Far-from-convincing-fundamentals make the ambitious pricing a risky proposition!
The share, which was worth only Rs 11.47 for the promoters in June 2021, is now offered to public at an exorbitant premium of 1700%!!
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DCX SYSTEMS OFFER AT A GLANCE |
|
| Offer Type | Book Built |
| Platform | Main Frame |
| Offer Size | Rs 500 Cr (2,41,54,589 equity shares) |
| Fresh Issue | Rs 400 Cr (1,93,23,671 equity shares) |
| Offer for Sale | Rs 100 Cr (48,30,918 equity shares) |
| Face Value | Rs 2 |
| Price Band | Rs 197–207 |
| Mkt/Bid Lot | 72 Nos. |
| Implied M-Cap | Rs 2002 Cr (at cap price) |
| Implied Equity Cap | Rs 9.67 Cr |
| Free Float | 26.42% |
| Lead Manager | Edelweiss Fin, Axis Cap and Saffron Cap |
| Registrar | Link Intime |
| Listing | BSE, NSE |
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INDICATIVE ISSUE SCHEDULE |
|
| Opening :31-Oct-2022 | Closing :02-Nov-2022 |
| Allotment :07-Nov-2022 | Refunding :09-Nov-2022 |
| Demat Credit :10-Nov-2022 | Trading :11-Nov-2022 |
The Offer
Bengaluru Rural-based DCX Systems Ltd (DSL) is entering the capital market with a Rs 500 Cr IPO which consists of a fresh issue of Rs 400 Cr (2,41,54,589 equity shares) from the company and an offer for sale of Rs 100 Cr (48,30,918 equity shares) from the corporate promoters. The offer is being made through the book-building route with a price band of Rs 197-207 for Rs 2 paid-up share.
Applicants for the IPO should bid for a minimum lot of 72 shares and multiples thereof. The shares are proposed to be listed on the main frame of BSE and NSE on Friday, November 11, 2022. Edelweiss Financial, Axis Capital and Saffron Capital have been roped in as the lead-managers to the offer. Link Intime Technologies will act as the registrar to the issue. The bidding opens on Monday, October 31, 2022 and closes on Wednesday, November 02, 2022.
The company proposes to utilize the net proceeds from the fresh issue (Rs 400 Cr) towards repayment of loans (Rs 110 Cr), funding incremental working capital requirements (Rs 160 Cr) and financing subsidiary Raneal Advanced Systems’ capital expenditure (Rs 45 Cr). The balance amount is earmarked for general corporate purposes.
Lineage
DSL has a complex ownership structure. The company’s offer document presents H.S. Raghavendra Rao, NCBG Holdings Inc and VNG Technology Private Ltd as promoters. However, a close scrutiny of the document reveals that the company was originally incorporated as DCX Cable Assemblies Private Ltd on December 16, 2011, by Dinesh Poonamchand Shah and Jyotivadan Occhavlal Sheth with a capital of Rs 1 lakh.
Raghavendra Rao joined the company’s board a month later, on January 16, 2012 and became a shareholder only after ten years, in January 2022! Currently he holds 9.56% of DSL’s equity.
DSL’s corporate promoters VNG and NCBG became shareholders of the company after six months and three months respectively from the date of incorporation. They control 44.32% each.
NCBG was incorporated on June 28, 2002 as an exempted company in the Companies Law as per the laws of the Cayman Islands. The 100% ownership of NCBG rests with Commerce Management Services Ltd which is equally owned by two foreigners, Neal Jeremy Castleman and Samuel Brian Gamberg.
VNG Technology was incorporated in India just two days before DSL’s incorporation. VNG is majorly (76.08%) owned by another privately held company, Raneal Technologies which is jointly controlled by Raghavendra Rao (51%), Neal Jeremy Castleman (26%) and Samuel Brian Gamberg (23%).Raghavendra Rao directly holds 23.92% in VNG.
Interestingly, the original promoters of the company (Dinesh Shah and Jyotivadan Sheth) had to make an exit after some disputes with the new promoters. VNG, NCBG, Raghavendra Rao and DSL entered into a settlement agreement dated February 24, 2021, to resolve the disputes and differences between NCBG and the original promoters in relation to the management of the affairs of the company.
Pursuant to the settlement agreement, the original promoters agreed to transfer their entire shareholding in DSL to NCBG and its nominees, and to settle outstanding disputes including any legal proceedings in accordance with the terms and conditions of the settlement agreement.
Accordingly a share purchase agreement was made on June 14, 2021 and 23% of the shareholding held by the original promoter was acquired by the new promoter at a price equivalent to Rs 229.43 which became just Rs 11.47 post 5:1 split and 3:1 bonus. Such a lowly valued stock a year ago is now being offered to public at an exorbitant premium of 1700%!
