Stagnant revenue and receding bottom line in the face of bulging equity coupled with optimum pricing leaves little room for capital appreciation.
Over-dependence on Government entities and filling the board with ex-employees of a main customer do not augur well for the company’s future.
|
PARAS DEFENCE OFFER AT A GLANCE |
|
| Offer Type | Book Built |
| Platform | Main Frame |
| Fresh Issue | Rs 140.60 Cr (8,034,286 shares) |
| Offer for Sale | 1,724,490 shares ( Rs 30.18 Cr) |
| Face Value | Rs 10 |
| Price Band | Rs 165 – 175 |
| Mkt/Bid Lot | 85 Nos. |
| Implied M-Cap | Rs 682.40 Cr |
| Implied Equity Cap | Rs 39 Cr |
| Free Float | 41.06% |
| Lead Manager | Anand Rathi Advisors |
| Registrar | Link Intime |
| Listing At | BSE, NSE |
|
INDICATIVE ISSUE SCHEDULE |
|
| Opening :21-Sep-2021 | Closing :23-Sep-2021 |
| Allotment :28-Sep-2021 | Refunding :29-Sep-2021 |
| Demat Credit :30-Sep-2021 | Trading :1-Oct-2021 |
The Offer
Navi Mumbai-based defence and space engineering products manufacturer Paras Defence and Space Engineering Ltd (PDSEL) is going public with a fresh issue of Rs 141 Cr (8,034,286 shares) and an offer for sale (OFS) of 1,724,490 shares (Rs 30 Cr). The public offer would work out to 25.02% of the company’s paid-up equity capital. The offer is being made through the book-building route with a price band of Rs 165 – 175 for Rs 10 paid-up share. At the cap price, the value of IPO amounts to Rs 171 cr.
Applicants should bid for a minimum lot of 85 shares and multiples thereof. The shares are proposed to be listed on the main frame of BSE & NSE on October 1. Anand Rathi Advisors is acting as the lead manager to the offer and Link Intime has been roped in as registrar to the issue. The bidding opens on Tuesday, September 21 and closes on Thursday, September 23, 2021.
Net proceeds from the fresh issue are proposed to be utilized for the purchase of machinery and equipment (Rs 34.66 Cr), funding incremental working capital requirements (Rs 60 Cr), repayment of loans (Rs 12 Cr) and general corporate purposes (balance amount).
Lineage
The 12-year-old PDSEL was originally incorporated as Paras Flow Form Engineering Ltd. The name was changed to the present one in fiscal 2016. The genesis of PDSEL’s business goes back to its predecessor, Paras Engineering Co (PEC), a proprietary concern, which was established in 1979 by PDSEL’s promoter, Sharad Virji Shah.
PEC was involved in the business of manufacturing precision machine components, pressed and fabricated components, precision spares and fastners. The taking over of the PEC in its entirety including all its assets and liabilities was one of the main objects of PDSEL at the time of its incorporation. The company completed the acquisition of the plants and machinery of PEC on April 1, 2012. In fiscal 2015 PDSEL amalgamated two private limited companies viz. Paras Gate India and Neetnav Realtors. Further, in fiscal 2018, two more companies namely Mechvac India Ltd and Concept Shapers and Electronics Private Ltd were amalgamated with PDSEL.
In August 2020 Maharashtra Defence and Aerospace Venture Fund (MDAVF), through its investment manager IDBI Capital Market & Securities Ltd, entered into an agreement to invest Rs 30 Cr in PDSEL with an understanding that MDAVF should get a return (IRR) of 20%. At that time the Rs 10 paid share was priced Rs 197. However, few months later (in January 2021), for reasons best known only to MDAVF and PDSEL, the agreement was amended to facilitate an early exit for MDAVF.
Whereas MDAVF had agreed to transfer PDSEL’s equity shares at Rs 237 on the exit date (August 12, 2021), in order to pay-back MDAVF, PDSEL management resorted to `Pre-IPO Private Placements’ under which 18,40,000 shares were issued at a price of Rs 125 each in March/April 2021 and 7,12,598 shares were placed in July 2021 at a price of Rs 160 each.
PDSEL derives most of the revenue under the contracts from the Government arms and associated entities such as defence public sector undertakings and government organizations involved in space research. The single largest customer is Bharat Electronics Ltd (BEL) which contributed over 16% of the revenue in fiscal 2021. Incidentally, three of the Independent Directors of PDSEL are retired senior executives of BEL!
Key Management
Though PDSEL is perceived to be a high tech company, its promoters/full-time directors do not have any technical qualification. Promoter-chairman Sharad Virji Shah (73) has completed his education up to secondary school certificate level. Promoter – Managing Director Munjal Sharad Shah (44) has completed his education up to higher secondary certificate level. Whole-Time Director of the company since June 25, 2018, Shilpa Amit Mahajan (41), has completed her education up to secondary school certificate level and holds a diploma in interior design.
