Book running lead manager to the issue is Narnolia Financial Services.
• Compliance Officer for the issue is Pramod Kumar Gupta.

Profile of the company

Divyadhan Recycling Industries is into the business of manufacturing of Recycled Polyester Staple Fibre (R-PSF) and Recycled Pellets. The recycled fibre and pellets are produced from post-consumer PET bottles also known as Polyethylene Terephthalate bottles. The company started its operations in the financial year 2018-19, by manufacturing Recycled Polyester Staple Fibre (R-PSF) at their manufacturing facility based in Baddi, Himachal Pradesh with a capacity of 8030 Metric tons per annum. Further, in November 2023, the company also started manufacturing of Recycled Pellets. However, the company is in the trial stage of manufacturing the recycled pellets.

The promoters of the company acquired the company from initial promoters (subscribers to the memorandum of association) in the year 2013-14, since then till FY 2015 - 2016, the company was looking for better opportunities to acquire land and building, plant and machinery to start its manufacturing facility. In the year 2015 - 16, the company came across and acquired a distressed asset from the Axis Bank under SARFESI Act, 2002 and it took almost 2 years to get all the necessary approvals and sanctions from many departments in such as pollution board, electricity department, fire and water department to get the manufacturing facility operational and commence its production. In the year 2018-19, the company finally started its operations.

The company produces Hollow and Solid Recycled Polyester Staple Fibre, which gives good resilience properties and is used to make premium pillows, cushions and quilts. The recycled fibre is supplied to various industries such as Packaging, home furnishing and Textiles. Its hollow structure adds to its insulating properties, making it suitable for use in a wide range of products including clothing, home furnishings, automotive components, non-woven fabrics, and insulation materials. The recycled pellets are used to manufacture food grade and non-food grade bottles. FSSAI has issued latest instructions dated June 15, 2022, for acceptance criteria for recycled PET for food packaging. Further, the company is currently catering to non-food industries requiring recycled bottles for their packaging.

Proceed is being used for:

• Meeting capital expenditure
• Meeting the general corporate purposes
• Meeting the issue expenses

Industry Overview

India Polyester Staple Fibre Market has reached $1.54 billion by 2023 and is anticipated to project robust growth in the forecast period with a CAGR of 4.25% through 2029. Polyester Staple Fibre (PSF) is extensively used in spinning and other textile applications due to its durability, cost-effectiveness, and versatility. In the Indian PSF market, there are two main categories: solid and hollow products. Solid PSF is widely popular in traditional textile manufacturing, known for its strength and resilience. On the other hand, hollow PSF is gaining traction for its unique properties such as lightweightness and excellent insulation. However, the widespread use of synthetic fibers like polyester has raised environmental concerns. These fibers are non-biodegradable, posing a significant threat to its ecosystems. To address this issue, the industry must focus on innovation and invest in recycling technologies to ensure the sustainability of PSF production. By adopting these recycling methods, it can minimize the environmental impact and promote a circular economy.

In recent years, the automotive industry has witnessed a significant surge in the demand for polyester staple fibre (PSF). This surge can be attributed to several factors, including the material's exceptional resilience, its lightweight properties, and its cost-effectiveness. These qualities make PSF an ideal choice for a wide range of automotive components, such as car interiors, seat covers, airbags, and even tyre cords. The use of PSF in the automotive industry has proven to be highly advantageous. Its high resilience ensures that automotive components can withstand the rigors of daily use, providing long-lasting durability. Additionally, its lightweight nature contributes to improved fuel efficiency, a crucial consideration in today's environmentally conscious world. Furthermore, the cost-effectiveness of PSF makes it an attractive option for manufacturers, allowing for competitive pricing without compromising on quality. The growing demand for PSF in the automotive industry has had a notable impact on India's PSF market. As the automotive industry continues to innovate and evolve, the need for durable and cost-effective materials like PSF is expected to rise even further. 

West India emerged as the dominant player in the India Polyester Staple Fibre Market in 2023, holding the largest market share in terms of value. In West India, particularly in states like Maharashtra and Gujarat, there exists a thriving and robust textile industry. This industry stands as one of the largest consumers of PSF (polyester staple fibre) in the country. The region boasts some of the biggest textile mills, which not only contribute significantly to the demand for PSF but also play a vital role in shaping the overall textile and apparel sector. The strategic geographical location of West India also adds to its dominance in the PSF market. Situated along the western coastline, this region enjoys the advantage of easy importation of raw materials and seamless exportation of finished goods. This accessibility gives a competitive edge to manufacturers based in this area, propelling their growth and success in the industry. With its well-established textile industry, thriving apparel sector, and strategic location, West India continues to be a major player in the demand for polyester staple fibre.

Pros and strengths

Own manufacturing facilities: The company has its own manufacturing facility registered in its own name at Kalyanpur Tehsil Baddi, District Solan, Himachal Pradesh. This manufacturing facility was purchased from Axis bank Limited as a distressed asset. The Company has an owned land spreading to around 10,000 square meters and the manufacturing facility is built on an area of 5,000 square meters where all the manufacturing process pertaining to recycled polyester staple fibre and recycled pellets is carried out. Its facility has total capacity of 8030 metric tons per annum for fiber and 4320 metric tons per annum for pellets.

