Global Surfaces Ltd : AVOID

Global Surfaces Ltd : AVOID
  • Date

    13 Mar 2023 - 15 Mar 2023

  • Price Range

    ₹133 - ₹140

  • Minimum Order Quantity


  • (D) RHP


Incorporated in 1964, Divgi TorqTransfer Systems Ltd. (DTTSL) is engaged in manufacturing and supplying transfer case systems, torque couplers, and providing DCT solutions to various segments of the automotive industry. The company has also focused on designing and developing prototypes of transmission systems for EVs and is in the process of launching domestically manufactured DCT systems for the Indian market. Moreover, DTTSL is the only player in the market that manufactures and exports transfer cases to global OEMs from India along with being the sole manufacturer of torque couplers in India. The company is in the list of a select few to serve both as a systems-level solution provider as well as a component kit supplier to global OEMs and Tier I transmission systems suppliers. The company’s client base includes several marquee domestic and global OEMs in the automobile sector such as Tata Motors and Mahindra & Mahindra, and global suppliers such as BorgWarner. Presently, the company has three manufacturing and assembling facilities across India located at Sirsi in Karnataka, and Shivare and Bhosari near Pune in Maharashtra. On the global front, the company has expanded its services to automotive OEMs across key markets like the USA, China, Korea, Russia, etc.

Objects of the issue:
The IPO proceeds of the fresh issue will be used towards the following purposes:
  • Funding capital expenditure requirements for the purchase of equipments/machineries of the company’s manufacturing facilities.
  • General corporate purposes.
Investment Rationale:

Higher focus on the engineered quartz segment is set to drive business growth going forward 
It is estimated that the market for EV transmission is expected to grow at a CAGR of 77-82% in the FY2022-27 period in both volume and value terms. To capitalize on this opportunity, the company intends to increase its market share in both the Indian and overseas markets by providing comprehensive transmission solutions and components to EV OEMs and acquiring new customers within this segment. Presently, the company has a contract for the supply of EV transmission systems for one of the leading providers of EVs in India. However, this has not materialized yet commercially. Another area of interest for the company is the UV segment in which its share in total PV production has risen to 35% from 20% earlier. Thus, with higher penetration of DCT in the compact UV and UV segments, the company stands to benefit as it is the only company to manufacture DCT systems in the Indian market.

Strategically located manufacturing facilities
The business has followed a strategic approach in setting up its facilities in a manner that helped them to minimize its costs. Illustrating this, the company’s manufacturing facility – Unit I is located near its key raw material (i.e. blocks of natural stones) where it could source its raw materials more efficiently, thereby reducing the logistics and transportation cost of the business. Moreover, the company has positioned its new manufacturing facility in The Jebel Ali Free Zone, Dubai where it enjoys the benefit of being income tax exempt and having free trade privileges as compared to manufacturing units established in landlocked areas that use rail and roads for transportation.

Valuation and Outlook:

On the way forward, Global Surfaces Ltd. aims on increasing its focus on the engineered quartz segment wherein it commands higher margins as compared to the natural stones segment. While the company’s overall capacity utilization for natural stones stood at 63.0%, 57.2%, and 28.7% for FY20, FY21, and FY22, respectively, the engineered quartz segment’s overall capacity utilization was reported at 70.4%, 64.0%, and 69.0% for the period. On the upper end of the price band, the issue is valued at a P/E of 13x based on FY2022 earnings. However, the declining margin profile of the business (EBITDA margin: 24.7% in FY20 v/s 22.0% in FY22) and deterioration in key return ratios like ROCE (33.0% in FY20 v/s 20.9% in FY22) and ROE (32.5% in FY20 v/s 26.6% in FY22) remain a cause of concern. We, therefore, remain cautious over this issue and recommend an “AVOID” rating.