Rs. 171 cr IPO -

• Rs. 141 cr fresh issue for working cap (Rs. 60 cr), capex (Rs. 35 cr), debt repayment (Rs. 12 cr). 
• Rs. 30 cr offer for sale (OFS) mainly by promoters, trimming 79% stake to 59%.

Price band: Rs. 165-175 per share

Mcap: Rs. 682cr, implying 25% dilution

Pre-IPO worth Rs. 34 cr raised at Rs. 125 per share in Mar/Apr 2021 and at Rs. 160 per share on 29Jul 2021. 40% premium to 5 month ago price, can not be justified in absence of Q1FY22 financials, but seem to be a consequence of life-high levels of secondary markets.

IPO Date: Tue 21 Sep 21 to Thu 23 Sep 21

Listing: 1 Oct 21 in T2T segment 

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

Merits and demerits of the company, which is a leading player in Optics and Critical Imaging for Defence and Space include:

Strengths:

1. Beneficiary of Atmanirbhar Bharat and Make in India push: (i) Indigenously Designed Developed and Manufacturer (IDDM), which is the highest category under Defence Acquisition Procedure, effective 1.10.20. (ii) Manufactures few of the electro-magnetic pulse (EMP) products like EMP racks and filters, under Import Embargo List of 101 items. (iii) Drone, anti-drone & satellite subsidiaries promising, with company also planning to participate in PLI for defence exports.
2. H2FY21 revenue of Rs. 106 cr with PAT of Rs. 16 cr (15% net margin) and EPS of Rs. 5.14, over full year FY20 EPS of Rs. 6.9.
3. As of 30.6.21, Rs.305 cr order book (200 cr in defence & space optics), doubling from Rs. 159 cr as of 31.12.20. Current order book, at 1.5x H2FY21 annualised revenue, provides high growth visibility for next 18 months, as current capacity utilisation is 90% and company plans a significant capex of Rs. 48 cr capex (Rs. 155 cr fixed assets as of 31.3.21).

Concerns:

1. Topline stagnant in pre-covid years (FY20 revenue of Rs. 147 cr similar to FY18’s Rs. 149 cr), with PBT declining to Rs. 22 cr in FY20, from Rs. 30 cr in FY18. Revenue run-rate improved just before IPO.
2. Despite government entities accounting for only 50% of revenue, working capital management is extremely poor, with debtors and inventory being 10-11 months of sale, not just for FY21, but FY20 and FY19 as well. Since more capital gets blocked in funding working capital, RoE is capped, to a maximum of mid-teens. 
3. Small size of operations, with only Rs. 200 cr in annual topline (compared to BEL’s Rs. 14,000 cr topline). Company still deals with co-operative bank even after PMC debacle and has credit rating of BBB+ with outlook being lowered to negative in Mar 2021.