Small order size help in getting more orders from small scale buyers: As per the market dynamic, the buyer must plan at least 10 days in advance before placing an order, and then arrange and block required funds in the appropriate quantity in addition to preparing storage space for the arriving items. Typically, orders are placed for a minimum of 25 tons. Since its delivery vehicle can only carry a maximum of 7 tons of goods; hence it operates on a modest order basis. Since its customers don't need to plan, they may place their orders whenever they want, if they do so by 4 p.m., and then get their orders delivered. This helps it in having better margin and more demanding for small scale buyers. It also eliminates the need for middlemen like traders to offload.

Established relationship with customers: The company operates on almost all days of year, except national holidays. This helps it in building new relationships and maintain existing customer base as its manufacture facility runs every day of the year, thereby meeting the market demand. It manufactures on daily basis and deliver the same as per customer requirement without compromising on quality. Further, it is able to attract and retain small scale customers which gives them advantage to procure as per their economies of scale and allows it to expand its customer base. 

Risks and concerns 

Dependent on PV Fibers LLP for significant portion of revenue: The company sold its final product to various customers, PV Fibers LLP is one of them. The company garnered 88.05%, 84.85% and 75.77% of its total revenue from PV Fibers in FY24, FY23 and FY22 respectively. The company, thus, is dependent on it, for its sales. Uptill now it has been able maintain cordial relation with it, however it cannot assure that the same will exist and be maintained in long run. In case of any conflict or change in commercial terms and conditions not acceptable to either of the parties or if it is unable to maintain the quality or meet the order commitment, it might lose one of its major customers, which will result significant reduction in revenue from operations which in turn will affect its profitability, liquidity, reduction in cash flows and overall growth of its business.

Top 10 suppliers contribute a significant portion of raw material: The company procures raw materials from various suppliers. Around 50% to 60% of total raw material purchased is sourced from its top 10 suppliers. During the financial year 2023-2024, its dependency was 62.98% on its top 10 suppliers. Though it has not faced any instances of difficulty in procuring the raw material. However, it cannot assure that it will not face any such situations, or the procurement of raw material will be on commercially viable terms. Furthermore, any dispute with any of the suppliers may damage its relationship with existing and potential suppliers, and in any such event its operations will be adversely affected. Further it will also affect its profitability and reputation in the market. 

Geographical constrain: The company’s business operations span various regions across India. Despite this diversified presence, it has a significance dependency on Himachal Pradesh which contributes 88.55%, 94.06%, and 87.17%, to its total revenue for the Financial Years ending on March 31, 2024, March 31, 2023 and March 31, 2022, respectively. Relying heavily on one geographic location exposes it to regional economic fluctuations, regulatory changes, and local market dynamics. Adverse conditions such as economic downturns, political instability, or natural disasters specific to that region could significantly impact its revenue stream and also any decline in the economic prosperity or changes in regulations within that particular region could negatively affect its financial performance.

Outlook

Divyadhan Recycling Industries manufactures Recycled Polyester Staple Fibre (R-PSF) and Recycled Pellets. The company produces synthetic fibre known as Recycled Polyester Staple Fiber (R-PSF) from PET bottles, such as those used for Coke, soda, water, and other post-consumer PET bottles. The Company's manufacturing unit is located in Village Kalyanpur, Tehsil Baddi, Dist Solan Himachal, and has a total capacity of 8030 metric tons per annum for fibre and 4320 metric tons per annum for pellets. On the concern side, the company is dependent on one of its customers named PV Fibers LLP, who contributes significant portion of revenue of the company during the last 3 financial years and stub period. Any loss of business from this customer may adversely affect its revenues and profitability. Moreover, majority of its state wise revenues from operations for the last 3 years is majorly derived from Himachal Pradesh. Any adverse developments affecting its operations in this state could have an adverse impact on its revenue and results of operations. 

The company is coming out with a maiden IPO of 37,76,000 equity shares of Rs 10 each. The issue has been offered in a price band of Rs 60-64 per equity share. The aggregate size of the offer is around Rs 22.66 crore to Rs 24.17 crore based on lower and upper price band respectively. On performance front, total income for the Financial Year 2023-24 stood at Rs 5,912.88 lakh whereas in Financial Year 2022-23 it stood at Rs 5,815.51 lakh representing an increase of 1.67%. The company’s restated profit after tax increased by Rs 21.61 lakh from Rs 216.18 lakh in FY ended March 31, 2023 to Rs 237.80 lakh for the FY ended March 31, 2024.

The company is engaged in the manufacturing of Recycled Polyester Fiber and Recycled Pellets. It intends to expand its operations by setting up a new manufacturing facility in Baddi, Himachal Pradesh, through the purchase of new wash line machinery. Further, the company initially faced challenges in attracting buyers due to intense competition in the industry. It took a proactive approach by gathering customer reviews and using that feedback it started improving the quality of their products. Besides this, it was also analyzing and studying the market dynamics. After some time, the company successfully gained more buyers and established a good reputation in the industry. Offering competitive pricing strategies to attract price-sensitive customers in the competitive industry is one of its strategies followed for customer acquisition.