DCX Systems Limited - IPO Note
Defence
DCX Systems Limited - IPO Note
Defence
Stock Info
Shareholding (Pre IPO)
Shareholding (Post IPO)
Competitive strengths and strategies
Among the preferred Indian Offset Partners (IOP) for the defence and aerospace
industry with global accreditations
Company is a preferred IOP for foreign OEMs for executing defence manufacturing
projects (Source: Company Commissioned F&S Report). They undertake “build-to-print”
system integration and manufacture cable and wire harness assemblies for both domestic
and international OEMs. It is also one of the largest IOP for the IAI Group, Israel.
DCX Systems hold a number of key certifications that include AS-9100:2016 certification for quality management systems for aviation, space and defense products. The company holds Defence Industrial License from the Ministry of Commerce and Industry, Government of India for the manufacture of defence subsystems that includes microwave components, modules for radar and electronic warfare subsystems, microwave sub modules, for command and guidance units for missile subsystems only.
Capable to provide wide array of services:
As part of its system integration services, company’s strength includes the
manufacturing of complex microwave modules and sub-systems such as transmit receiver
modules, receiver subsystems, and antennas used in military applications, space
technology and aerospace. They are also engaged in manufacturing a large variety
of cables and wire harnesses assemblies such as radio frequency co-axial, mixed
signal, power, data and communication cables for a variety of uses including communication
systems, sensors, surveillance systems, missile systems, military armored vehicle,
and other electronic warfare systems.
Strong relationship with its customers
Company has established long-term relationships with its key customers and the average
period of business relationship with its top three customers is over five years.
As of June 30, 2022, DCX had 26 customers in Israel, United States, Korea and India,
including certain Fortune 500 companies, multinational corporations and start-ups.
Their customers include domestic and international OEMs, and private companies and
public sector undertakings in India across different sectors, ranging from defence
and aerospace to space ventures and railways. Some of its key customers include
Elta Systems Limited, Israel Aerospace Industries Limited – System Missiles
and Space Division, Bharat Electronics Limited, Astra Rafael Comsys Private Limited,
Alpha-Elsec Defense 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-Chol Enterprises Inc.
Company believes that their long-standing relationship with its customers has enabled
them to be among its preferred suppliers.
Decent track record of Financial Performance
DCX Systems have been delivering consistent financial performance in the past 3
fiscals. In Fiscal 2020, 2021 and 2022, revenue from operations was Rs.449 cr, Rs.641cr
and 1103 cr, respectively. Revenue from operations grew at a CAGR of 56.64% between
Fiscal 2020 and Fiscal 2022. EBITDA also witnessed a good growth and was reported
at Rs.67 cr as on FY22. EBITDA (including other income) has increased at a CAGR
of 53% from Rs.45 cr in Fiscal 2020 to Rs.105 cr in Fiscal 2022. PAT more than doubled
in FY22 at Rs.66 cr from Rs.31 cr clocked in FY21demonstrating strong growth.
| Particulars (Rs. In crores) | FY20 | FY21 | FY22 |
|---|---|---|---|
| Revenue | 465 | 683 | 1124 |
| EBITDA (including other income) | 45 | 32 | 105 |
| EBITDA Margin (%)(including other income) | 9.72% | 4.75% | 9.42% |
| Profit After Tax | 9 | 31 | 66 |
| PAT Margin (%) | 2% | 5% | 6% |
| Particulars | FY20 | FY21 | FY22 |
|---|---|---|---|
| EBITDA | 30 | 10 | 84 |
| Adjustments: | |||
| Add: Interest on fixed deposits | 15 | 22 | 22 |
| Adjusted (EBITDA) (A) | 45 | 32 | 106 |
| Total Income (B) | 465 | 683 | 1124 |
| Adjusted EBITDA Margin (A/B) | 9.72% | 4.75% | 9.42% |
(Source : RHP)
Note – FY20 and FY21 represent standalone numbers and FY22 represent consolidated
figures as per RHP
Industry
Peer comparison
| Particulars (Rs. in Crores) | M. Cap(Cr) | Face value (Rs.) | Total Revenues(cr) | EPS(Rs) | PE | ROE(%) | ROCE (%) |
|---|---|---|---|---|---|---|---|
| DCX Systems Limited | 2000.00 | 2.00 | 1102.00 | 9.19 | 22.50 | 56.00 | 13.15 |
| Bharat Electronics Limited | 78361.00 | 1.00 | 15600.00 | 3.28 | 32.00 | 20.00 | 27.00 |
| Data Patterns | 7077.00 | 2.00 | 315.00 | 19.48 | 61.50 | 33.00 | 24.00 |
| Astra Microwave Products | 2663.00 | 2.00 | 757.00 | 4.37 | 73.15 | 9.00 | 16.00 |
| Centum Electronics Ltd | 766.00 | 10.00 | 788.00 | -23.70 | NA | 4.40 | 12.00 |
| Paras Defence and Space Tech | 2500.00 | 10.00 | 186.00 | 7.78 | 85.00 | 9.23 | 10.40 |
Risks
Key Areas of concern:
High debt and low Operating Margins: DCX Systems outstanding borrowings
at the end of August 31,2022 stands at Rs.890 cr which is extremely high. As far
as Margins are concerned, company’s core EBITDA margins excluding other income
are quite low and are in single digit at 6% as of FY22.
High raw material costs: Company imports key raw materials for manufacture of its products and due to high raw material costs, margins are quite low ultimately impacting financials of the company which acts as a key area of concern.
