Bharat Dynamics IPO

IPO Rating - 51 (Investment Recommended)*

About the Issue 

The IPO of Bharat Dynamics will remain open for subscription from March 13-15, 2018. The issue consists of Offer for Sale (OFS) where the Indian government is selling 12% stake worth Rs 960.94 crore. The issue price is in the range of Rs 413-428 per equity share having face value of Rs 10 each. Also, a discount of Rs 10 per share on the offer price would be given to retail investors and employees. The minimum lot size consists of 35 shares. The company will get listed on both BSE and NSE. 

Purpose of the Issue

- To carry out the disinvestment of equity shares by the selling shareholders
- To achieve the benefits of listing the equity shares on the stock exchanges

As the issue consists of OFS, the company will not receive any proceeds from the offer and all the proceeds will go to the selling shareholders. 

Company Background 

Bharat Dynamics is a wholly-owned Government of India (GoI) company headquartered in Hyderabad and under the administrative control of Ministry of Defence (MoD). It was conferred Mini-Ratna (category-1) status by GoI's Department of Public Enterprises. Founded in 1970, the company has over four decades of experience in manufacturing missiles and countermeasures and its allied equipments. 

The company is engaged in the manufacture of Surface-to-Air Missiles (SAMs), Anti-Tank Guided Missiles (ATGMs), underwater weapons, launchers, countermeasures and test equipments. It is the sole manufacturer for SAMs, torpedoes, ATGMs and sole supplier of SAMs and ATGMs to the Indian armed forces in India. Additionally, it is engaged in the business of refurbishment and life extension of manufactured missiles. 

It currently has three manufacturing facilities located in Hyderabad, Bhanur and Vishakhapatnam. The Hyderabad manufacturing unit is engaged in the manufacture of SAMs, Milan 2T ATGMs, countermeasures, launchers and test equipments. The Bhanur unit is engaged in the manufacture of the Konkurs – M ATGMs, the INVAR (3 UBK 20) ATGMs, launchers and spares. The Vishakhapatnam unit is engaged in the manufacture of light-weight torpedoes, the C-303 anti-torpedo system, countermeasures and spares. 

The company intends to increase the R&D activities to provide novel and better products to its customers. The R&D expenses have grown at 23.60% CAGR from Rs 22.72 crore for FY15 to Rs 34.71 crore for FY17. It has established the missile development group with the objective of designing and developing missiles. 

Financial Performance 

The company's revenue and net profit for the year has increased from Rs 2,840.82 crore and Rs 443.54 crore, respectively, in FY15 to Rs 4,832.75 crore and Rs 490.31 crore, respectively, in FY17, showing growth of 30.43% and 5.14%  CAGR, respectively. The company has consistently declared dividends for the last five years. As on October 31, 2017, the company’s order book stood at Rs ~11,164 crore, which is almost 2.5 times the revenue generated in FY17. It has delivered RoNW of 26.8%, 30.4% and 22.2% for FY15, FY16 and FY17 respectively. 

Valuation 

For FY17, the company’s EPS was Rs 40.13. Considering the upper price band of Rs 428, the company’s P/E works out to 10.67x. However, Company had issued bonus shares in ratio of 1:1 in February 2018. Retrospectively, the EPS for FY17 including the bonus shares would be Rs 21.57. Accordingly, the P/E works out at 19.8x. As a matter of fact, Bharat Dynamics is engaged in the business of manufacturing missiles, and as it is the sole manufacture and supplier, there are no direct listed peers in the sector. But we have considered some listed companies from the defence sector for comparison.

(* Market Price as on March 1, 2018) 

Our View 

The company has a monopoly in manufacturing and supplying missiles in India. It supplies only to the Indian armed forces. There are many opportunities in the Indian market, which will be up for grabs in the future. These opportunities, coupled with the ‘Make in India’ initiative, has stimulated an interesting market dynamic in India. The company's revenue growth has been consistent and the current order book gives revenue visibility for the next two years. Also, it is available at attractive valuations. As it is a government company, it is a safe bet. Investors can subscribe to the IPO with medium to long term perspective.

*40 or lower – Avoid Investment, 41 to 45 – Risky, 46 to 50 – Invest with limited exposure, 51 to 55 – Investment recommended, 56 & above – Excellent Investment

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