DCX Systems IPO opens next week: Should you subscribe?

DCX Systems Limited IPO opens for subscription on 31st October. The company is looking to raise up to Rs 500 crore through the public issue. Here are the details:  

DCX Systems Limited IPO Details

• DCX Systems IPO Date: 31 October - 2 November 2022
• DCX Systems IPO Price band: Rs 197 - Rs 207
• DCX Systems IPO Issue Size: Rs 500 crore (Fresh Issue of Equity shares aggregating up to Rs 400 crore and Offer for sale of Equity Shares aggregating up to Rs100 crore)
• Reservation: QIB 75%, Retail - 10%, NII 15%
• Minimum Investment: Rs 14,904
• Post Issue Implied Market Cap: Rs 1,925 – 2,002 crore
• Bid lot: 72 shares, and in multiples of 72 shares

DCX Systems Limited IPO: Objects of the Issue

The net proceeds from the IPO will be utilized for the below purposes:

• Repayment/ prepayment of certain borrowings availed of by the Company.
• Funding working capital requirements of the Company.
• Investment in a wholly owned Subsidiary, Raneal Advanced Systems Private Limited, to fund its capital expenditure expenses.
• General corporate purposes.

DCX Systems Limited IPO: About DCX Systems

• The company was incorporated in December 2011 and is among the leading Indian players in the manufacture of electronic sub-systems and cable harnesses in terms of manufacturing capability and revenue in the defence and aerospace sector. 
• They are engaged in system integration and manufacturing a comprehensive array of cables and wire harness assemblies.
• DCX Systems provide product assembly and system integration services to address customers’ requirements.
• DCX Systems is also one of the largest IOP for ELTA Systems Ltd and Israel Aerospace Industries Ltd, System Missiles and Space Division, Israel.
• The company operates through its manufacturing facility located at the Hi-Tech Defence and Aerospace Park SEZ in Bengaluru, Karnataka. 

DCX Systems Limited IPO: Products

Below are some products of DCX Systems:

• System Integration: They undertake system integration in areas of radar systems, sensors, electronic warfare, missiles, and communication systems.
• Cable and Wire Harness Assemblies: It manufactures a comprehensive array of cables and wire harnesses assemblies for the aerospace and defence industries as per its customers’ requirements.
• Fine Wire Cable Assemblies: These are lightweight, high temperature resistant, radiation resistant, low smoke, and zero halogens, and strongly used in robotic, aerospace, marine, space, and medical applications to obtain high performance.
• Wired Enclosure: The company produces high-reliability backplane assemblies, and wired enclosures for the defence and aerospace, and industrial markets.

DCX Systems Limited IPO: Industry Outlook

• Global defence spending touched $2.07 trillion in 2021, which was an increase of 6.69% over the corresponding period in 2020. The five largest spenders, accounting for 62% of the total global spending, were India, China, the United States, Russia, and the United Kingdom.
• India’s military spending in 2021 was $76.6 billion, ranked third globally and up 5.0 % from 2020. This rise is attributed to India’s existing tensions with Pakistan and increasing border tensions with China. 
• India’s Defence budget outlay for FY23 is Rs 5.25 trillion annual budget representing a 10% increase over the budget of Rs 4.78 trillion in FY22. The Indian Defence Budget has experienced a CAGR of 14.3% between the period Fiscal 2017 to Fiscal 2023. 
• The estimated market size for the Global Defence Electronics Market is expected to be $142 billion for the year 2022. The market is poised to reach a forecasted value of $237 billion by the year 2030, with a CAGR of 6.6%.

DCX Systems Limited IPO: Listed peers

The company has many listed peers and will face tough competition from them. The listed peers include names like Bharat Electronics, Data Patterns, Paras Defence and Space Technologies, Astra Microwave Products, and Centrum Electronics. The comparison is as below:

• Among listed peers, the biggest player in terms of revenue is BEL, followed by DCX Systems.
• Earning Per Share (EPS) is the second highest for DCX, and Data Patterns Ltd has the highest EPS of 19.48.
• PE ratio is higher for the industry in general and the average PE is around 68. Based on the FY22 consolidated performance basis, P/E stands at 30.53 for DCX which is lower than average. However, if we annualize Q1FY23 performance and attribute it to a post-IPO fully diluted equity base, then the asking price is at a P/E of around 90.
• Return on Net Worth (RoNW) is highest for DCX Systems, followed by BEL.

