DCX Ltd IPO: Scope for future potential

DCX Systems Limited is tapping the capital markets with its fresh issue for Rs400 crores and Rs100 crores through an offer for sale. The issue opens today, the 31st of October and closes on Wednesday, the 2nd of November. The price band is Rs197-207.

DCX Systems Limited is a 100 per cent boot strapped company and this is the first fundraise being done by it. There are no PE investors in the company and the entire shareholding is with the promoters. The company is into defence related activities and is a system integrator, manufacturing cable and wire harness assemblies and kitting. The company is also an IOP (Indian Offset Partner) for defence contracts. Its major customers under the offset rules are from Israel. It exports its products to many countries including Israel, Korea and the United States. Roughly 2/3rd of its revenues come from exports while the balance comes from domestic.

The company began its operations in 2011-12 and in the very first year executed a deemed export order. The current programs require a lot of testing and checking at every stage. The equipment required for the same is sourced from the company for whom DCX is an IOP partner on free of cost basis. This equipment is to be returned after the program is over and there is no customs duty payment on the same. This ensures virtually an asset light model operation. Its largest offset partner is ELTA Systems Limited and IAI group, both from Israel. Its other customers include BEL. Its order book is close to Rs2,600 crores from about 50 orders and this would take between 18-24 months to execute. The company had revenues of Rs1,100 crores in the year ended March 22.

System integration requires a substantial portion of PCB and as part of its backward integration, DCX is setting up a PCB line in its wholly owned subsidiary. The company would be investing about Rs45 crores for the same. This would help the company reduce the bought-out components and PCB's, which are roughly half of the total value of sales. This would improve the margins of the company as the subsidiary would be more efficient than the current supplier and his margins would be earned by the subsidiary. Secondly, spare capacity would be used for supplying other customers orders for PCBs. One indirect benefit would be that with in-house production, the inventory levels of PCBs would help in reducing working capital.

The company would also retire debt of about Rs150 crores from the money raised. The biggest requirement of money is for bank guarantees which the company needs for its business. The company has to provide the same against the advances that customers give. Going forward being a listed company and its credit rating improving, it could get the same bank guarantees at a much lower margin than the 100 per cent currently.

The company enjoys an EBITDA of just short of double digit and PAT of almost 6 per cent. As the orders executed increase and the company completes the backward integration of the PCB line, expect that margins at the EBITDA and net levels would see substantial improvement. Revenues would also increase as the company executes more orders. PCB revenues would not flow initially as it would be adding some more components which are currently outsourced.

There is a huge shortfall in the offset orders which need to be fulfilled in the defence space by global suppliers. The Indian Government has become very serious on the same and had recently levied penalties on companies which had not fulfilled the offset clause. More recently they have taken steps to debar such companies from bidding for contracts. This has made companies more conscious and has thrown open the business of finding reliable offset partners. Considering the huge shortfall in execution of pending offset contracts, the company has a huge future going forward.

The EPS for the year ended March 22 was Rs9.19. At this price the PE band is 21.44-22.52 times. The company is attractively valued and offers scope for appreciation in the short, medium and long term. Investors should look at subscribing to the above IPO. With a spate of IPOs coming in the next seven to 10 days and money not being fungible in the first flour issues, allotment would be relatively easier.

(The author is the founder of Kejriwal Research and Investment Services, an advisory firm)