IPO: DEE Development Engineers

DEE Development Engineers, a piping systems company, is launching its IPO (initial public offering) on June 19, 2024. Below is a breakdown of the company's strengths, weaknesses, and growth prospects to help investors make an informed decision.

In a nutshell

• Quality: ROE and ROCE was 2.8 and 3.5 per cent, respectively, between FY21 and FY23.
  
• Growth: Between FY21 and FY23, its revenue grew 9.7 per cent annually. However, the profit after tax declined 4.4 per cent per annum due to a higher base of FY21 on account of previously deferred taxes.
  
• Valuation: The stock is valued at a P/E and P/B of 108.1 and 1.9 times, respectively.
  
• Overview: Growing energy demands and the government's push on the oil, gas and power sectors are key growth drivers for the company. However, a weak global economy, volatile raw material prices, and intense competition within the industry can damage its prospects.

About DEE Development Engineers

Founded in 1988, DEE Development Engineers offers customised piping solutions through specialised processes to industries like oil, gas, and chemicals. As of 9M FY24, its order book was valued at Rs 829 crore, with 74 per cent of these orders originating from its largest segment-the oil and gas industry. Additionally, the company has a strong presence overseas. Its exports accounted for 41 per cent of its revenue for 9M FY24.

Strengths of DEE Development Engineers

• The company has maintained long-term relationships with its key customers in the Indian and global markets. For instance, it has been associated with Reliance and Mitsubishi Heavy Industries for 12 years.
  
• Since the company offers specialised process piping solutions, clients do not easily switch to different suppliers, which creates an entry barrier for new players in the industry.

Weaknesses of DEE Development Engineers

• The company's revenue is highly concentrated . Its top 10 customers contributed 66 per cent to its total revenue as of 9M FY24.
  
• DEE Development Engineers has high working capital requirements , with receivable days and inventory days of 99 and 181, respectively. Over the last three years, the company has had to rely on short-term debt to grow its business. As a result, its short-term debt grew from Rs 206 crore in FY21 to Rs 325 crore as of 9M FY24.
  
• The business is cyclical and highly dependent on the oil and gas sector and the government's infrastructure push. Moreover, its margins significantly depend on steel prices, which is a key raw material.

Risk report

Company and business

• Are DEE Development Engineers' earnings before tax more than Rs 50 crore in the last 12 months?
  No. Its earnings before tax for FY23 was Rs 20.4 crore.
  
• Will DEE Development Engineers be able to scale up its business?
  Yes. Growing energy consumption in India and the government's infrastructure push to develop power and energy capacity will help the company scale up its business.
  
• Does DEE Development Engineers have recognisable brands with client stickiness?
  Yes. The company exhibits client stickiness as it has long-term relationships with its key customers. The industry also has high switching costs.
  
• Does the company have a credible moat?
  No. Competition is intense within the industry, and margins are very thin. However, in terms of capacity, the company is the largest player in the process piping solutions industry in India.

Management

• Do any of the company's founders still hold at least a 5 per cent stake? Or do promoters have over 25 per cent stake in the company?
  Yes. Post IPO, the promoters' stake will increase to 70.2 per cent.
  
• Do the top three managers have over 15 years of combined leadership at DEE Development Engineers?
  Yes. Krishan Lalit Bansal, Chairman and Managing Director, has been with the company since 1988.
  
• Is the management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
  Yes. There is no information to suggest otherwise.
  
• Is the company's accounting policy stable?
  Yes. There is no information to suggest otherwise.
  
• Is DEE Development Engineers free of promoter pledging of its shares?
  Yes. The company is free of promoters pledging its shares.

Financials

• Did the company generate a current and three-year average return on equity (ROE) of more than 15 per cent and a return on capital employed (ROCE) of more than 18 per cent?
  No. Its three-year average ROE and ROCE are 2.8 and 3.5 per cent, respectively. Its ROE and ROCE were 3.1 and 3.9 per cent, respectively, in FY23.
  
• Was the company's operating cash flow positive during the last three years?
  Yes. It generated positive cash flows from operations in each of the last three years.
  
• Is the company's net debt-to-equity ratio less than one?
  Yes. Its net debt-to-equity ratio stood at 0.9 times as of December 2023.
  
• Is DEE Development Engineers free from reliance on significant working capital for day-to-day affairs?
  No. The business has high receivables and inventory days of 99 and 181 days, respectively, as of FY23.
  
• Can the company operate its business without relying on external funding in the next three years?
  No. Although the company has been generating strong cash flows from operations, its high working capital requirements and capital-intensive nature may compel it to raise external funds for growth. Further, the company has relied on debt over the last three years to fuel its growth.
  
• Is DEE Development Engineers free from meaningful contingent liabilities?
  No. As of December 2023, its contingent liabilities as a percentage of equity stood at around 22.1 per cent.

Valuations

• Does the stock offer an operating earnings yield of more than 8 per cent on its enterprise value?
  No. The stock offers an earnings yield of 1.8 per cent.
  
• Is the stock's price-to-earnings less than its peers' median level?
  No. It is valued at a price-to-earnings ratio of 108.1 times compared to its only listed peer's P/E of 37.2 times.
  
• Is the stock's price-to-book value less than its peers' average level?
  Yes. It is valued at a price-to-book ratio of 1.8 times compared to its only listed peer's P/B of 3.6 times.

Disclaimer: This is not a stock recommendation. Do your due diligence before investing.

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