Nandan Nilekani backed Divgi TorqTransfer floats IPO to raise funds amidst bruises from Russia and China exports

Pune-based Divgi Torqtransfer Systems, which bought out its joint venture partner BorgWarner in 2016, announced raising funds through an initial public offering (IPO) route in order to fund its expansion plans. 

Divgi, a supplier of system-level transfer cases, torque couplers, and dual clutch automatic transmission (DCT) solutions on Monday announced setting up a  price range of Rs 560-590 per share for its upper band at  Rs 412 crore offering. The IPO consists of a new issue of equity shares worth Rs 180 crore and a 39.34 lakh share offer-for-sale (OFS) by investors and other selling shareholders. The issue has been distributed to qualified institutional investors 75%, non-institutional investors 15%, and retail investors 10%. Investors can bid for a minimum of 25 equity shares and multiples thereof, the company management informed during a media briefing.

Jitendra Divgi, MD, Divgi TTS said, "Our portfolio gives us a lot of elbow room and flexibility at a market which is versatile and complex". The company is looking at a capex of around Rs 150 crore, out of which about Rs 36 crore is expected to be spent in FY2024 while the remaining Rs 114 crore is likely to be spent in FY2025 which will be used for machinery purchases, and other expenditures. 

In fact, the company sources highlighted that Divgi's journey to IPO is said to have commenced in 2014, when it realised that its partnership with the US automotive component giant BorgWarner was not yielding the desired results. And expanding on its own would require new investments. For the context, it was a period when India's automotive industry, while promising, was still seen as an outlier in comparison to neighbouring China's. It goes without saying that the major investment plans of the world's automakers were largely aimed at China rather than India. The separation finally happened in August 2016, with Divgi acquiring the 60% stakes of BorgWarner at valuation of Rs 167 crore,ending nearly 21 year old partnership. Investors including Infosys Nandan Nilekani and Oman India Joint Investment Fund later came onboard. 

The business has three manufacturing and assembly plants in India: Sirsi in Karnataka, Shivare and Bhosari near Pune in Maharashtra. Furthermore, the company has one under-construction manufacturing facility located in Shirwal, near Pune, where it bought 10 acres of land and began construction, which will help the company expand its manufacturing capacity, including the manufacture of DCT and EV transmissions. The company counts Mahindra & Mahindra, Tata Motors, and Toyota Kirloskar Auto Parts amongst its customers. 

For FY 2022, FY 2021 and FY 2020, the company's from its top five customers amounted to Rs 213 crore, Rs 173 crore and Rs 138 crore respectively. 

Localizing to capture the DCT market
Even, as Indian automotive market moves towards being the third largest in the world with increasing number of technologically advanced vehicles getting rolled out, OEMs are said to be heavily depending upon imports for DCT. 

The major suppliers to Indian market include Aisin, Hyundai Powersys, Stellantis, etc. BorgWarner, Continental, Eaton, GKN, KG International, Magna, Punch Powertrain, Schaeffler, Valeo, ZF. Taking advantage of the development, players like Divgi are looking to launch domestically manufactured DCT systems for the Indian market.  The development seems significant considering a recent CRISIL report suggesting the DCT market at a system level for passenger vehicles (catering to OEM demand) at Rs 450 crore in FY2021. DCT variants are available in models of premium hatchback and upwards. Utility vehicles and compact utility vehicles together occupy more than 85% share of the market, followed by large cars and small cars. Similarly, the market for EV transmission is expected to be Rs 2080 crore with a volume of 224.8 thousand by FY2026.

Geopolitical tensions eats into exports
As per the Divgi management, overseas sales which constitute around 35% of its total business   are primarily dependent on two countries- China and Russia, which exposes its risks of concentration. However, the ongoing Russian-Ukraine war which has been raging since past over a year, has ended up crippling its operations in the former Soviet nation. Similarly, the tensions between India and China has also dented its business with the country. The financial numbers speaks for itself. During FY2022, the company's revenues from  from exports to China and Russia fell to Rs 46 crore from Rs 58 crore in FY2021. 

Hirendra Divgi, Executive Director, Divgi TTS said, " Before the war broke out, we thought our Russian business would be able to do better" " However, now we are just waiting for situation to normalize" he added.