Independent Director Sunil Kumar Sharma (64) has been on PDSEL’s board since January 8, 2019. He holds a degree of bachelor of engineering (electronics) from Bangalore University and a master’s degree in business administration in production management from Bangalore University. He has 38 years of experience of working with Bharat Electronics Ltd and served as its managing director from January 2014 to September 2016.
Another Independent Director Manmohan Handa (65) who too has been on the board since January 8, 2019, holds a bachelor’s degree of science in mechanical engineering from Kurukshetra University and completed a post graduate diploma in material management from Indian Institute of Material Management. He is also having 38 years of working experience with BEL and served as a director of its Bangalore complex from July 31, 2014 to April 30, 2016.
The third Independent director from BEL, Suresh Katyal (65), who joined the board only in January this year, holds a bachelor’s degree of science in engineering and a master’s degree in business administration from Punjab University. He too has 38 years of experience with BEL in different areas (product assurance, quality control, testing, telecom & broadcasting and defence).
The company has also roped in an ex-employee of DRDO, Hina Gokhale (63), who is on the board as an Independent Director since April 1, 2020. She holds a bachelor’s degree in science from Gujarat University and master’s degree and a Ph.D. in statistics from University of Pittsburgh. She has over 31 years of experience in the areas of human resources, experiment design and analysis, policy development and project management.
Stakeholders
Of the present equity capital of Rs 31 Cr, the two core promoters hold about 59% and associates control 20%. 57 public shareholders have 21%. Post IPO, of the enlarged equity base of Rs 39 Cr, the promoters will have 44% and their associates will control around 15%. Whereas the average cost of the 41% public holding would be more than Rs 125 a share, the promoters/associates’ cost would be negative which is bound to impact the stock price post-lock-in period.
Business Track
PDSEL is one of the leading ‘Indigenously Designed Developed and Manufactured’ category companies in India catering to four major segments of Indian defence sector i.e. defence and space optics, defence electronics, electro-magnetic pulse (EMP) protection solution and heavy engineering. The company claims to be the sole Indian supplier of critical imaging components such as large size optics and diffractive gratings for space applications in India.
The company has two manufacturing facilities in Maharashtra, located at Nerul in Navi Mumbai and Ambernath in Thane. The Nerul facility is said to be an advanced nano technology machining centre for producing high quality optics and ultra-precision components and is engaged in manufacturing of optics, design, development, manufacturing and integration of electronics and EMP protection products and solutions.
The Ambernath facility is engaged in manufacturing of heavy engineering products such as flow-formed motor tubes, vacuum brazed cold plates, titanium structures and assemblies, large and heavy dynamic structures with built-in automation for strategic applications, indigenously designed and manufactured flow-forming machines and mechanical racks, cabinets and consoles for various defence applications.
Though incorporated in 2009, the company bagged order for developing electronic control system only in 2015. It reportedly started developing and manufacturing optics for space in 2016 and secured order for developing and manufacturing EMP racks in 2017. It established the subsidiary, Paras Aerospace Private Ltd, for venturing into drone systems and services in 2019.
The company’s customer base includes Government arms and notable Indian public and private sector companies including BEL, HAL, Bharat Dynamics, Hindustan Shipyard, Electronic Corporation of India, Tata Consultancy Services, Solar Industries India, Alpha Design Technologies and Astra-Rafael Comsys. Its foreign customers include Advanced Mechanical and Optical Systems (Belgium), Tae Young Optics Company (South Korea) and Green Optics (South Korea).
Financial Track
Even though PDSEL’s profit margin continues to be attractive, the company’s top line has failed to grow in recent years. The revenue was at Rs 149 cr in fiscal 2018 and peaked at Rs 154 cr in 2019. But, next couple of years witnessed negative growth. Whereas revenue has dipped from Rs 147 cr in 2020 to Rs 143 cr in 2021, operating margin has surged from 26.7% to 30.3%.
The company claims to have orders worth Rs 305 cr at the end of June 2021 which is more than twice of its current turnover. Nevertheless, what’s disturbing is, while the consolidated net profit has slumped from Rs 25 cr in 2018 to Rs 16 cr in 2021, the company’s equity has bulged from Rs 5.58 cr to Rs 30 cr in this period. Post public offer equity will further increase to Rs 39 cr which dilutes the earnings per share considerably.
