Diffusion Engineers, promoted by Prashant Garg, manufactures welding consumables, wear plates and wear parts and heavy engineering machinery for core industries. It provides specialized repairs and reconditioning services for heavy machinery and equipment and trades anti-wear powders and welding and cutting machinery.

The company provides super conditioning process at its manufacturing facilities, a surface treatment solution for machine components that enhances wear resistance, eliminates stress and improves their repairability ultimately extending their lifespan and reducing production costs.

Its products and services portfolio can be classified into welding and anti-wear consumables[special purpose electrodes, flux cored wires, cold repair compounds]; wear plates / wear parts [includes Welding service job work], heavy engineering equipment [air separator, high pressure grinding rollers, FD fan, mill body, RAPH rotter] and trading [thermal spray powder, welding equipment].

Of the FY 2024 consolidated revenue, 30.4% was from welding and anti-wear consumables; 34.9% from wear plate/wear parts; 26% from heavy engineering equipment, and 8.7% from trading.

A special purpose electrode (SPE) is specially formulated maintenance purpose welding electrodes to ensure the enhancement of working performance with minimum heat input. The company manufactures a range of electrodes using alloys such as tungsten, nickel, chromium, cobalt, molybdenum, niobium, andvanadium. Flux-cored wire (FCW) is a type of welding consumable used in various welding processes.

About 20.25% and 77.01% of the total volume of SPE and FCW manufactured in FY2024 were captively (in-house) consumed and balance sold to customers in domestic and international market. Of the FY2024 standalone revenue, the SPE and FCW accounted for 20.27% and 7.9%, respectively.

Wear plates are used to reduce wear and tear on equipment surface caused by harsh working environment prevalent in industries and are used across various industries and find its application where abrasion, wear, tear and impact requirements are particularly critical. Wear plates and wear parts accounted for 13.28% and 14.2% of the FY2024 standalone revenue from operations.

In India, the company sells its products through a network of distributors, who further distribute its products to the end-use customers. It sells products under various brand labels including but not limited to `Diffusion’, `Diffcor’, `Corodur’ and `SOP’. Products are sold in Asian, APEC, Africa, Middles east, Europe and US. Thus, a sizeable 9.47% revenue was from exports in FY2024, with the balance 90.53% coming from domestic market. Of the FY2024 standalone revenue, about 36.66% come from cement, 13.92% from engineering, 12.92% from steel, 7.31% from power, 4.47% from sugar, and balance 24.72% from others.

Currently operating four manufacturing units. All are in Nagpur, Maharashtra. Unit 1 manufacturesspecial purpose welding electrodes(700 tpa installed capacity). Unit II manufactures flux cored wires, wear plates and wear parts through fabrication and machining (3204 tpa installed capacity); Unit III produces coatings for abrasion and corrosion resistance (810 tpa installed capacity); and Unit IV manufactures flux cored wires (444 tpa), wear plates and heavy engineering machinery (9000 tpa). It has overseas presence through subsidiaries in Singapore, Turkey and Philippines, and JVs and associates in United Kingdom and Malaysia.

Intends to venture into manufacturing of nickel, cobalt and iron-based powders to cater to the growing demand for these powders from its customer and outside. It intends to enter into a technical collaboration agreement with associate LSN Diffusion (UK), from whom it currently sources thermal spray powders for trading.

Looks to extend its anti wear solutions and heavy engineering equipment business beyond its current focus on cement, steel and power sectors into new industries such as mining, defence etc. It also looks at strategic leasing of heavy equipment for pre-determined leasing and maintenance fees from customers.

The Issue and Object of the Issue

The IPO comprises fresh issue of equity shares of 9405000 equity share of Rs 10 face value.

Of the net proceeds from the fresh issue, about Rs 71.38 crore will be used for funding capital expenditure requirements towards expansion of its existing manufacturing facility Unit IV at Khapri (Uma) in Nagpur; Rs 30.385 crore towards setting up of a new manufacturing facility located at Hingna in Sonegaon District of Maharashtra; Rs 22 crore towards funding working capital requirements of the company; and balance for general corporate purposes.

On completion of the expansion project, the installed capacity of Unit IV for wear plates and heavy engineering fabrication will increase to 16920 tpa [4920 tpa of wear plates, 12000 tpa of heavy engineering fabrication] from 9000 tpa, and 1080tpa from 444 tpa of FCW. The expansion of Unit IV is expected to commence production by November 2025.

The proposed new plant at Hingna will have the capacity to manufacture SPE and wire strips to be utilized in the production of FCW signaling backward integration. This plant will have an installed capacity to produce 600 tpa of SPE and 1200 tpa of CR coil slitting line and is expected to commence production by November 2025.

Strengths

Long experience in welding consumables and wear plates, with expertise in designing, developing and manufacturing complex and specialized industrial equipment and components for OEMs and end-user industries such as cement, steel and power sector. Revenue contribution from OEMs stood at 27.75% of FY2024 total operational revenue and balance 72.25% from direct end customers.

Synergistic business models focused on forward integration

Has a diversified customer base with which it has long standing relationship. Has served 503, 500 and 444 customers for Fiscals 2024, 2023 and 2022, respectively. The Top 10 customers contribute just 29.43% of FY2024 standalone revenue.

Weakness

Operates in a competitive and fragmented industry with low barriers to entry and may be unable to compete with the unorganized sector.

Had negative operating cash flows in FY2023 and may incur negative cash flow in the future also.

All its four manufacturing facilities are in Nagpur, Maharashtra.

Made allotment of equity shares in the past to more than 49 investors, which may have been in non-compliance with the Companies Act, 1956.

Group companies MecdiffSdnBhd and Benvira Forward Algorithms Private Limited and certain subsidiaries are engaged in similar business. Has not entered any non-compete agreements with such group companies and subsidiaries.

Some instances of incorrect filings with the Registrar of Companies and other non-compliances under the Companies Act in the past.

Cyclical nature of industrial capex in the country

Valuation

Consolidated re-stated revenue stood higher by 9% to Rs 278.14 crore in FY 2024. But with the OPM expanding by a strong 310 bps to 14% on the back of better product mix, OP jumped up by 39% to Rs 38.87 crore. Eventually, Pat after MI stood higher by 39% to Rs 30.80 crore.

At the upper price band, the PE works out to 20.2 times of its FY2024 EPS, the P/BV works out to 1.8 times and EV/Sales works out to 2.4 times.

In comparison, welding consumable players such as Ador Welding, Esab India, GEE, D&H India quotes at a PE of 29.3 times, 59.9 times, 36.3 times and 44.6 times and at P/BV of 5.1 times, 31.5 times, 3.6 times and 2.8 times. AIA Engineering and Tega Industries, who are into mill liners and other related consumables, quotes at a PE of 36.8 times and 62.5 times, respectively, and P/BV of 6.3 times and 10.2 times. Ador Welding, Esab India, GEE, D&H India, AIA Engg and Tega Industries in comparison quote at EV/sales of 18.2 times, 13.6 times, 32.6 times, 101.7 times, 3.6 times and 2.8 times, respectively. But these companies are not apple-to-apple comparisons.