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00:00Hello and welcome to NDTV Profit, you are watching IPO at the and my guest today is
00:10from Diffusion Engineers Limited, it is a Maharashtra based company which is into manufacturing
00:16of welding consumables, wear plates and wear parts and heavy engineering.
00:21And joining me today is Prashant Gagg who is the Chairman and Managing Director of the
00:24company and Abhishek Mehta who is the CFO of the company.
00:27The company's IPO is opening on September 26, closes on September 38, price between
00:32159 to 168 rupees per share, is a fresh issue of 158 crores and that gives the company a
00:38value of little over 629 crores at the upper end of the price band.
00:42Gentlemen, thank you very much for joining us on NDTV Profit.
00:45Prashant, let me begin with you.
00:49Give me a sense, you know you are into a niche business, so give us an idea of your business
00:55metrics and the model that you have.
00:57Good morning and thank you for having us here.
01:02So we are in the business of manufacturing speciality welding consumables, wear plates
01:08and wear parts and doing heavy engineering and our customer base is basically the core
01:14industrial sector.
01:15So we supply into industries such as cement, steel, power, mining, sugar and all process
01:23industries which are facing wear and tear problems and our value proposition to the
01:28customer is using our products and services, they can run their equipments longer and improve
01:34the equipment availability.
01:35You are raising around 158 crores, can you take us through how you are going to use that
01:41money?
01:42So this is a completely primary issue.
01:45We are going to use this money for expanding our manufacturing facilities and increasing
01:51our capabilities to deliver more sophisticated and large equipments in heavy engineering
01:56sector.
01:57This is also going to be used for increasing our capability to manufacture more specialized
02:04consumables which are welding electrodes, flux core wires and you know many of it are
02:11still imported, special ones, so to indigenize that and also to increase our capability to
02:16manufacture wear parts for the core sector industry.
02:20When you speak about supplying to many of the key industries, core industries which
02:25is cement, engineering and power, is there an order book that gets built up for you in
02:33your industry or is it on a spot basis that comes in?
02:38No, so specially for heavy engineering wear parts, there is an order book and we have
02:43a very healthy order book.
02:44For welding consumables, it is made to stock.
02:48So we know the patterns of these consumables which are used regularly in the operations
02:51of the industry and accordingly we manufacture.
02:55These are industrial consumables which are very important for upkeep and maintenance
02:58of the equipment which is there in the core industrial sector and these are needed on
03:03a regular basis.
03:04So they are both parts to the business, one is made to order and one is made to stock.
03:09And what is the kind of order book that you are sitting on for heavy engineering?
03:13So right now, wear parts and heavy engineering order book is close to 145 to 150 crores.
03:19And normally, what is the tenure of these orders that you have to supply to?
03:25This all has to be delivered in the next 6 months maximum.
03:28Of course, depending on the delivery times which are needed to manufacture these parts.
03:31Some of the items which we manufacture will have a lead time of 6 months.
03:36You know, Abhishek, you look at the finance part of it, give us an idea of the margins
03:42that you have normally, 14% for FY24 engineering margins.
03:48Is there enough headroom for you to take these margins higher?
03:52What are the kind of levers that you use in this?
03:54Hi, good morning and thank you for having us here.
03:59Basically, in the engineering sector, we are having average margins of around 14 to 20%.
04:06And this is mainly because we will have a height in savings in the raw material costs
04:12and that is where we can get good margins in the heavy engineering sector.
04:18And also since we are increasing our capacity in welding consumables, the wires and electrodes,
04:26we will be saving in that.
04:28This will also affect in increasing the margins of it.
04:33So, can you give us an idea of the kind of margins that you have and a breakup of your
04:38revenues with respect to how much of heavy engineering revenues comes to and consumables,
04:46welding consumables, how much that accounts for?
04:49The average, if I can say, in FY24 heavy engineering was around 72 CR, which is and if we take
04:58this heavy engineering is around 72 of my 258 to 278 CR.
05:03So, all heavy engineering, welding consumables, wear parts and my trading, if we take it,
05:11welding consumables around 30% and trading is around 25-30%, this is around 30%.
05:16So, I move in at the same range of all the three verticals which I have, all the three
05:21products which we have.
05:22And what is the kind of margins in each of the verticals?
05:25Margins in each of the verticals around 35-40% in welding consumables which we have and around
05:34I would say 20%, the gross, I am talking about the gross margins because there are other
05:38costs as well, around 20-25% in the heavy engineering part.
