DCX Methods Ltd – IPO Observe

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Firm Overview: 

DCX Methods is primarily engaged in system integration and manufacturing a complete array of cables and wire harness assemblies and are additionally concerned in kitting. The agency is among the many main Indian gamers for the manufacture of digital sub-systems and cable harnesses by way of manufacturing functionality and income in FY2022. It’s also one of many largest Indian Offset Companion (“IOP”) for ELTA Methods Restricted and Israel Aerospace Industries Restricted, System Missiles and House Division (collectively, the “IAI Group”), Israel, for the Indian defence marketplace for the manufacture of digital sub-systems and cable and wire harness assemblies. The manufacturing facility is situated on the Hello-Tech Defence and Aerospace Park SEZ in Bengaluru, Karnataka. It has 26 clients in Israel, the USA, Korea, and India, together with sure Fortune 500 firms, multinational companies, and start-ups. 

Objects of the Provide:

The Firm proposes to utilise the Internet Proceeds of the Recent Difficulty in the direction of funding the next objects:

  • Compensation/ prepayment, in full or half, of sure borrowings availed of by the Firm.
  • Funding working capital necessities of the Firm.
  • Funding within the wholly owned Subsidiary, Raneal Superior Methods Personal Restricted, to fund its capital expenditure bills.
  • Normal company functions.

Funding Rationale:

Robust Base: The corporate is a most well-liked IOP for international OEMs (Authentic Gear Producers) for executing defence manufacturing tasks. It undertakes “build-to-print” system integration and manufactures cable and wire harness assemblies for each home and worldwide OEMs. The corporate caters to a mixture of home and worldwide clients and key clients embrace Elta Methods Restricted, Israel Aerospace Industries Restricted – System Missiles and House Division, Bharat Electronics Restricted, Astra Rafael Comsys Personal Restricted, Alpha-Elsec Protection and Aerospace Methods Personal Restricted, Alpha Design Applied sciences Personal Restricted, Astra Microwave Merchandise Restricted, Kalyani Rafael Superior Methods Personal Restricted, SFO Applied sciences Personal Restricted, and DCX-Chol Enterprises Inc.

Monetary Observe Document: The Firm has had sturdy income progress within the final 3 years. Whereas it’s not apple to apple comparability to check standalone revenues with consolidated revenues, its revenues elevated from Rs.465 crs in FY20 to Rs.1124 crs in FY22. Income from operations has elevated at a CAGR of 56.64% between Fiscal 2020 and Fiscal 2022. Together with this, DCX has generated an ROE of 55% and a ROCE of 16% for FY22. The corporate’s ROE is greater as a result of excessive debt on its stability sheet. 

Robust Order Ebook: The corporate’s product portfolio is backed by its system integration and manufacturing capabilities has led the order guide to develop from 45 orders aggregating Rs.1941 crs, as of March 31, 2020 to 48 orders aggregating Rs.2369 crs, as of March 31, 2022. As of June 30, 2022, the order guide comprised 42 orders and was Rs.2564 crs with orders from a number of clients for tasks to be executed in Fiscal 2023 to Fiscal 2025. The aggressive benefits embrace effectivity in operations leading to well timed supply to clients, sustaining high quality management, and product safety. This has enabled the Firm to develop long-term and entrenched relationships with OEM clients which have resulted in progress of their operations and sizeable order guide.

Key Dangers:

OFS – The IPO is a mixture of a suggestion on the market (OFS) and a Recent challenge with OFS being 20% of the general challenge dimension. NCBG Holdings and VNG Expertise are the promoters of the corporate. By way of this IPO, every entity will probably be offloading 15% of its stake by way of the provide on the market. Although solely a major a part of the IPO is OFS, the corporate received’t get something from that half.

Consumer Focus Threat – The highest 3 clients account for 81% and the highest 10 buyer accounts for 99% of the income for FY22. The lack of a number of such clients or a discount of their demand for the merchandise might adversely have an effect on the enterprise, outcomes of operations, monetary situation, and money flows of the corporate.

Outlook: 

The corporate’s listed friends are Bharat Electronics Ltd, Information patterns Ltd, and Paras Defence and House tech. Ltd, Astra Microwave merchandise, and so forth. At a better value band, the itemizing market cap will probably be round ~Rs.2000 crs and DCX is demanding a P/E a number of of 30x based mostly on FY22 EPS (Put up recent challenge), which appears to be affordable whereas in contrast with its friends. The corporate’s prime line is within the speedy progress part additionally the order guide of the corporate is big together with a major market share within the business. One of many key benefits for the corporate is the commercial tailwind as the federal government has launched a 3rd optimistic indigenization listing, which forbids the import of 780 LRU/parts, and roughly 101 merchandise from the defence-based imports class. Nevertheless, the working and internet revenue margin of the corporate is within the single digits which appears to be difficult for the corporate. Based mostly on the above views, we offer a ‘Subscribe‘ score for this IPO.

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