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Weak Q1; Execution and Margin Recovery Remain Key Monitors

DCX Systems (DCXINDIA) reported a weak Q1 performance, significantly below our expectation, with the sharp decline in revenue leading to a sharp deterioration in operating profitability and losses at the consolidated level. While we assume execution to improve in the next few quarters, the magnitude and pace of margin recovery remain uncertain. Management expects supplychain conditions and programme execution to improve, which could support a recovery; however, we would look for evidence of sustained revenue conversion and margin improvement before turning more constructive

We believe order visibility remains a key positive, with DCXINDIA securing INR 4.77 Bn of fresh orders in this quarter, taking the order book to ~INR 32.7 Bn (~4.4x FY26 revenue). We believe this provides sufficient revenue visibility and leaves room for a potential recovery if execution normalises. However, given the weak Q1 performance, we believe the key question is no longer order acquisition but how soon the existing order book can be converted into revenue and profitable growth

We believe subsidiary losses remain an overhang, with RASPL and NIART reporting losses of INR 24 Mn and INR 107 Mn, respectively, in this quarter. NIART is still in the development stage and has yet to commence commercial production, while DCX has invested significant amount across RASPL and NIART. We, therefore, remain cautious on the near-term earnings contribution from these businesses.

We maintain our FY28E estimate, assuming a gradual improvement in execution and profitability and value DCX Systems at 30x FY28E EPS, arriving at a TP of INR 150. We acknowledge the potential for a near-term bounce if execution improves faster than expected; however, given the weak starting point, unproven margin recovery and continued subsidiary losses, we believe the current valuation adequately captures the recovery potential. We maintain our ‘SELL’ rating

Weak quarter; performance well below expectation

* Revenue for Q1FY27 down 53.6% YoY and 50.2% QoQ at INR 1,031 Mn (vs CIE est. of INR 1,999 Mn)

* EBIDTA came in at INR -106.8 Mn (vs CIE est. of INR -10 Mn). The EBITDA margin stood at -10.4%, contracted by 1,041 bps YoY (vs CIE est. of -0.5%)

* PAT came in at INR -86.6 Mn (vs CIE est. of INR 60 Mn). PAT margin contracted by 913 bps YoY, reaching -8.4% (vs CIE est. of 3%)

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