Divgi Toque Transfer Systems

Transmits well

DTTS is one of the few companies who serve both as systems level solution provider as well as component kit supplier to global OEMs and Tier I transmission systems suppliers for wide array of automotive vehicles

Divgi Toque Transfer Systems (DTTS) offer a range of products to its customers such as system level transfer case, torque coupler, DCT solutions across segments in the automotive industry, including passenger vehicles, utility vehicles and commercial vehicles. It also has the capability to develop and provide transmission systems for EVs. It has an in-house software development capability which helps it in providing system level solutions offering software that controls the vehicle dynamics. It is one of leading player supplying transfer case systems to OEMs in India.

DTTS manufacture and supply a variety of products under the broad categories of (i) torque transfer systems (which includes four wheel-drive (“4WD”) and all-wheel-drive (“AWD”) products); (ii) synchronizer systems for manual transmissions and Dual Clutch Transmission (DCT); and (iii) components for the above-mentioned product categories for torque transfer systems and synchronizer systems in manual transmission, DCT, and EVs. It has also developed (i) transmission systems for EVs; (ii) DCT systems; and (iii) rear wheel drive manual transmissions.

Transfer case system is used in four-wheel drive (4WD) and transfers power from the transmission to the front and rear axles by means of drive shafts. Torque coupler is used in front wheel drive (FWD) based all-wheel drive (AWD) vehicles and it senses the torque requirement & transfers the necessary torque to the rear wheels when wheels start slipping on the surface. M&M’s XUV 700 uses Divgi TTS made Nextrac Torque Coupler. Vehicles fitted with Manual Transmission (MT), Automatic Manual Transmission (AMT)/ intelligent Manual Transmission (iMT) and Dual Clutch Transmission (DCT) require synchroniser set.

Dual clutch transmission (DCT), also known as twin-clutch transmission transmits the power from the engine to the wheels of the passenger vehicle using two separate clutches for odd and even gears, within one housing. OEMs are heavily dependent on imports for DCT. Company like Divgi TTS is in the process of launching domestically manufactured DCT systems for the Indian market. The company is planning to localize and commercialize 7 Speed Dual Clutch Automatic Transmission. Divgi TTS will therefore be the only the manufacturer of DCT systems in India as other leading manufacturers such as Aisin, BorgWarner, Hyundai Powersys have import based business model.

Transmission component kit consists of parts of the transmission systems such as manual transmission (aluminium castings, clutch housing, main case, rear case; torque transfer components such as gears, shafts, clutches; synchronizers; other shift linkages, elastomers, bearings, oil seals, fastners, speedo sensors, reverse switch, gear indicators etc.), Dual Clutch Transmission(aluminium castings, torque transfer components, synchronizers, dual clutch, electrohydraulic control unit, sensor cluster, ECU/software), Transfer case (aluminium castings, torque transfer components, planetary gear sets, strokets, output shafts, Electromagnetic Actuator, ECU/software and others), EV transmission etc.

DTTS has three manufacturing and assembling facilities located across India. Manufacturing facilities of DTTS are located at Bhosari and Shivare near Pune in Maharashtra and Sirsi, in Karnataka. It is also embarked on setting up another manufacturing unit at Shirwal (Maharashtra). As on February 3, 2023, about 80% of the construction of Shirwal manufacturing unit is completed, and is expected to be fully completed by Fiscal 2024.

DTTS are also one of the first few suppliers of steel and carbon-based synchronizer systems for the Indian markets, and are one of the leading manufacturers of steel synchronizers in India.

Currently DTTS has license agreement with BorgWarner (inked on Oct 4, 2004 and subsequently renewed on March 1, 2017 for another 7 years) which provides it the exclusive rights to manufacture transfer cases and automatic locking hubs, and non-exclusive rights to manufacture manual transmissions and synchronizers for manual transmissions. It have also entered into an exclusive distribution agreement with a Japanese automotive supply chain company in relation to sourcing of products and components made by the company.

Its diverse capabilities enable it to service customers across segments in the automotive industry, including passenger vehicles, utility vehicles and commercial vehicles. It have strong and well established relationships with several marquee domestic and global OEMs in the automobile sector. Its customer base includes leading automotive OEMs such as Tata Motors, Mahindra & Mahindra, BorgWarner, a Japanese automotive supply chain company, a Chinese automobile manufacturer, an Indian automotive manufacturing company, and an Indian supplier to global automotive OEM, amongst others. For instance, it has been in continued business with BorgWarner, Tata Motors and Mahindra & Mahindra for over two decades.

Issue & Objects of the offer

The offer comprised fresh offer aggregating to Rs 180 crore and offer for sale of 3934243 equity shares [2250000 equity shares by Oman India Joint Investment Fund; 1441441 equity shares by NRJN Family Trust; the investor selling shareholders, 15232 equity shares by Kishore Mangesh Kalbag, 49430 equity shares by Bharat Bhalchandra Divgi, 104020 equity shares by Ashish Anant Divgi, 33660 equity shares by Arun Ramdas Idgunji and 40460 equity shares by Sanjay Bhalachandra Divgi, the other selling shareholders].

