Diffusion Engineers Makes Healthy Debut With 15% Premium | NDTV Profit
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00:00Hello and welcome, you are tuned into the SMIT show here on NDTV Profit.
00:12I am Harsh Saita, with me is Mahima Vatsrajani and we have the management of diffusion engineers
00:17with us.
00:18It is day one of listing for diffusion engineers.
00:22We have Abhishek Mehta who is the CFO and Prashant Garg who is the Chairman and Managing
00:25Director at Diffusion Engineers.
00:28Welcome and many congratulations sirs.
00:33Feels amazing, feels thrilled to be here, it's a new start for us.
00:37Right, just talk to us about what is the next trajectory that we see diffusion engineers
00:46take.
00:47Abhishek let me come to you.
00:48So, we will be doing our expansion, the money which we receive, we will be doing our expansion,
00:56we will be increasing our capacity in our existing heavy engine division, we will be
01:01doing expansion in our electrodes division also.
01:06These are the two things which we are doing with the funds which we have received and
01:09our expansion will happen starts immediately in some time.
01:15Right, Mr. Garg you know you are planning to expand your focus beyond cement, steel
01:22and power sectors and you are planning to explore the defense in the mining space.
01:26What are your plans with respect to that?
01:30Yes, we are already supplying in the defense sector.
01:36Welding consumables are used for very prestigious application of armoring which is used in the
01:43manufacturing of the T90 Urgent Tank.
01:46We are also prominently present in the mining sector.
01:50We are supplying to some prominent OEMs such as Metso.
01:54So we are already present there and of course our focus is to you know diversify new industries
01:59and our capex and expansion will help us cater to newer sectors.
02:05Right, you know let me come to you Abhishek with regard to how top line shapes up for
02:13you.
02:15Please talk to us about what's the trajectory you see in the two to three year period.
02:23So basically it will take around a year or so to do our capex and then we will start
02:30our production will increase which will help us increase our top line and we expect that
02:37around we will go in the double digits only.
02:40That's what our expectation in next two to three years.
02:44All right and Abhishek, your margins in FY20 for jump to nearly 14% which have been around
02:4911% before that.
02:51So I want to understand that what has led to this jump first of all and do you expect
02:56margins to sustain at 14% going forward?
03:05Our margins because of our lower direct cost, our margins improved and we expected to remain
03:12it in the same level in the years to come.
03:15I will try to maintain it in the same level in it which it is right now.
03:20All right and Mr. Mehta, you know you also plan to begin in-house production for nickel,
03:26cobalt and iron based powders.
03:27So this will meet you know your raw material demand overall.
03:31So I want to understand that what will, how will this impact the overall margins then
03:35going forward from a longer term perspective?
03:41I will take that.
03:44So these products are also, they are not used as raw materials but they are used for manufacturing
03:53products which are supplied in the end customer industry.
03:56So this will and there are very few manufacturers of these products in India and majority of
04:02these products are imported right now.
04:04So it will definitely help us improve margins because locally manufacturing will reduce
04:09cost and we will be able to you know gather or capture bigger market share.
04:15Right.
04:16Prashant, let me stick with you.
04:19With regard to your CAPEX plans, where does this take your capacity?
04:23Just talk to us about where capacity currently stands at, where does it go maybe a year from
04:28now as that CAPEX starts to unwind and some of that incremental CAPEX that you've built
04:35in starts to generate revenue for you?
04:41So currently we are sort of maxed out on our capacities and that sort of is reflected in
04:46the top line of last year.
04:48We are you know already around 85-90% of our utilization.
04:52So with this CAPEX we will be able to double our capacities at least.
04:57Of course what also happens is when you have associated equipments and bigger space you
05:04tend to get better utilization and even higher manufacturing capacities gets freed up or
05:11generated.
05:12So we expect minimum double and expect it to be higher also.
05:17Okay and where does your dead stand give us perspective on that and any more fundraising
05:23plans of any kind or will the entire of any incremental CAPEX from here be funded through
05:29internal accruals?
05:30Just talk to us about those couple of things.
05:35Yes so we don't have any long term debt, we have only got working capital debt going on
05:40with us and we don't expect any new fund raise to happen in the near future and we think
05:47we have strong operating cash flow so we think that whatever incremental CAPEX will be needed
05:52in years to come we will be able to fund it through our internal accruals.
05:56Right and Mr. Garg you are also particularly focusing on increasing your presence in Turkey.
06:02So I want to understand what is the kind of progress there and of course I want to also
06:07understand that in terms of international expansion right now roughly your revenue from
06:13international business is 9% where will that grow to because your focus is to expand internationally.
06:22Yes so we are typically looking at markets where cement and steel industries are prominently
06:30present.
06:31It's not just Turkey so we are also present in Philippines, we are present in Vietnam
06:37and Turkey of course has got a very big cement industry.
06:40We are also you know opened a base in Sharjah and expect to also you know start something
06:46very soon in Saudi.
