IPO Analysis: DCX Systems Limited

IPO Rating: Invest for long term

About the issue: 

DCX Systems Limited, a leading Indian player in the manufacture of electronic sub-systems and cable harnesses is coming out with its initial public offering (IPO) of equity shares of the face value of Rs 2 per equity share. The price band of the issue has been fixed at Rs 197 to Rs 207 per equity share. The issue size is Rs 500 crore at higher price band.  

The IPO opening date is October 31, 2022, and it will be closing on November 2, 2022. The issue is likely to be listed on the exchange on November 11, 2022. The IPO market lot size is 72 Shares and in multiple thereof. A retail-individual investor can apply up to a maximum of 13 lots (936 shares or Rs 193,752) at upper price band. 

Objects of the Issue 

The company proposes to utilise the net proceeds of the fresh issue towards funding the following objects: 

1. Repayment/prepayment, in full or part, of certain borrowings availed of by the company. 

2. Funding working capital requirements of the company. 

3. Investment in our wholly owned subsidiary, Raneal Advanced Systems Private Limited, to fund its capital expenditure expenses. 

4. General corporate purposes. 

Promoter holding  

The Pre issue shareholding is 98.20 per cent, Post the IPO the promoter stake will be 73.58 per cent.  

About the company: 

DCX Systems Ltd (DCXSL), formerly known as DCX Cable Assemblies Pvt Ltd, is one of the top Indian manufacturers of electronic sub-systems and cable harnesses in terms of production capacity and revenue in the defence and aerospace sector as of Fiscal 2022. (Source: Company Commissioned F&S Report). The company's main business is system integration, but it also produces a wide range of cables and wire harness assemblies and engages in kitting. For the execution of aerospace and defence manufacturing projects, DCXSL has been a favoured Indian Offset Partner (IOP) for international original equipment manufacturers (OEMs) (Source: Company Commissioned F&S Report). It is a fast-expanding corporation in the Indian defence industry (Source: Company Commissioned F&S Report), and between Fiscal 2020 and Fiscal 2022, its revenue from operations increased at a CAGR of 56.64 per cent. 

ELTA Systems Limited and Israel Aerospace Industries Limited, System Missiles and Space Division (collectively, the "IAI Group"), Israel, count DCXSL as one of their largest Indian Offset Partners ("IOP") for the production of electronic subsystems and cable and wire harness assemblies for the Indian defence market. The company's order book has increased and its production capabilities have been enhanced over time. 

The expanding defence and aerospace market in India presents a significant opportunity for the company. By 2030, the Indian aerospace and defence industry is expected to be worth USD 70 billion. Recent actions like raising foreign direct investment ("FDI") in the Indian defence sector from the present 49 per cent to 74 per cent through the automatic route are expected to be major drivers and development possibilities for the market. A need for cables and connections is anticipated throughout the Indian defence environment as a result of the Defence Research and Development Organization's announcement of the indigenous development of around 108 systems and subsystems. 

The Indian government has also established the third positive indigenization list, which forbids the import of 780 LRU/components, and roughly 101 products from the defence-based imports category. These strategies should increase domestic manufacturing in India. By expanding the options available to the private sector, the establishment of defence industrial corridors across Uttar Pradesh and Tamil Nadu is also positioned to strengthen the market growth dynamics. Each of them presents a chance for DCXSL to take advantage of the anticipated expansion in this market. 

It has 26 clients as of June 30, 2022, spread across Israel, the US, Korea, and India. These clients included several Fortune 500 firms, global enterprises, and start-ups. Its clients include local and foreign OEMs, Indian private and public sector enterprises operating in a variety of industries, from rail and aerospace to defence and aerospace. Elta Systems Limited, Israel Aerospace Industries Limited's System Missiles and Space Division, Bharat Electronics Limited, Astra Rafael Comsys Private Limited, Alpha-Elsec Defence and Aerospace Systems Private Limited, Alpha Design Technologies Private Limited, Astra Microwave Products Limited, Kalyani Rafael Advanced Systems Private Limited, SFO Technologies Private Limited, and DCX- are some of its major clients. The firm had 98 workers on its payroll as of June 30, 2022. 

DCX systems Limited business verticals: 

• Provide system integration in areas of radar systems, sensors, electronic warfare, missiles, and communication systems. 

• Provide Cable and Wire Harness Assemblies. 

• The company supplies assembly-ready kits of electronic and electro-mechanical parts. 

Financial  

It has posted growth in its top and bottom lines for the reported periods of the offer document. 
Its current order book stands at Rs 2563 crore.  

In terms of financial performance, DCXSL has reported turnover/net profits of Rs 465.23 crore/Rs 9.74 crore (FY20) and Rs. 683.24 crore/Rs (FY21). On a combined basis, it made a net profit of Rs 65.61 crore on sales of Rs 1124.33 crore, while during the first quarter of FY23, it made a net profit of Rs 5.57 crore on sales of Rs 220.25 crore. 

For the previous three fiscal years, DCXSL reported an average RoNW of 58.41 per cent and an average EPS of Rs. 6.23 on a standalone/consolidated basis. According to its NAV of Rs. 15.92 as of June 30, 2022, and according to its post-IPO NAV of Rs. 54.09, the issue is valued at a P/BV of 13. (At the upper cap). It had a net profit of Rs 5.57 crore for the first quarter of FY23 on sales of Rs 220.25 crore. 

*Standalone Basis 

Valuation and Outlook

On the valuation part, companies top line is in the rapid growth phase also the order book of the company is huge along with significant market share in the industry. However, the operating and net profit margin of the company are in a single digit which seems challenging for the company. One of the key advantages for the company is industrial tail wind as government has introduced third positive indigenization list, which forbids the import of 780 LRU/components, and roughly 101 products from the defence-based imports category. The issue is coming at a P/E of almost 30.53x if we annualize Q1-FY23 performance and assign it to a post-IPO fully diluted equity based. 

Based on the above-mentioned factors we recommend to invest in this IPO for long term.