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Margins remain lower on high offset contracts…

About the Company: DCX Systems (DCX) is among the leading Indian players for manufacturing electronic sub-systems and cable harnesses in terms of manufacturing capability

* The company is primarily engaged in system integration and manufacturing a comprehensive array of cables and wire harness assemblies and is also involved in kitting

* DCX commenced its operations in 2011 and has been a preferred Indian offset partner for foreign original equipment manufacturers (OEMs) for executing aerospace and defence manufacturing projects. Revenue from operations has grown at a CAGR of 56.6% in FY20-22

Key triggers/Highlights:

* With defence public sector undertakings focusing on specialisation and integration and sub-component manufacture being outsourced to the private sector, there are significant opportunities for private sector companies like DCX Systems

* DCX is a preferred Indian offset partner for foreign OEMs for executing defence projects. It undertakes system integration & manufacture cable/wire harness assemblies for both domestic & international OEMs

* DCX is one of the largest IOP for the IAI Group, Israel, for the Indian defence market for electronic sub-systems and cable/wire harness assemblies

* DCX has established a leadership position in the Indian aerospace and defence industry amongst other companies, in the segment of “system integration” business

What should investors do? During FY20-22, DCX registered CAGR revenue, EBITDA, PAT growth of 56.6%, 228.3%, 159.5%, respectively. Its order book has increased from | 1941 crore in FY20 to | 2369 crore in FY22. However, considering the low margin on higher exposure towards contract manufacturing through offsets, significant improvement in margins needs to be seen in future. Post issue P/E at 30.5x FY22 EPS looks fair as compared to peers like Data Patterns and Paras Defence.

* We assign a UNRATED rating to the IPO

Key risk & concerns

* Dependence on offset defence contracts

* Delay or disruption in the supply of raw materials

* Dependence on the performance of the electronic subsystems

* High level of working capital requirement

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