06:47So we are looking at these sort of geographies because we have got very good credentials
06:51and track record in cement and steel sector and we want to replicate that in these countries.
06:56As far as international presence is concerned I think India you know Indian customers have
07:03really taught us to develop novel solutions because Indian customers demand a maximum
07:08amount of asset.
07:09They want to squeeze the maximum out of their installed base to maximize asset utilization
07:15and that has helped us to develop new products and solutions which we think can be very well
07:20replicated in these geographies and the value realization is also much better in these geographies
07:26because the number of players present are less or fewer.
07:29So we expect export sales to grow up steadily.
07:32Bear in mind that we have grown twice in last four years.
07:37So as our top line is increasing the percentage of exports doesn't show up but our export
07:41sales are constantly increasing and we expect them to at least you know become 50% to 75%
07:47of our total turnover in the near future.
07:50Got it.
07:51Just two quick questions on this one Prashant.
07:52So one is how is competition in some of these markets?
07:57You were alluding to the fact that likely competition is not as intense.
08:07In the newer geographies you mean to say?
08:08Yes please.
08:09So what I meant to say was our experience in India to serve our customers is helping
08:19us to develop newer solutions and that is helping us to you know get better and we can
08:25you know replicate these success stories in these geographies.
08:27So that is what I you know meant to say.
08:31While competition is present there you believe that just the kind of experience and the kind
08:37of work that you have done is helping you penetrate these markets better.
08:44Is that the right way to look at it?
08:48Yes because of our you know we are developing newer solutions to you know cater to the Indian
08:54sector and these sort of solutions have not been developed to a large extent elsewhere
09:01and then these success stories we are trying to replicate in these newer geographies.
09:05Given that you are maxed out on your capacity utilization, would you therefore focus more
09:11on these markets at the expense of India?
09:13Is that how your revenue distribution will actually go?
09:18No, our capacities so with the capex that with the fundraise that we have been able
09:26to do, we will increase our manufacturing capabilities and
09:30A forward right, apologies Mr. Garg if I am getting this wrong.
09:33Manufacturing capabilities are, sorry come again.
09:39But that's one year forward right, your capex, the extra amount of capacity that you are
09:46adding is maybe a year away.
09:48So what do you do for the next year?
09:52No, so it's not that we are selling to these export markets at the cost of Indian markets.
10:02Right now as I mentioned before we are around 85% of our capacity utilization and there
10:07is a lead time that is given to us from our customers to deliver our products and services.
10:12So you know we are able to cater to these markets.
10:14For the growth prospects you know we need to increase our capacity so that we can you
10:19know capture bigger market share in India as well as outside.
10:23Right, Mr. Mehta you know I want to understand that you know three year revenue CAGR is 21%
10:31since FY21 to 24 and PAT CAGR has been 38% and you have said that you will be doing a
10:37double digit growth.
10:38Can you help us quantify as to you know by the end of FY25 what will the growth look
10:43like?
10:48Obviously it will be difficult to quantify as of now what would be the growth like but
10:53yes since we have as Mr. Prashant said that our capacity is maxed out but we will be in
10:59the same range of around what we have grown in the years.
11:04So we are expecting around the same CAGR which we are doing it.
11:08So that's a double digit we are expecting in the growth front.
11:14Right, and Mr. Garg just to try and break this down a little bit better.
11:21So does the export market allow you to grow better on your top line given the fact that
11:28you will probably get better realizations, better value for the product you are selling
11:32and also is it more margin accretive?
11:34So does this leave scope for a margin upside maybe a couple of years from now?
11:43So export markets definitely help contribute in the bottom line better.
11:49Of course now we need to also in order to understand this better there are three aspects
11:53to our business.
11:54One is welding consumables, second is ware parts and third is heavy engineering.
11:58So on the ware parts and heavy engineering we feel the export markets offer better margins.
12:03So definitely it helps contribute on the bottom line better but we are again you know seeing
12:08growth the kind of sectors that we serve in, steel, cement, power, mining, engineering,
12:15railways, we see growth happening in India as well.
12:18So we are trying to capture markets outside of India as well as in India and we are focused
12:25on both these initiatives.
12:26We are not just doing one at the cost of other.
12:31It takes a little bit longer to get export markets so therefore you can't do one at the
12:38expense of other or one at the cost of another.
12:40Sure point taken.
12:41Mr. Mehta last off with regard to return ratios what's the kind of return ratio expectations
12:46you have because you've just done a fundraiser for around 160 crore on a market cap which
12:51is roughly 800 odd crore.
12:53So where should your return ratios be at?
12:57We will try to maintain our return ratios and improve it better in the years to come.
13:08Okay okay point taken.
13:10Alright with that completely out of time with both of you thank you so much the management
13:16of diffusion of course stock up 21% so cheer especially for investors who've gotten an
13:23allocation in this particular IPO.