| Price | Lot Size | Issue Date | Issue Size |
|---|---|---|---|
| ₹ 193 to ₹ 203 | 73 | 19th June, 2024 – 21st June, 2024 | ₹ 418.01Cr |
Company Overview
DEE Development Engineering Ltd. is an engineering company specializing in process piping solutions for oil and gas, power, chemicals, and others. With over three and a half decades of experience, the company provides high-pressure piping systems, piping spools, industrial fittings, and other products. The company is a leading global provider of process pipe solutions for complex industrial requirements. It is currently India’s largest player in process piping solutions in terms of installed capacity. The company offers specialized process piping solutions, including engineering and pre-fabrication services. The company’s expertise covers the engineering of process/power piping systems, pre-fabrication activities such as cutting, beveling, welding, radiography, post-weld heat treatment, hydro-testing, pickling, passivation, grit blasting, painting, and working with complex metals. The company has seven manufacturing facilities located strategically across five locations in India and one in Thailand. The cumulative installed capacity as of FY23 stood at 94,500 MTPA. The company has initiated operations at the New Anjar Facility I, with an installed capacity of 3,000 MTPA. It plans to set up New Anjar Facility II with a proposed capacity of 9,000 MTPA, thus increasing the total capacity from 3,000 MTPA to 15,000 MTPA. The company has also built long-term relationships with clients in various industries and continues to attract new business due to the company’s ability to meet customer requirements. The customer base includes domestic and overseas clients, including Fortune 500 companies in India and multinational corporations.
Objects of the issue:
The net proceeds from the fresh issue will be used towards the following purposes:
- Funding working capital requirements of the company;
- General corporate purposes.
Investment Rationale:
Leading industry player with high entry barriers provide ample growth opportunities
DEE Development Engineering Ltd. is an engineering company providing specialized process piping solutions for industries such as oil and gas, power, process industries and chemicals through engineering, procurement and manufacturing services. The company leadership position can be attributed to factors such as long-standing relationships with certain global customers, business experience, domain expertise and consistent quality of products. The company’s leadership position offers competitive advantages such as product pricing, reduced costs due to economies of scale, ability to scale business, customer loyalty and higher client base. As per the D&B Report, India’s process piping solutions industry has high entry barriers due to the requirement of skilled labour with complex manufacturing technology, high capital investment and robust design and execution capability. Given the nature of the application of products and engineering processes to critical industries such as oil and gas and power (including nuclear), their products and engineering processes are subject to and measured against high-quality standards and stringent specifications of customers. Over the years, the company has built strong relationships with many customers, owing to its technical capabilities, track record, timely deliveries, and good and consistent quality products and engineering capabilities. Additionally, the level of technical skill and expertise essential for developing in-house engineering processes and handling complex metals require a significant amount of training that can only be achieved over time and involves high initial investment as well as a recurring cost, thereby creating further entry barrier for new entrants.
Long-standing customer relationships to aid sustained growth ahead
DEE Development Engineering Ltd. has 35 years of business operations and established long-term customer relationship across industries. The company believes that the ability to address the various and stringent client requirements over long periods enable it to obtain additional business from existing clients and new clients in an industry marked by high entry barriers. They have a balanced mix of domestic and overseas customers, including certain Fortune 500 companies in India and various multinational corporations. The customer relationships are led primarily by the ability to develop processes, meet stringent quality and technical specifications and manufacture customers’ products in a timely and cost-effective manner. As a result, they have a history of high customer retention and have been manufacturing products for specific customers for over a decade. The company believes that such long–term association with customers offers significant competitive advantages such as revenue visibility, industry goodwill, and a deep understanding of customers’ requirements, which are a testament to the quality of products and services. These enduring customer relationships have helped them expand product offerings and geographic reach. The company’s long-term relationships and ongoing active engagements with customers also allow them to plan capital expenditure to enhance the ability to benefit from increasing economies of scale, thereby ensuring a competitive cost structure to achieve sustainable growth and profitability.
Valuation
DEE Development Engineering Ltd. has evolved as one of the key players in process piping solutions in India w.r.t. installed capacity, with a strong focus on automation and process excellence to drive operational efficiencies and offerings to its customers. The company is increasing its focus on high-margin products with additional contributions from modular skids and usage of high-grade materials, forging technology tie-ups with select global OEMs to derive consistent order flow to become a preferred partner for its clients for the next few years. On the industrial front, the Indian pipe process industry has a decent growth outlook and is expected to grow at a CAGR of 6.1% between FY23 and FY30, supported by oil and gas, chemicals/petrochemicals, ethanol, and biomass, and power sectors. The company’s revenue has grown at a CAGR of 10% between FY21-23. The company has initiated the capacity expansion plans mentioned above, which will help it to improve its financial performance in the future. Further, the company is deleveraging its balance sheet by reducing debt. As we advance, the company’s financial performance is likely to be driven by its robust balance sheet, long-standing customer relationships, capacity expansion, higher entry barriers, and strong management team holding impressive backgrounds. The issue is valued at a P/E of 56.4x on the upper price band based on FY24 earnings, which we feel is fairly valued given the strong growth prospectus and stickiness of customer. We, therefore, recommend a SUBSCRIBE rating for the issue.
