The IPO of Bengaluru-based DCX Systems (DCX) opens for subscription on 31 October and will close on 2 November. DCX IPO price band has been fixed at Rs 197-207 per equity share of face value Rs 2 each. Ahead of the IPO, the company raised Rs 225 crore via anchor book . The company plans to raise Rs 500 crore through this public issue that includes a fresh issue of Rs 400 crore and an offer for sale (OFS) of Rs 100 crore. After the IPO, the promoter shareholding will decline 24.61% and come down to 73.58% from the current 98.19% stake held by the them in the company. Of the total offer size, 75% of the net offer is reserved for qualified institutional buyers (QIBs), 15% for non-institutional investors (NIIs) and the remaining 10 percent is for retail investors.

Investors can bid for a minimum lot size of 72 shares and in multiples thereof. A retail investor can apply for upto 13 lots or 936 shares for an amount of Rs 1,93,752. Out of the total proceeds from the fresh issue, Rs 110 crore will be utilized for the prepayment/repayment of debt, while Rs 160 crore will be used to fund the working capital requirement. Another Rs 44.9 crore will be utilized to invest in wholly-owned subsidiary, Raneal Advanced Systems to fund its capital expenditure expenses. DCX Systems shares are commanding a grey market premium (GMP) of Rs 75 on Monday. The shares of the company are expected to list on stock exchanges BSE and NSE on 11 November 2022.

Should you subscribe to DCX Systems IPO?

“Based on FY22 earnings, the company is valued at 25.4x EV/EBITDA, 1.5x EV/Sales and 31x P/E, which is below its peers. DCX is poised to grow with several opportunities in defence and aerospace in the domestic and international markets. The defence budget outlay has increased to Rs 5,250bn in FY23, from Rs 4,780bn in FY22. In view of a healthy order book (Rs 25.6bn, 2.3x FY22 revenue), which provides revenue visibility, decent financial performance, being a key beneficiary of the government’s thrust on the defence space and valuation comfort, we recommend ‘SUBSCRIBE’ to the issue.”

“At higher price band, DCX is demanding an EV/Sales multiple of 1.2x, which is lower than the peer average. Considering the favorable macros for the defence manufacturing sector and for the company, we feel the IPO is attractively priced. Thus we assign a “SUBSCRIBE” rating for the issue.”

“In terms of valuations, the post-issue P/E works out to 30.5x FY22 EPS (at the upper end of the issue price band) which is low compared to its peers like Paras Defense & Space Technologies Ltd, Data Patterns (India) Ltd, and Sundram Fasteners Ltd. Further, DSL has better revenue/PAT growth (CAGR of 57%/159% respectively) over 2 years, a healthy return on equity and the company also has a strong order book (of Rs 2,564cr) which provides visibility for next 2 years. Considering all the positive factors, we believe this valuation is at reasonable levels. Thus, we recommend a SUBSCRIBE rating on the issue.”

“The Government of India aims to become a $5 billion export country by 2025 in the aerospace and defence goods sector thus providing private players like DCX Systems to play an important role in achieving this target. To enhance its global presence, the company continues to strengthen its international operations in Israel, the United States and Korea and also aims to expand its global footprint to Europe. DCX maintains a healthy order book which has increased from Rs 19,413.11 million, as of FY2020 to Rs 23,690.04 million, as of FY22. As of 30 June, 2022, the order book stands at Rs 25,636.34 million to be executed in Fiscal 2023 to 2025. However any changes in the offset defence policies remains a key risk. On the valuation front, we value the company at a P/E of 22.5x based on FY22 earnings and recommend a “SUBSCRIBE” for the benefit of listing gains.”