05:44Abhishek and Prashant, anyone can answer this question, you know, you have been looking
05:51at forward integration going into heavy engineering.
05:54Is there a, you know, the game plan which you have once your new facility comes into
06:01play, which is again in Nagpur, if I am not wrong, that will change the metrics of your
06:08revenues coming from heavy engineering?
06:11So, see heavy engineering is basically has stemmed out from our capability of manufacturing
06:18welding alloys and special welding materials.
06:21And it's a forward integration of, you know, just being able to supply welding consumables
06:27which the customers would then have to consume themselves and carry out on-site welding and
06:33repairs to, you know, move on to supply them ready-to-fit parts and to further move on
06:40to supply them industrial equipments, which is where the industry is, you know, moving.
06:45Everyone wants to have ready-to-fit parts so that they carry out less and less work
06:49at site and everything is, you know, fitted at site quickly in their shutdowns.
06:55So this is how we progress to heavy engineering.
06:57So it's all related, it's not diversified, it's, you know, we're just going up in the
07:03value chain.
07:04Now, with our expansion, our capability to manufacture larger parts and more critical
07:10parts will increase and that will help us in margin expansion and, you know, we see
07:15growth happening in all the three sectors or three verticals of our business.
07:18So there's a heightened requirement for new welding consumables, there are requirements
07:24for wear parts and also to, as the capex is happening in these core industrial sectors
07:29like cement and steel, we're expecting a lot of new equipment coming up in these sectors
07:34and therefore, you know, requirement for heavy engineering also going up.
07:38You know, four or five key sectors is where you have the maximum exposure to, cement being
07:44one where 36% of your revenues come from cement, if I'm not wrong, and followed by
07:50you have engineering at 14% and steel at 13%.
07:55We've seen a good amount of capex being put into these three sectors.
08:00What is the kind of outlook that you have given the fact that a lot of capex is coming
08:05in these three sectors?
08:06Yeah, it's very good.
08:09It's very buoyant right now and we are very positive about it.
08:13The good thing about our business is that we get business not just from new build on
08:18new project, but also from existing installed industrial base.
08:22So it's very good that there is new installed base coming in and it also shows that the
08:28capacity utilization of the existing installed base is increasing and customers are looking
08:32for products which can help their equipments last longer.
08:36So it is definitely going to give us a lot of boost in our sales because we'll get business
08:42from the new project build as well as from the existing installed base.
08:46One thing that we have also noticed in India is that customers are looking to get more
08:50premium products.
08:51So they don't want to buy the cheapest, they want to buy products which can help them get
08:56higher reliability.
08:57So that is also very encouraging sign for us.
09:00You're putting in a capex of nearly 71 crores in your existing facilities and another new
09:06facility for 30 crores.
09:08By when do they come up for commercial operations and once they come up, what is the capacity
09:16addition will you have as a whole and the revenue potential that you get from there?
09:22So we will be able to deploy all of this and start commercial production within the 12
09:27months of the fund raise and we are expecting that at least we should be able to double
09:35or maybe increase our turnover by at least two times using this capex or higher also.
09:43And does it also translate into equivalent amount of revenues as well going forward?
09:48Yes, equivalent amount of revenues and also we expect some margin expansion because it
09:54will be more integrated facility.
09:56What is the kind of margin expansion that you see once it becomes integrated?
10:05It is already integrated but it's just that because we will have machine tools with which
10:09we can manufacture larger parts and more critical parts, we will be able to command better premiums
10:15because there are less and fewer players who can do this in India and therefore the competition
10:20will be less and we will be able to command better margins from what we are having right now.
10:26Abhishek, give me a sense of your cash flows because you have a total borrowing of roughly
10:32around 34 crores.
10:34What is the kind of cash flow from operation that you normally see from, I am talking of
10:39the free cash flows which will come in next couple of years and what it was in FY24?
