What you must know about DEE Development Engineers IPO?

About the company DEE Development Engineers Ltd

DEE Development Engineers Ltd was incorporated in the year 1988 as an engineering company offering specialized process piping solutions.  The company caters to the for oil and gas, thermal power, nuclear power, chemicals, and other process industries offering them end-to-end engineering, procurement, and manufacturing solutions. In addition, DEE Development Engineers Ltd also manufactures and supplies piping products, including high-pressure piping systems, piping spools, high frequency induction pipe bends, longitudinally submerged arc welding pipes, industrial pipe fittings, pressure vessels, industrial stacks, modular skids, and accessories. It also includes specialized components like boiler superheater coils, de-superheaters, and other customized components. DEE Development Engineers Ltd has a total of 7 manufacturing facilities with 3 facilities located at Palwal in Haryana and 1 each in Anjar in Gujarat, Barmer in Rajasthan, and Numaligarh in Assam. In addition, the company also has an international manufacturing site at Bangkok, Thailand.

Currently, DEE Development Engineers Ltd has a total installed manufacturing capacity of 94,500 million tonnes per annum (MTPA). Only recently, DEE Development Engineers Ltd has also forayed into its latest vertical offering design, engineering, fabrication, and manufacturing of pilot plants. The company currently employs 1,061 employees on its rolls; which includes highly skilled welders. Its comprehensive specialized process piping solutions include engineering services such as pre bid engineering, basic engineering, detailed engineering, and support engineering. This also includes engineering of process / power piping systems for projects, and pre-fabrication services such as cutting and bevelling on conventional and CNC machines, welding services on semi-automatic and fully automatic robotic welding machines, conventional and digital radiography. Also, post weld heat treatment using CNG fired fully calibrated furnaces and induction heating process, and hydro testing are used. The company also handles complex metals of varying grades of carbon steel, stainless steel, stainless steel, alloy steel; as well as Inconel and Hastelloy.

The fresh funds will be used for funding working capital needs of the company and also for prepayment / repayment of the high cost debt of the company. The promoters of the company include Krishna Lalit Bansal, Ashima Bansal, and DDE Piping Components Private Ltd. The promoters currently have a 100.00% stake in the company, which will get diluted post IPO to 70.18%. The IPO will be lead managed by SBI Capital Markets and Equirus Capital; while Link Intime India Private Ltd will be IPO registrar.

Highlights DEE Development Engineers IPO Issue

Here are some of the key highlights to the public issue of DEE Development Engineers IPO.

•    DEE Development Engineers IPO will be open from June 19th, 2024 to June 21st, 2024; both days inclusive. The stock of DEE Development Engineers Ltd has a face value of ₹10 per share and the price band for the book building IPO has been set in the range of ₹193 to ₹203 per share. 

•    The IPO of DEE Development Engineers Ltd will be a combination of a fresh issue of shares and offer for sale (OFS) component. The fresh issue brings in fresh funds into the company, but is also EPS and equity dilutive. On the other hand, OFS is just a transfer of ownership; and hence neither EPS nor equity dilutive.

•    The fresh issue portion of the IPO of DEE Development Engineers Ltd comprises the issue of 1,60,09,852 shares (160.10 lakh shares approximately), which at the upper price band of ₹203 per share will translate into a fresh issue size of ₹325.00 crore.

•    The offer for sale (OFS) portion of the IPO of DEE Development Engineers Ltd comprises the sale / offer of 45,82,000 shares (45.82 lakh shares), which at the upper price band of ₹203 per share will translate into an OFS size of ₹93.01 crore. The entire 45.82 lakh shares in the OFS is being offered by promoter shareholder, Krishan Lalit Bansal.

•    Therefore, the total IPO of DEE Development Engineers Ltd will comprise of a fresh issue and an OFS of 2,05,91,852 shares (205.92 lakh shares approximately) which at the upper end of the price band of ₹203 per share aggregates to total issue size of ₹418.01 crore.

The IPO of DEE Development Engineers Ltd will be listed on the NSE and the BSE on the IPO mainboard.

Key dates for DEE Development Engineers IPO and How to Apply?

The IPO of DEE Development Engineers IPO opens on Wednesday, 19th June 2024 and closes on Friday, 21st June 2024. The DEE Development Engineers Ltd IPO bid date is from 19th June 2024 at 10.00 AM to 21st June 2024 at 5.00 PM. The Cut-off time for UPI Mandate confirmation is 5 PM on the issue closing day; which is 21st June 2024.

