Key Rating Drivers & Detailed Description

Strengths:

Extensive experience of the promoters: The four-decade-long experience of the promoters in the transformer industry and their healthy relationships with customers and suppliers should continue to support the business risk profile. Over the years, the company has established a strong market position, backed by timely execution of orders from private and government parties. The revenue profile is diverse, as the company caters to several private companies and also exports its products. With no customer contributing more than 15-20% of overall revenue, concentration risk is low. As a result, revenue has grown by 41% in compounded terms over the three fiscals through March 2024. Furthermore, a steady focus on research and development and diversification of the product portfolio should support business growth over the medium term.

Healthy financial risk profile: The financial risk profile is marked by strong networth and gearing projected to be in the range of Rs 310-320 crore and below 0.1 time, respectively, as on March 31, 2025, as against Rs 81 crore and 0.12 time, respectively, a year before. Improvement in networth will be supported by funds raised through the IPO, amounting to Rs 198 crore in October 2024, and higher accretion to reserves. On a standalone level, DPL is estimated to have no term debt on its books as on March 31, 2025. The improving operating margin and limited dependence on bank debt kept debt protection indicators healthy, with interest coverage projected to be 14-15 times for fiscal 2025. In the absence of any debt-funded capital expenditure (capex) plans, the financial risk profile is expected to remain comfortable over the medium term.

Healthy operating margin: Operating margin has improved to 16.8% in fiscal 2024 and is further expected to improve to 19-20% (19.8% reported till December 2024), led by higher contribution from the invertor duty transformer segment, economies of scale, and operationalization of the new plant. The invertor duty transformers fetch a higher margin, and the company too is able to charge a premium as it is able to provide in-house customization of orders based on customer preference carried out in house. Going forward, the company also plans to integrate backward by manufacturing radiators and plans to undertake a capex of Rs 40 crore for this purpose. Sustained improvement in operating margin remains a key monitorable.

Weaknesses:

Modest scale of operations: Though operating income has grown to Rs 333 crore and is expected to grow by a healthy rate of 20-25% in fiscal 2025, the scale remains modest and constrained by intense competition. Till December 2024, the company has booked revenue of Rs 278 crore and is expected to book revenue of Rs 400-420 crore in fiscal 2025. Furthermore, orders worth more than Rs 400 crore should provide revenue visibility for fiscal 2026. Steady order inflow, leading to sustained growth in revenue, will be a key monitorable.

Working capital-intensive operations: Gross current assets (without cash) are projected to be in the range of 120-130 days as on March 31, 2025, driven by inventory of 70-80 days and receivables of 50-60 days. Receivables are likely to remain in line with the credit period offered to customers to combat competition and over the medium term it is expected to increase from 45-50 days to 85-90 days in line with MSME laws. Inventory is likely to range from 70 to 80 days over the medium term in view of the lead time for procurement of raw material and the production process. The working capital cycle is supported by payables of 30-40 days along with bank limit and cash accrual. The working capital cycle is expected to elongate to around 140-150 days in coming fiscals as MSME rules will no longer be applicable however the same will be managed through healthy cash accruals. More than stretch in the working capital cycle leading to higher dependence on external debt shall remain monitorable.

Annexure - Details of Instrument(s)

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