IPO Size: Rs.500 cr

• Rs. 400 cr fresh issue for working cap (Rs. 160 cr), debt repayment (Rs. 110 cr), capex (Rs. 45 cr)
• Rs. 100 cr offer for sale (OFS) by the promoter (98.2% to drop to 73.6%)

Price band: Rs. 197-207 per share

• Only 10% for retail, as cash balance of Rs. 780 cr is more than net worth of Rs. 123 cr

M cap: Rs. 2,002 cr, implying 25% dilution

IPO Date: Mon 31^st Oct to Wed 2^nd Nov 2022, Listing Fri 11^th Nov 2022

Grey Market Premium (GMP): We are strongly against ‘grey market premium’ as it is an unofficial figure, against SEBI guidelines.

Defence Manufacturing Company

DCX Systems is a 11 year old Indian Offset Player, engaged in system integration services and manufacturing electronic sub-systems and cable and wire harness assemblies for defence and aerospace sectors, with 80% of Rs. 1,100 cr revenue coming from top 3 customers.  

Growth Visibility

Current fixed assets is only Rs. 10 cr. It is undertaking Rs. 45 cr capex in FY23 itself in subsidiary company, for electronic manufacturing services (EMS) facility at Bengaluru, to be funded through IPO proceeds. This along with separate expansion through term loans, will significantly enhance capacity.

Besides, repeat orders from the existing customers accounted for 98% of total orders in FY22. Current order book of Rs. 2,560 cr provides healthy growth visibility.

Robust Business Model

With lower value addition and input cost comprising ~90% of topline, company’s Gross Margin is only 10%, much lower than other defence manufacturers. However, low finance cost (most of its Rs. 500 cr debt is packing credit loan in foreign currency) due to negligible interest cost (Rs. 5 cr in Q1FY23) and annual deprecation of only Rs. 2 cr (asset light business model), flows to a healthy mid-single digit net margin. On FY22 PAT of Rs. 66 cr, net margin was at 6%, with an EPS of Rs. 9.2. Q1FY23 revenue growth stood at 73% YoY to Rs. 213 cr, with PAT up 67% YoY to Rs. 6 cr.  

Although business is asset light, it is working capital intensive. Thus FY22’s 55% RoE will moderate to ~19% after IPO, as Rs. 400 cr fresh issue will expand its net worth.

Undemanding Valuation

On expected m cap of Rs. 2,002 cr, enterprise value (EV) stands at Rs. 1,612 cr. Based on FY23E revenue of Rs. 1,800 cr and PAT of ~Rs. 95 cr, current year PE multiple works out to about 21x and EV/revenue multiple less than 1x. Since private sector defence peers like Data Patterns, Astra Microwave and Paras Defence are ruling at PE multiples above 45x, DCX’s IPO pricing is seen quite attractive.

This adequately discounts the BBB credit rating, from an unknown rating agency Infomerics Valuation (as also company’s unacceptance of an earlier rating from Acuite Ratings).