Good prospects. DCX Systems IPO: 5 things to know before subscribing

The IPO of Bengaluru based manufacturer of electronic sub-systems and cable harnesses opened on Monday, October 31, 2022 and closes on November 2, 2022. The offer so far has seen enthusisatic response from retail investors. The total offer is worth ₹ 500 crore out of which ₹ 400 crore is fresh issue and ₹ 100 crore is an offer for sale. The price band of the issue has been set in the range of ₹197-₹207.

If you are wondering whether to subscribe to this defence and aerospace supplier, here are five things to know about the IPO.

Business

DCX Systems is a prominent player in the manufacturing of electronic sub-systems and cable harnesses in the Indian defence and aerospace industry.

The major verticals of the company are System Integration where it undertakes system integration of radar systems, sensors, electronic warfare, missiles, and communication systems. The second is Cable and Wire Harness Assemblies where it manufactures a comprehensive array of cables and wire harnesses assemblies such as radio frequency cables, data cables. The third vertical is Kitting where it supplies assembly ready kits of electronic and electro-mechanical parts.

As per information in the RHP, The Indian defence Electronics market is expected to grow at a CAGR of 13.71 per cent to $2.57 billion by 2030. The Cable and wire harness market is also expected to grow at CAGR of 13 per cent to around $1.4 billion.

The company is planning to establish new verticals to enhance their customer base. It is planning to foray into Electronic manufacturing services (EMS) and Maintenance, Repair and Overhaul (“MRO”) services.

As of June 30, 2022, the company had 26 customers in Israel, United States, Korea and India, including certain Fortune 500 companies. The key customers of the company include Israel Aerospace Industries Ltd – System Missiles and Space Division, Bharat Electronics Ltd, Astra Rafael Comsys Private Ltd, Kalyani Rafael Advanced Systems Private Ltd. and DCX-Chol Enterprises Inc.

Geographic segments

DCX Systems has good amount of foreign customers and is involved in exports. The company derived ₹ 611.69 crore (56 per cent of total revenue) from exports in FY22 whereas the domestic sales were ₹ 485.9 crore (44 per cent of total revenue).

The Ministry of Defence has planned to ban the imports of certain components in a staggered manner over six years by issuing positive indigenization lists in December 2021, March 2022 and August 2022. In addition, the  Army Chief announced that in next 6-7 years orders worth ₹ 8 lakh crore will be given to domestic vendors. These factors are expected to be positive for the domestic defence industry.

Strengths

The company is a preferred Indian Offset partner for foreign OEMs. The company undertakes “build-to-print” system integration and manufactures cable and wire harness assemblies. The company has been involved in production of MRSAM / LRSAM - Transmit receiver group module under System integration module and Barak-1 and Barak-8 Missile Systems (Cable and wire harness).

System integration services of the company are a part of an array of electronic, electro-mechanical and wired assemblies, and full-system integration services. The company also does in-house testing to ensure the quality of final products. DCX Systems also specializes in manufacturing assemblies that are used in land, underwater and airborne applications.

Financials and Valuation

The company has posted decent numbers for past few years and in FY22 the revenue grew 72 per cent (₹ 1102.27 crore), EBITDA grew 69 per cent (₹ 89 crore) and PAT grew 122 per cent (₹ 65.6 crore) over FY21. The EPS reported for FY22 was ₹ 9.19 against ₹ 4.22 in FY21. According to the management, in FY22 the company bagged a sizeable order from BEL (Bharat Electronics Ltd) which contributed to 23 per cent of the total revenue and was a major contributing factor for the growth in FY22 along with cost efficient operations. The orderbook of the company as at June 30,2022 was ₹ 2,563 crore which gives a revenue visibility of around 2.5 years (based on FY22 figures). The P/E of the company (post issue on upper band) works out to 31.8x. While this might look a bit expensive when seen in isolation, when compared to its peers it is relatively cheaper.

As compared to its listed peers in the defence space, DCX Systems is trading at the lower end of the industry range.

What should investors do?

The overall prospects of the defence and aerospace sector seem good and therefore,DCX Systems can benefit if it executes well. The strong growth over previous years in FY22 and the lower valuation as compared to its peers make this offering attractive. However, the margins of the company are lower than its peers.

While there may be listing gains, long term investors can wait and watch to assess sustainable revenue growth rate after last year’s big increase and also the quarterly margin trends.

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