DCX Systems Limited IPO: Financials

• The company reported revenue from operations of Rs 449.26 crore, Rs 641.16 crore, and Rs 1102.27 crore for FY20, FY21 (standalone), and FY22 (consolidated). The revenue has increased at a CAGR of 56% over the last three years.
• EBITDA for FY20, FY21, and FY22 was Rs 45.20 crore, Rs 32.48 crore, and Rs 105.90 crore, respectively. The EBITDA margin for the same period was 9.72%, 4.75%, and 9.42%, respectively.
• The net profit reported by the company for FY20, FY21, and FY22 is Rs 9.74 crore, Rs 29.56 crore, and Rs 65.61 crore, respectively. The net profit has increased multifold in the said period.
• It has reported an average EPS of Rs 6.23 and an average RoNW of 58.41% for the last three financial years.
• The average ROE and ROCE reported by the company for the last three financial years are 58.6% and 12.2%, respectively.
• The company’s order book has increased from Rs 1,941.31 crore, as of March 31, 2020, to Rs 2,369 crore, as of March 31, 2022.
• At the end of FY22, the Debt to Equity ratio is 4.27.

DCX Systems Limited IPO: Unique Selling Propositions

Preferred Indian Offset Partners: DCX Systems is a preferred IOP for foreign OEMs for executing defence manufacturing projects. They undertake “build-to-print” system integration and manufacture cable and wire harness assemblies for both domestic and international OEMs. 

Technology-enabled and scalable end-to-end capabilities: DCX's system integration services are a part of an array of electronic, electro-mechanical, and wired assemblies, and full-system integration services, which can be configured as per customers' requirements.

Strategically located: In 2020, they commissioned their new manufacturing facility at the Hi-Tech Defence and Aerospace Park SEZ in Bengaluru, Karnataka. The facility is situated within an SEZ that offers them duty-free imports, exemption from GST, and supplies that are zero-rated under extant regulations.

Well-positioned to capitalize on industry tailwinds: There is a strong focus and various initiatives by the Government of India in the aerospace and defence sectors. DCX's in-depth knowledge base and understanding of the aerospace and defence industry, particularly in India positions them to take advantage of the growth in these sections.

DCX Systems Limited IPO: Growth Potential

Strengthen system integration operations: The company intends to expand its existing cable and wire harness assembly operations to better serve the requirements of global customers.

Focus on adjacent industry verticals: They intend to focus on the products identified in the Positive Indigenization List by the Ministry of Defence, (GoI), which they believe will provide opportunities to obtain transfer of technology.

Cross-selling of products: They plan to increase cross-selling of products to increase customer base in various product verticals and expand into new or adjacent product verticals with existing customers. DCX will continue to leverage existing customer relationships to expand into new product categories.

Penetrate into new geographies: They intend to identify opportunities in overseas jurisdictions and tie up with local partners to utilize existing product portfolios and further develop products suitable for meeting the respective country’s native requirements.

DCX Systems Limited IPO: Risks

Heavy dependency on top three customers: DCX's top three customers accounted for 73.26%, 86.90%, 80.55%, 85.70%, and 96.83% of its revenue from operations in FY20, FY21, and FY22 and in the three months ended June 30, 2021, and June 30, 2022, respectively. The loss of one or more such customers or a reduction in their demand for DCX's products will adversely affect its financials.

Order book may not translate to future income: The company has a strong order book but its current order book may not necessarily translate into future income in its entirety. Some of the current orders received may be modified, cancelled, delayed, put on hold, or not fully paid, which could adversely affect the results of operations. 

Shortage of raw material: Their operations are dependent on the availability of raw materials that they require for the manufacture of products in the defence and aerospace industries. Significant shortages or delays or disruptions in the supply of raw materials will have a direct impact on the business.

DCX Systems IPO: Detailed review and Recommendation

• Robust rise in revenues: DCX Systems has seen a robust 57% CAGR rise in revenues between FY20- 22.
• Good rise in profit: DCX Systems has seen a solid 160% CAGR rise in profit between FY20- 22.
• Improving margins: DCX Systems’ EBITDA margin has improved from 4.75% in Fy20 to 11.05% in FY22. The firm’s Net Profit margin has been in the range of 2-5.85%.  
• Dominant market share: DCX Systems is among the leading Indian players for the manufacture of electronic sub-systems and cable harnesses in terms of manufacturing capability and revenue in the defence and aerospace sector. 
• Reasonable valuations: At the higher end of the price band,  DCX Systems IPO is reasonably priced at post issue at 31 times FY22  earnings (consolidated). This is lower than peers  Bharat Electronics (34 times), Data Patterns (61 times), Paras Defence (97 times), Astra Microwave (97 times). Interestingly, DCX Systems has reported a better RoNW than these listed peers.  

DCX Systems Ltd review: Given factors such as a strong rise in revenues, decent margins, dominant market share, rise in profit, and good runway for growth and reasonable valuations, analysts have given a ‘positive’ rating on the company’s long-term prospects.