As compared to its asset base and revenue size, PDSEL’s equity capital is indeed disproportionately high.
|
Paras Defence Consolidated Financials (in Cr) |
||||
| Year Ended |
Mar-21 |
Mar-20 | Mar-19 |
Mar-18 |
| Revenue |
143.33 |
147.04 | 154.40 |
149.26 |
| Operating Profit |
43.40 |
39.27 | 42.83 |
41.17 |
| OPM% |
30.3 |
26.7 | 27.7 |
27.6 |
| Other Income |
1.28 |
2.01 | 2.77 |
3.28 |
| EBIDTA |
44.68 |
41.28 | 45.6 |
44.45 |
| EBIDTA % |
30.9 |
27.7 | 29.0 |
29.1 |
| Interest |
12.41 |
9.77 | 9.39 |
7.36 |
| Depreciation |
9.65 |
9.71 | 9.41 |
6.68 |
| Net Profit |
15.79 |
19.66 | 18.97 |
25.01 |
| Equity (Implied) |
39.00 |
28.41 | 5.68 |
5.58 |
| Reserves (Implied) |
332.71 |
144.21 | 146.68 |
118.25 |
| Borrowing |
93.57 |
96.95 | 76.13 |
60.05 |
| Fixed Assets |
155.60 |
160.70 | 168.50 |
170.90 |
Valuation
Though PDSEL may not have a direct peer to compare with, it may compare well with defence/space electronics ancillary like MTAR Technologies in terms of price-discounting. The proposed IPO cap price of PDSEL discounts the company’s net earnings more than 43 times which is less than a half of MTAR Tech. However, PDSEL’s pricing looks steep when compared to its main PSU customers like Bharat Electronics and Bharat Dynamics.
Moreover, offering at a steep P/E of more 43x during the boom time, is bound to curt the stock price when market takes a turn unless the company significantly improves its earnings, which looks unlikely in the immediate future.
|
HOW PARAS COMPARES WITH DEFENCE/SPACE ELECTRONICS PEERS AND CUSTOMERS |
|||||
|
Financials |
|||||
|
(Amount in Cr) |
Paras Defence |
Bharat Electronics | Bharat Dynamics | MTAR Technologies |
Apollo Micro Systems |
| Market Cap |
683 |
50478 | 7396 | 4396 |
251 |
| Borrowing |
94 |
0 | 0 | 12 |
116 |
| Fixed Assets |
156 |
2883 | 764 | 177 |
101 |
| Revenue |
143 |
13850 | 1914 | 246 |
203 |
| Other Income |
1 |
125 | 95 | 1 |
1 |
| EBIDTA |
45 |
3366 | 439 | 84 |
39 |
| Interest |
12 |
6 | 4 | 7 |
16 |
| Net Profit |
16 |
2100 | 258 | 46 |
10 |
| Equity Cap |
39 |
246 | 183 | 31 |
21 |
| Reserves |
333 |
10816 | 2501 | 446 |
285 |
|
Stock Features |
|||||
| Current Price (Rs) |
175 |
205 | 404 | 1429 |
121 |
| Face Value (Rs) |
10 |
1 | 10 | 10 |
10 |
| Book Value |
95 |
45 | 146 | 155 |
147 |
| Promoter Stake % |
58.9 |
51.1 | 74.9 | 50.3 |
59.1 |
| Debt/Equity |
0.25 |
0 | 0 | 0.03 |
0.38 |
|
Profitability |
|||||
| OPM % |
30.3 |
23.4 | 18.0 | 33.7 |
19.0 |
| Net Margin % |
10.9 |
15.0 | 12.8 | 18.6 |
5.0 |
| Cash EPS |
6.51 |
10.12 | 19.22 | 19.09 |
9.12 |
| Earnings Per Share |
4.03 |
8.54 | 14.06 | 15.01 |
4.94 |
|
Return |
|||||
| RONW % |
7.6 |
19.0 | 9.6 | 9.7 |
3.4 |
| ROCE % |
11.7 |
26.9 | 12.8 | 14.7 |
7.2 |
|
Discounting |
|||||
| Price/Earnings |
43.4 |
24.1 | 28.7 | 95.2 |
24.5 |
| Price/Cash EPS |
26.9 |
20.3 | 21.0 | 74.9 |
13.3 |
| Price/Book Value |
1.8 |
4.6 | 2.8 | 9.2 |
0.8 |
| Price/EBIDTA |
15.3 |
15.0 | 16.8 | 52.1 |
6.4 |
| Price/Revenue |
4.8 |
3.6 | 3.9 | 17.8 |
1.2 |
| Price/Fixed Assets |
4.4 |
17.5 | 9.7 | 24.9 |
2.5 |
|
Distribution |
|||||
| Dividend % |
0 |
400 | 0 | 50 |
2.5 |
| Yield % |
0 |
2.2 | 0 | 0.4 |
0.2 |
| Pay-out % |
0.0 |
46.8 | 0.0 | 20.0 |
5.1 |
Concern
- A decline or re-prioritization of the Indian defence or space budget, reduction in orders, termination of existing contracts, delay of existing or anticipated contracts or programmes or any adverse change in the GoI’s defence or space related policies will have a major impact on the company.
- Auditor’s reports for fiscals 2021, 2020 and 2019 identifies matters such as undisputed amounts due outstanding towards income tax for more than six months and delays in deposit of statutory dues such as provident fund, employees state insurance and income tax which reflects poor standards of corporate governance practiced by the company.