10:45FY24 it was around 32 CR was my cash flow, positive cash flow and going forward my operating
10:56cash flow will always remain in the positive side because as you can see there was a negative
11:02cash flow in last year because there was a heavy sale, there was a very change in my
11:09turnover from 195 to 54 CR which allowed that inventory and debtors to build up which caused
11:18a negative cash flow but going forward it will always remain the positive because the
11:22way which will grow and with respect to our borrowings, we have already around 22 CR in
11:32our object as working capital. So, we will be utilizing that for reduction of our working
11:38capital also going forward. So, I expect that my working capital will remain in the same
11:44range of 34, 35 CR. Give me a sense because you spoke about your inventory, normally what
11:50is the kind of inventory days that you keep and also a little bit on your trade receivables
11:56because if I am not wrong it was around 24%, 66, 67 CR that was in FY24. So, give me a sense
12:04of how this works in this industry because it is a new industry just to understand the
12:08mechanics and how it moves. So, my inventory generally comprises of two parts. One is my
12:16I would say building consumables which are over the counter products which can
12:20get sold immediately. So, we do not keep much inventory there and the second part of my
12:25inventory is heavy engineering which as Prashant rightly said it takes around up to 6 months to
12:29complete. So, this is where my inventory boils up there and with respect to my debtors it is around
12:3870 to 90 days which goes. And do you have any plans to bring it down?
12:46It will remain around 80, 90 days. It may not go down because of the payment terms which we will
12:52have with the. Okay. Prashant, can you take us to your export strategy because it is around 10%
13:02of your revenues today. It has come down marginally I think from 12 to 10 or something in
13:08FY24. So, how do you plan to take this export strategy going forward?
13:14So, we are exporting to 30 plus countries right now. We have stepped down subsidies also. So,
13:20we have people on the ground selling our products and solutions to the core industrial sector in
13:24countries such as Philippines, Southeast Asia which includes Philippines, Vietnam, Indonesia,
13:31Malaysia even in Middle East and Africa. So, we have a branch office in Sharjah. We just opened
13:38a subsidiary in Turkey and in Africa we have people on the ground in East Africa which is Uganda,
13:45Kenya and we are also selling some quantities to Europe. So, this is basically where we are
13:52exporting right now. We expect the export growth to happen continually. We are also exporting to
13:57Russia. We started exporting to Russia since last year and we expect to reach at least 20% of our
14:03total sales in exports in the next two years. So, we have laid down the foundation. We are getting
14:09good response from the customers there and we are expecting ramp up of sales in these countries
14:16where we are present. And this would be more to do with welding consumables or even in the heavy
14:24equipments as well? It is both. So, welding consumables which can be used by the customers
14:30themselves but also wear parts, industrial services and also larger equipments such as
14:38grinding rollers that we export out of India. Top five customers of yours account for nearly 21%
14:47and I was reading your RHB. It said that some of the top customers are your related party.
14:53So, how much of the top five customers are related party and what is the contribution
14:59to the top line from related party? There is only one related party. That related party is
15:12approved in a different place. So, we are buying material through that related party for that
15:19vendor or that customer. And what is the amount and what percentage of your revenues?
15:27It would be hardly less than 2 to 3% of the revenue.
15:32Okay. Finally, Prashant, you are in an industry which is niche and the size of the industry is
15:39also very limited. I think 5000 or 6000 odd crores. That is what I read. How do you plan
15:45to expand from here on? Do you see a lot of consolidation happening in your industry?
15:51Because I think you are one of the few to list in the stock exchanges,
15:56maybe the first to list in the stock exchanges. No. So, see we started originally as a welding
16:02product manufacturing company and our strategy is to not just remain as a welding consumable
16:10supplier. We are now very much there as an industrial solution provider wherein we are
16:20helping our customers to increase their equipment availability. So,
16:24from being an electrode supplier, we have done forward integration wherein we are now
16:31manufacturing complete equipments and not just supplying these equipments but also doing
16:36lifecycle management for our customers. So, that is why we are pushing the envelope of our market.
16:42We are increasing our marketplace and we believe that because of our 4A in heavy engineering
16:48and with the backbone or the background of developing new alloys and increasing
16:52lifetime of these equipments, the market is very big. If you see a comparable industry
16:57who has done it very successfully in something similar as AI engineering, who from being a
17:04foundry or a casting manufacturer has become a ware part supplier and it is a very good
17:11way to sort of increase the market size or the market available for us to cater to. So,
17:18we are sort of following the same approach and we are of course also backing it up with
17:24industrial services and providing complete end-to-end solutions for our customers. So,
17:31we think the market is really big and also with our increase in exports and
17:36you know our international presence which we are growing outside of India,
17:40we think that we will be able to become a big company bigger than the market sizes that you
17:46have mentioned in the near future. Gentlemen, it was a pleasure talking to you. Your IPO is
17:52opening on September 26th, price between 159 to 168 and it is a 158 crores IPO which is going to
17:59be used for CAPEX and new facility in Nagpur and some part is going to be used for the working
18:04capital requirement. Thank you for being with us and joining us on IPO. Thank you. Thank you so much.