Danish Power NSE SME IPO review (May apply)

•    The company is in the business of manufacturing various types of transformers and also provides substation automation services.
•    It marked growth in its top lines for the reported periods, but the sudden surge in bottom lines from FY24 onwards (pre-IPO periods) raises eyebrows.
•    Based on FY25 super annualized earnings, the issue appears fully priced. 
•    Well-informed investors may park funds for long term.

ABOUT COMPANY:
Danish Power Ltd. (DPL) is an ISO 9001:2015, ISO 14001: 2015 and ISO 45001:2018 certified company, engaged in the business of manufacturing of different types of transformers including inverter duty transformers used in renewable power projects like solar power plant or wind farms, oil and dry type power and distribution transformers, control relay panel along with substation automation services. 

These transformers and panels are used across various sectors and industries to facilitate the efficient transmission and distribution of electrical power such as renewable power EPC projects like solar power plant, wind power farms, other power generation plants, power transmission, electricity sub-stations, power utilities etc. DPL's customers include companies like Tata Power Solar System Ltd, Waaree Renewable Technologies Limited, Jakson Green Private Limited, ABB India Limited & Torrent Power Limited.

Its current product portfolio consists of - 1. Inverter Duty Transformers (multi-winding) up to 20 MVA 33 kV Class for Solar Plants, Transformers for Wind Turbine Generator, 2. Distribution Transformers up to 5 MVA 33 kV Class, 3. Power Transformers up to 63 MVA 132 kV Class, 4. Panels includes Control Relay Panels up to 400 kV Class, Substation Automation (SCADA), Bus Bar Protection Panels, LT Panels, APFC Panels. Inverter duty transformer has the lion share in its top line followed by distribution transformer.

Its plants have a combined capacity of around 4681 MVA for transformer manufacturing and a capacity of around 576 units for control relay panels manufacturing. The manufacturing facilities of the Company is equipped with Foil winding machine, Oil storage tanks, Bus bar processing machine, Lath machine, CNC plasma machine, Transformer oil filter machine, Sheet rolling machine, Powder coating plant, Motorized sheet cutter machine, Power press, HV/LV coil winding machine, Vacuum drying oven with trolly, Pipe & bolt threading machine, Roller bending machine, Vacuum pump, shearing machine insulated motorized. 

Company's manufacturing facility is staffed with a workforce of approximately 346 employees as of June 30, 2024. Its testing facility is NABL accredited and is capable for routine test as per industry standards along with tests such as lighting impulse withstand tests, capacitance - tan delta, temperature rise & partial discharge tests. These manufacturing capabilities and testing facilities have been critical for the production of transformers and panels with strict compliance with the regulatory standards and requirements of the customer, which are very important for customer satisfaction and client retention.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden book building route IPO of 5208000 equity shares of Rs. 10 each to mobilize Rs. 197.90 cr. (at the upper cap). The company has announced a price band of Rs. 360 - Rs. 380 per share. The issue opens for subscription on October 22, 2024, and will close on October 24, 2024. The minimum number of shares to be applied is for 300 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on NSE SME Emerge. The issue constitutes 26.45% of the post-IPO paid-up capital of the company. From the net proceeds of the IPO, the company will utilize Rs. 37.00 cr. for capex towards expansion of manufacturing facility, Rs. 20.00 cr. for repayment of certain borrowings, Rs. 85.00 cr. for working capital, and the rest for general corporate purposes. 

The IPO is solely lead managed by Hem Securities Ltd., and Link Intime India Pvt. Ltd. is the registrar to the issue. HEM Group's Hem Finlease Pvt. Ltd., is the Market Maker for the company. 

Having issued initial equity shares at par value, the company converted further equity shares at a fixed price of Rs. 21 per share in April 2007, and has also issued bonus shares in the ratio of 8 for 1 in June 2024. The average cost of acquisition of shares by the promoters is Rs. 0.00, Rs. 0.25, and Rs. 1.11 per share. 

Post-IPO, company's current paid-up equity capital of Rs. 14.48 cr. will stand enhanced to Rs. 19.69 cr. Based on the upper price band of the IPO, the company is looking for a market cap of Rs. 748.28 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has (on a standalone basis) posted a total revenue/net profit of Rs. 149.17 cr. / Rs. 5.25 cr. (FY22), Rs. 189.44 cr. / Rs. 8.57 cr. (FY23), and Rs. 334.64 cr. / Rs. 38.07 cr. (FY24). For Q1 of FY25 ended on June 30, 2024, it earned a net profit of Rs. 10.42 cr. on a total revenue of Rs. 72.30 cr. Thus the company has reported steady growth in its top and bottom lines for the reported periods. However, sudden boost in its bottom lines in pre-IPO periods from FY24 onwards raises eyebrows and concern over its sustainability going forward. It is operating in a highly competitive and fragmented segment. 

On a consolidated basis, the company posted a total revenue/net profit of Rs. 334.64 cr. / Rs. 38.07 cr. (FY24), and Rs.  72.73 cr. / Rs. 9.98 cr. (Q1-FY25). 

For the last three fiscals, the company has reported an average EPS of Rs. 15.72 and an average RoNW of 32.13%. The issue is priced at a P/BV of 5.98 based on its NAV of Rs. 63.53 as of June 30, 2024 (on a consolidated basis), and at a P/BV of 2.58 based on its post-IPO NAV of Rs. 147.23 per share (at the upper cap). 

If we attribute FY25 annualized super earnings on post-IPO fully diluted equity capital, then the asking price is at a P/E of 18.74, and based on FY24 earnings, the P/E stands at 19.66. The issue relatively appears fully priced.

For the reported periods, the company has (on a standalone basis) posted PAT margins of 3.53% (FY22), 4.54 % (FY23), 11.45% (FY24), 14.58% (Q1-FY25), and RoCE margins of 14.73%, 23.90%, 56.98%, 12.30%, respectively for the referred periods. And on a consolidated basis it reported PAT margins of 11.45% (FY24), 13.88% (Q1-FY25), and RoCE margins of 56.98%, 12.41% respectively. 

DIVIDEND POLICY:
The company has not paid any dividends for the reported periods in the offer document. It will adopt a prudent dividend policy post listing, based on its financial performance and future prospects. 

COMPARISION WITH LISTED PEERS:
As per the offer document, the company has shown Indo Tech Transformers, Shilas of October 18, 2024). However, they are not truly comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORD:
This is the 60th mandate from Hem Securities in the last three fiscals (including the ongoing one).  Out of the last 11 listings, all opened with a premiums ranging from 2.30% to 90% on the date of listing.