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Preferred Indian Offset Partners (IOP) for the Defence & Aerospace industry: DCX Systems undertakes “build-to-print” system integration and manufacturing of cable and wire harness assemblies. It undertakes system integration in areas of radar systems, sensors, electronic warfare, missiles, and communication systems. It is one of the largest IOP for the IAI Group, Israel. As of Q1FY23, the order book stood at INR26bn (2.3xFY22 revenues) which is to be executed by FY25.

Well-positioned to capitalize on industry tailwinds: Indian Aerospace & Defence sector is poised to attain a value of USD70bn by 2030, led by initiatives like increase in FDI, government’s push on indigenization through Atmanirbhar Bharat, PLI scheme and negative Import list, along with revised DAP Policy 2020. MoD aims at doubling defence production by 2025 and at increasing exports by 5x through increased involvement of private players and privatization of Ordinance Factory Board.

Diversification into adjacent industry verticals to drive growth: DCX derives ~85-90% of revenues from system integration projects and balance from cable harness. By 2026, it aims to reduce contribution from these segments to 75% and add new high growing verticals like Electronic Manufacturing Services (EMS), MRO (Maintenance, Repair & Overhaul) and Product Sales from Transfer of Technology.

Financials: DCX’s revenue/EBITDA/PAT grew strongly by 57%/228%/ 160% over FY20-FY22, on the back of low base. Given an asset light model, return ratios are robust with FY22 RoE at 78.9%.

Issue Size: INR5bn IPO consists of fresh issue of INR4bn and OFS of INR1bn by promoters, which would result in latter’s stake reducing to 74% post-IPO. The market cap post listing would stand at INR20bn. Funds raised would be used to repay INR1.1bn debt, fund INR1.6bn working capital requirement and capex of INR0.4bn.

Valuation & View: DCX, being preferred IOP in the Defence & aerospace space is well placed to capture the industry tailwinds. We like its focus on revenue/geography diversification, customer base expansion and inorganic growth which could keep the earnings growth strong. It is valued at 30.5xFY22 P/E which is reasonable compared to listed peers. Given the fancy for Defence stocks and continuous news flows in that space, we expect the IPO to do well. We suggest investors to Subscribe for listing gains.

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