Of the net proceeds from fresh issue the company will be using Rs 150.707 crore towards funding capital expenditure requirements for the purchase of equipments of its manufacturing facilities and balance towards general corporate purposes.

Strengths

DTTS is one of the few companies who serve both as systems level solution provider as well as component kit supplier to global OEMs and Tier I transmission systems suppliers for wide array of automotive vehicles and geographies with leadership across select product catergories. It has an in-house software development capability which helps it in providing system level solutions offering software that controls the vehicle dynamics.

DTTS is the only manufacturer of transfer case systems and torque couplers in India. These two products are imported by OEMs in India as penetration of 4WD and AWD vehicles in Indian market is miniscule at 1-2% currently. So DTTS is the only manufacturer and exporter of transfer cases (including the dominant chain driven transfer cases and ESOF transfer cases) to global OEMs from India. Similarly DTTS is planning to localize and commercialize 7 Speed Dual Clutch Automatic Transmission and thus DTTS will be the only manufacturer of DCT systems in India.

DTTS have entered into a product development agreement (“PDA”) and a technology transfer agreement (“TTA”) with a German automotive company for 13 years till 2033 under which DTTS is co-developing critical components and systems for DCT applications with exclusive rights for India and non-exclusive rights for markets outside India. In connection to the PDA and TTA, the production of the products has not yet commenced.

With the increasing penetration for automatics in passenger vehicles and with the emergence of EV, the company believes that automotive drive trains will shift from just mechanical systems to electronics control with embedded software to control the operation of these systems. It aims to capture this growing trend by continuously investing in R&D to develop and deliver new and innovative systems and components. With OEMs continuously focusing on weight reduction in PVs and EVs to enhance the range, augment the vehicle’s acceleration and improve overall efficiency, DTTS aim to develop solutions and alternatives for improving the torque density and reducing the weight of DCT systems and EV transmission units through its R&D efforts.

Weakness

Contribution of exports to top line is on decline from about 52% in FY20 to 8.4% in H1FY23. This is partly due to factors such as end of certain programs and the war in Ukraine as well as increase in domestic sales due to launch of new Mahindra Thar. Russia and China accounted for 15.8% and 16.5% of revenue in FY21 and that declined to 11.7% and 8.6% respectively in FY22 and to nil in H1FY23.

Share of top customer has increased from 37% in Fy21 to 75.31% in H1FY23 increasing the customer concentration risk. Any loss of business or underperformance of any model from top customer will impact the performance of the company.

DTTS dependent on some global suppliers for key components such as bearings, oil seals, carbon friction lining, ECU, friction discs and shift motor, etc.. The availability and price of the same may impact the price and performance of the company.

DTTS was earlier referred to the Board for Industrial and Financial Reconstruction and was declared a “Sick Company” under the provisions of Sick Industrial Companies (Special Provisions) Act, 1985 in 2008. It attained a positive net worth and was discharged from the purview of the Sick Industrial Companies (Special Provisions) Act, 1985 by the Board for Industrial and Financial Reconstruction pursuant to its order dated February 24, 2010.

Caters primarily to automobile industry the demand of which is cyclical in nature.

Valuation

Standalone sales for the fiscal ended March 2022 stood at Rs 233.78 crore. With OPM expand by 30 bps to 28.1%, the operating profit was up 26% to Rs 65.61 crore. The other income was down 4% to Rs 8.10 crore. Thus the PBIDT was up 22% to Rs 73.71 crore. The interest cost was down 10% to Rs 0.17 crore and the depreciation was up 50% to Rs 11.39 crore. Thus the PBT was up 18% to Rs 62.15 crore. With taxation stand higher by 10% to Rs 16 crore, the PAT was up 21% to Rs 46.15 crore.

For the half year ended Sep 2022, the sales were up Rs 133.72 crore and the net profit was Rs 25.66 crore. The annualized EPS for FY23 on fully diluted equity (at upper end of price band) works out to Rs 16.8. Thus the PE at upper price band works out to 35.1. In comparison, Endurance Technologies, Sona BLW Precision Forgings and Kinetic Engineering quotes at a PE of 36.1 times, 68.9 times and 115.7 times of their TTM EPS for quarter ended Dec 2022. Similarly Bosch, ZF Commercial Vehicles and Sundaram Fastners quotes at a PE of 38.53 times, 73.33 times, 43.43 times of its TTM EPS for quarter ended Dec 2022.Auto ancillary companies of similar size in revenue to DTTS such as ZF Steering and RACL Geartech quotes at a PE of 21.3 times and 27.97 times respectively of its TTM EPS for quarter ended Dec 2022.