Data Source: Company RHP

Investors can apply either through their existing trading account or the ASBA application can be directly logged through the internet banking account. This can only be done through the authorized list of self-certified syndicate banks (SCSB). In an ASBA application, the requisite amount is only blocked at the time of application and the necessary amount is debited only on allotment. It must be noted that in ASBA applications, there is no refund concept. The total application amount is blocked under the ASBA (applications supported by blocked amounts) system. Once the allotment is finalized, only the amount is debited to the extent of the allotment made and the lien on the balance amount is automatically released in the bank account. The credit of shares to the demat account on June 25th 2024, will be visible to investors under the ISIN Code – (INE841L01016). This allocation to the demat account is only applicable to the extent of the allocation of shares and if no allocations are made in the IPO, then no credit would be visible in the demat account.

Promoter Holdings and Investor Quota Allocation 

The promoters of the company include Krishna Lalit Bansal, Ashima Bansal, and DDE Piping Components Private Ltd. The promoters currently have a 100.00% stake in the company, which will get diluted post IPO to 70.18%. As per the terms of the offer, not more than 50% of the net offer is reserved for the qualified institutional buyers (QIBs), while not less than 35% of the net offer size is reserved for the retail investors. The residual 15% is kept aside for the HNI / NII investors. The table below captures the allocation to various categories.

It may be noted here that the Net Offer above refers to the quantity net of employee and promoter quota, as indicated above. There is an employee quota of up to ₹1.00 crore communicated by the company as the shares reserved for employees in its red herring prospectus (RHP) offered at a discount of ₹19 per share. The anchor portion, will be carved out of the QIB portion and the QIB portion available to the public will be reduced proportionately.

Lot sizes for investing in the DEE Development Engineers IPO

Lot size is the minimum number of shares that the investor has to put in as part of the IPO application. The lot size only applies for the IPO and once it is listed then it can be even traded in multiples of 1 shares since it is a mainboard issue. Investors in the IPO can only invest in minimum lot size and in multiples thereof. In the case of DEE Development Engineers Ltd, the minimum lot size is 13 shares with upper band indicative value of ₹14,973. The table below captures the minimum and maximum lots sizes applicable for different categories of investors in the IPO of DEE Development Engineers Ltd.

It may be noted here that for the B-HNI category and for the QIB (qualified institutional buyer) category, there are no upper limits applicable.

Financial highlights of DEE Development Engineers Ltd

The table below captures the key financials of DEE Development Engineers Ltd for the last 3 completed financial years. 

Data Source: Company RHP filed with SEBI (FY refers to Apr-Mar period)

There are few key takeaways from the financials of DEE Development Engineers Ltd which can be enumerated as under:

a)    In the last 3 years, revenue growth has been rather volatile, although the FY23 sales revenues are about 20% higher than the FY21 sales revenues. We are not comparing the data for previous year as FY22 was a year in which the profits and the sales had fallen. However, the net margins of the company have been quite tepid at around 2.18%.

b)    While the net margins of the company have been quite low, even the ROE at 3.06% and the ROA at 1.34% are quite low by industry standards. These are the latest year figures, but previous figures have average around that. The challenge appears to be that of a IRR based pricing model, where the net margins are getting largely constrained.

c)    The company has relatively lower sweating of assets at just around 0.62X in the latest year, and the previous year sweating (asset turnover) also converging around that level. In this case, the low asset turnover gets compounded by the low ROA of the company.

Overall, the company has reported volatile growth in sales and profits while the net margins and the capital margins are relatively low. Let us now turn to the valuation story.

Valuation metrics of the DEE Development Engineers IPO

Let us turn to the valuations part. On the latest year diluted EPS of ₹2.45, the upper band stock price of ₹203 gets discounted at a P/E ratio of 82-83 times. If one looks at the average growth in top line and bottom line and also as the margins on sales and capital; the pricing does look very aggressive and may not leave much on the table. If you look at the numbers for the first 9 months of FY24, the EPS is at ₹2.69, so full year EPS can be extrapolated to ₹3.59 per share. It now translates into P/E ratio of 56-57 times. This looks relatively reasonable but may be hard to justify unless the net margins and ROE pick up sharply.

Here are some qualitative advantages that DEE Development Engineers IPO brings to the table. 

•    In terms of the niche in which the company operates, the company is a leading player and that offers significant entry barriers. Long standing customer relationships are an added advantage to the company.

•    The spread of clients and the spread of solutions offered are not only niche but also of a higher quality. However, that does not change the fact that margins are persistently low.

If you add up the qualitative factors and the valuation on forward P/E of FY24, the story look to be reasonably good; although it is not too certain if the pricing leaves much on the table for investors. Investors must look at the business franchise from a long term investment perspective but only with a higher risk appetite.