Parked funds in Fixed deposits: Company earned Rs.22 cr on interest on FD in FY22. Despite elevated levels of debt, company has parked its funds in FD which raises concerns that we are not able to comprehend.
Other Risks and Concerns
Foreign currency fluctuation risk: Company is exposed to foreign
currency fluctuation risks, particularly in relation to its borrowings, import of
raw materials and export of products, which may adversely affect the results of
operations, financial condition, and cash flows.
Contingent Liabilities: Company has certain contingent liabilities that have not been provided for in their financial statements, which if they materialize, may adversely affect its financial condition.
| Particulars | Amount (Rs. In cr) |
|---|---|
| Bank guarantees | 485 |
| Total | 485 |
Operates in a competitive industry: Company faces significant competitive pressures in its industry. Its inability to compete effectively would be detrimental to their business and prospects for future growth.
Significant shortage of raw materials: Significant shortages of, or delay or disruption in the supply of primary raw materials could affect company’s estimated costs, expenditures and timelines which may have a material adverse effect on its business, financial condition, results of operations and cash flows.
Company Description
DCX Systems Limited (“DCX Systems”) was incorporated on December 16, 2011. DCX Systems is among the leading Indian players for the manufacture of electronic sub-systems and cable harnesses for defence and aerospace sector (Source: Company Commissioned F&S Report). They are preferred Indian Offset Partner (“IOP”) for foreign original equipment manufacturers (“OEMs”) for executing defence manufacturing projects. DCX Systems is primarily engaged in system integration and manufacturing a comprehensive array of cables and wire harness assemblies and is also involved in kitting. They undertake system integration in areas of radar systems, sensors, electronic warfare, missiles, and communication systems. They also provide product assembly as per customers’ requirements. The company is one of the largest IOP for ELTA Systems Ltd and Israel Aerospace Industries Ltd, System Missiles and Space Division (together, the “IAI Group”), Israel. In 2020, the company commissioned its new manufacturing facility at the Hi-Tech Defence and Aerospace Park SEZ in Bengaluru, Karnataka.
The company's business verticals includes the following:
- System integration in areas of radar systems, sensors, electronic warfare, missiles, and communication systems.
- Cable and Wire Harness Assemblies.
- The company supplies assembly-ready kits of electronic and electro-mechanical parts.
System Integration
Valuation
On the valuation front, DCXSL is valued at 23x with earnings of Rs.9.19 (EPS FY22) calculated at the upper price band of Rs 207 per share.
Though, we continue to remain bullish on the defence theme overall but due to low margins, extremely high debt, competitive space we assign an AVOID rating to the issue.
Key Information
Use of Proceeds:
Use of Proceeds: The total issue size is Rs. 500 cr, of which Rs.
400 cr is Fresh issue and balance (Rs.100 cr) is Offer for Sale (OFS). The company
will utilize the net proceeds from the fresh issue to repay debt, Funding working
capital requirements, Investment in wholly owned Subsidiary, Raneal Advanced Systems,
and general corporate purposes. Kindly find the bifurcation in the table given below.
| Particulars | Amount (Rs. In crores) |
|---|---|
| Repayment/ prepayment, in full or part, of certain borrowings availed of by the company; | 110 |
| Funding working capital requirements of the company; | 160 |
| Investment in the wholly owned Subsidiary, Raneal Advanced Systems Pvt Ltd, to fund its capex exps | 44.88 |
| General Corporate Purposes | 85.12 |
Book running lead managers:
Edelweiss Financial Services, Axis Capital Limited, Saffron Capital Advisors Limited
Management:
H.S. Raghavendra Rao (Promoter, Chairman and Managing Director), Ranga KS (CFO),
Shiva Kumara R (Vice President), Sankarakrishnan Ramalingam (Whole Time Director),
Kalyanasundaram Chandrasekaran, PanchangamNagashayana, Lathika Siddharth Pai (e
Independent Director), Nagaraj R Dhavaskar (Company Secretary, Legal and Compliance
Officer of the company), Pramod B (Deputy General Manager- Operations), Anand S
(Deputy General Manager- Supply Chain Management), Kiran Kumar K S (Manager-Production),
Atul DhondiramMutthe (Manager- Quality).
Financial Statement
Profit & Loss Statement:- (Consolidated)
| Particulars (in Crores) | FY20 | FY21 | FY22 |
|---|---|---|---|
| Revenue | 449.00 | 641.00 | 1102.00 |
| COGS | 408.00 | 618.00 | 1000.00 |
| Gross Profit | 41.00 | 23.00 | 102.00 |
| Gross Margins (%) | 9.00% | 4.00% | 9.00% |
| Employee Benefits Expenses | 6.00 | 5.00 | 9.00 |
| Other expenses | 30.00 | 7.00 | 26.00 |
| Core EBITDA | 5.00 | 11.00 | 67.00 |
| Core EBITDA Margin (%) | 1.00% | 2.00% | 6.00% |
| Depreciation and Amortization | 1.00 | 2.00 | 2.00 |
| EBIT | 4.00 | 9.00 | 65.00 |
| Other Income | 16.00 | 42.00 | 22.00 |
| Finance Cost | 8.00 | 10.00 | 11.00 |
| Profit Before Tax | 12.00 | 41.00 | 76.00 |
| Tax Expenses | -3.00 | -10.00 | -10.00 |
| Effective Tax Rate (%) | -25.00% | -24.00% | -13.00% |
| PAT | 9.00 | 31.00 | 66.00 |
| PAT Margin (%) | 2.00% | 5.00% | 6.00% |
| EPS(Rs.) | 1.39 | 4.22 | 9.19 |