Key Management
Raghavendra Rao (53) is the Chairman and Managing Director of the company. He has reportedly been conferred with an honorary doctorate in business management by the International Peace University, Germany. He claims to have about 21 years of experience in the electronics manufacturing and aerospace sectors. He was previously associated as a whole-time director with Vinyas Innovative Technologies Private Ltd whose financial track record is not known.
Whole-time Director of DSL, Sankarakrishnan Ramalingam (61), has joined the company only in January 2022. He reportedly has about 26 years of experience in the finance sector. He was previously associated with Hindustan Lever and Syndicate Bank. He has also been the whole-time director of Saffron Capital Advisors who are one of the lead managers to the present offer.
California-based Neal Jeremy Castleman (73), who has been a Director of DSL since March 14, 2012, is a Non-Independent and Non-executive Director. He has over two decades of experience in the electronics manufacturing sector.
Stakeholders
As on the date of the prospectus, the three promoters collectively hold 76,000,000 equity Shares, equivalent to 98.20% of the pre-IPO paid-up equity capital of the company. Post IPO, Raghavendra Rao will hold 74,00,000 shares at an average cost of Rs 7.05 a share. NCBG will have 3,18,84,541 shares at a negative cost of Rs 9.60 and VNG will hold similar quantity at a negative cost of Rs 15.14 a share.
Business
DSL claims to be among the leading Indian players for the manufacture of electronic sub-systems and cable harnesses in terms of manufacturing in the defence and aerospace sector. As of June 30, 2022, DSL had 26 customers in Israel, United States, Korea and India. It is reportedly involved in manufacturing a comprehensive array of cables and wire harnesses assemblies for a variety of uses including Communication systems, Sensors, Surveillance systems, Missile systems, Military Armoured Vehicles, Air Defence Systems, Reconnaissance and Observation System, Multifunction Displays and other Electronic Warfare Systems.
DSL claims to work with space organisations like Indian Space Research Organisation, research organisations like Defence Research and Development Organisation, Indian Defence forces (Army, Navy and Air Force) and PSUs – Bharat Electronics Limited, Bharat Dynamics Ltd, Hindustan Aeronautics Limited and Mazagaon Dock yard Limited, Ordnance Factory Board.
Financial Track
The decade-old DSL’s financials are far from convincing. Even though the company’s top line has more than tripled in last three years its operating margins were pathetically low at around 1.5% until fiscal 2021. It has leapt to 6.1% in fiscal 2022 that is on the eve of the IPO. In fact, other income component comprised of interest on fixed deposits and gains from forex fluctuations amounted to more than the operating profit.
The company claims to operate in a high-tech field with sales revenue of more than Rs 1100 Cr. Yet, its tangible assets are worth only Rs 15 Cr. Against a net worth of Rs 118 Cr, the company has huge borrowings of more than Rs 500 Cr. Apparently to boost the sentiment on the eve of the IPO DSL has put up a highly encouraging performance for fiscal 2022. However, the quantum leap in revenue and profits ended up in negative operating cash flow which speaks volume about the quality of the company’s operations.
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DCX Systems Financials (in Cr) |
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| Year Ended |
Mar-22 |
Mar-21 | Mar-20 |
Mar-19 |
| Revenue |
1102 |
641 | 449 |
300 |
| Operating Profit |
67 |
10 | 6 |
5 |
| OPM% |
6.1 |
1.6 | 1.4 |
1.6 |
| Other Income * |
22 |
42 | 16 |
9 |
| EBIDTA |
89 |
52 | 22 |
14 |
| EBIDTA % |
7.9 |
7.6 | 4.8 |
4.5 |
| Interest |
11 |
10 | 8 |
6 |
| Depreciation |
2 |
2 | 1 |
1 |
| Current Tax |
13 |
10 | 4 |
3 |
| Net Profit |
66 |
30 | 9 |
5 |
| Equity (Implied) |
19 |
4 | 4 |
4 |
| Reserves (Implied) |
504 |
43 | 14 |
4 |
| Borrowing |
503 |
136 | 134 |
109 |
| Fixed Assets |
15 |
16 | 17 |
9 |
| *Int on FDs |
22 |
22 | 15 |
9 |
| * Forex Gain |
0 |
20 | 0 |
0 |
Valuation
DSL’s reported fiscal 2022 earnings may perhaps justify the IPO cap price of Rs 207. Nevertheless, the far-from-convincing track record of the promoters, the quality of the company’s earnings, the pathetic profit margins, the exit price offered by the new promoters to the original promoters a year ago and the negative cost of holding of the corporate promoters post offer for sale would surely advise caution.
Concern
DSL does not own the brand name ‘DCX’. It uses the brand name DCX pursuant to a no objection letter received from DCX-Chol Enterprises, Inc. if the company were to discontinue the use of the brand name or the logo it could adversely affect DSL’s business and financial condition.
Also, many of the Saffron Capital-associated IPOs have inflicted huge capital loss on the investing public.