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Review By Dilip Davda on September 22, 2022

•    DCXSL is the most preferred India Offset partner for aerospace and defence manufacturing projects.
•    It has posted growth in its top and bottom lines for the reported periods of the offer document.
•    Its current order book stands at Rs. 2563+ cr. 
•    Based on its financial performance, the issue is reasonably priced. 
•    Investors may consider investing with a medium to long-term perspective.

ABOUT COMPANY:
DCX Systems Ltd. (DCXSL), formerly known as DCX Cable Assemblies Pvt. Ltd., is among the leading Indian players for the manufacture of electronic sub-systems and cable harnesses in terms of manufacturing capability and revenue in Fiscal 2022 in the defence and aerospace sector (Source: Company Commissioned F&S Report). 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. DCXSL has been a preferred Indian Offset Partner ("IOP") for foreign original equipment manufacturers ("OEMs") for executing aerospace and defence manufacturing projects (Source: Company Commissioned F&S Report). It is a rapidly growing company in the Indian defence space (Source: Company Commissioned F&S Report) and its revenue from operations has grown at a CAGR of 56.64% between Fiscal 2020 and Fiscal 2022. 

DCXSL is also one of the largest Indian Offset Partner ("IOP") for ELTA Systems Limited and Israel Aerospace Industries Limited, System Missiles and Space Division (together, the "IAI Group"), Israel, for the Indian defence market for the manufacture of electronic sub-systems and cable and wire harness assemblies. Over the years, the company has expanded its manufacturing capabilities and grown its order book. 

The growing Indian landscape for defence and aerospace serves as a key opportunity for the Company. The Indian aerospace and defence sector is poised to attain a value of USD 70 billion by 2030. Recent initiatives like an increase in foreign direct investment ("FDI") in the Indian defence sector from the current 49% to 74% under the automatic route are anticipated to be key drivers and growth opportunities for the market. The Defence Research and Development Organization has announced the indigenous development of roughly 108 systems and sub-systems which is expected to generate demand for cables and connectors across the Indian defence environment. 

The Indian government has also banned approximately 101 items within the defence-based imports segment and has also introduced the third positive indigenization list that bans the import of 780 LRU/components. These initiatives are expected to boost indigenous manufacturing within India. The instating of defence industry corridors across Uttar Pradesh and Tamil Nadu is also poised to improve the market growth dynamics by broadening the opportunities offered to the private sector. (Source: Company Commissioned F&S Report). All of these, in turn, serve as an opportunity for DCXSL to capitalize on the expected growth in this space.

As of June 30, 2022, it had 26 customers in Israel, the United States, Korea and India, including certain Fortune 500 companies, multinational corporations and start-ups. Its customers include domestic and international OEMs, private companies and public sector undertakings in India across different sectors, ranging from defence and aerospace to space ventures and railways. It has a mix of domestic and international customers and certain key customers include Elta Systems Limited, Israel Aerospace Industries Limited - System Missiles and Space Division, Bharat Electronics Limited, Astra Rafael Comsys Private Limited, Alpha-Elsec Defence and Aerospace Systems Private Limited, Alpha Design Technologies Private Limited, Astra Microwave Products Limited, Kalyani Rafael Advanced Systems Private Limited, SFO Technologies Private Limited, and DCX-Chol Enterprises Inc. As of June 30, 2022, the company had 98 employees on its payroll. 

ISSUE DETAILS/CAPITAL HISTORY:
To part finance its needs for repayment/prepayment of certain borrowings (Rs. 110 cr.), working capital (Rs. 160 cr.), investment in a wholly owned subsidiary (Rs. 44.88 cr.), and general corporate purposes, DCXSL is coming out with a maiden IPO with a combo of Fresh equity shares worth Rs. 400 cr. (approx. 19323720 shares at the upper cap) and an offer for sale of Rs. 100 cr. (approx. 4830930 shares) making an overall issue size of Rs. 500 cr. (approx. 24154650 shares). It has announced a price band of Rs. 197 - Rs. 207 per share of Rs. 2 each. The issue opens for subscription on October 31, 2022, and will close on November 02, 2022. A minimum application is to be made for 72 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. The issue constitutes 24.97% of the post-issue paid-up capital of the company. Though the company has posted profits, due to regulatory compliances, it has allocated 75% for QIBs, 15% for HNI, and 10% for Retail investors. 

The joint Book Running Lead Manager (BRLM) for this issue are Edelweiss Financial Services Ltd., Axis Capital Ltd., and Saffron Capital Advisors Pvt. Ltd., while Link Intime India Pvt. Ltd. is the registrar to the issue. 

Having issued initial equity shares at par, the company issued further equity at a price of Rs. 28.20 per share in January 2022. It has also issued bonus shares in the ratio of 3 for 1 in the same month. The average cost of acquisition of shares by the promoters/selling stakeholders is Rs. NIL, Rs. 0.50, Rs. 5.65, and Rs. 7.05 per share. 

Post this IPO, DCXSL's current paid-up equity capital of Rs. 15.48 cr. will stand enhanced to Rs. 19.35 cr. Based on the upper cap of the IPO price, the company is looking for a market cap of Rs. 2002.18 cr. 

FINANCIAL PERFORMANCE: 
On the financial performance front, on a standalone basis DCXSL has posted turnover/net profits of Rs. 465.23 cr. / Rs. 9.74 cr. (FY20), and Rs. 683.24 cr. / Rs. 29.56 cr. (FY21). On a consolidated basis it has earned a net profit of Rs. 65.61 cr. on a turnover of Rs. 1124.33 cr. and for Q1 of FY23 it posted a net profit of Rs. 5.57 cr. on a turnover of Rs. 220.25 cr. 

On a standalone/consolidated basis, DCXSL has reported an average EPS of Rs. 6.23 and an average RoNW of 58.41% for the last three fiscals. The issue is priced at a P/BV of 13 based on its NAV of Rs. 15.92 as of June 30, 2022, and at a P/BV of 3.83 based on its post-IPO NAV of Rs. 54.09 (at the upper cap). For Q1 of FY23, it earned a net profit of Rs. 5.57 cr. on a turnover of Rs. 220.25 cr. 

If we annualize Q1-FY23 performance and attribute it to a post-IPO fully diluted equity base, then the asking price is at a P/E of around 90, and based on the FY22 consolidated performance basis, P/E stands at 30.53.

However, according to the management, the major activities in the industry like DCXSL take place in the second half of the year as per historical data, and hence the Q1 of FY23 performance is not relevant for considering annualized performance.   

DCXSL's order book as of the date of filing of this offer document stands at Rs. 2563.00 cr. However, as per the disclaimer by the company, this order book is subject to modification, cancellation, delay, put on hold, or not fully paid may adversely affect its business. Thus the order book may not necessarily translate into future income in its entirety. 

COMPARISON WITH LISTED PEERS:
Asper the offer documents, DCXSL has shown Bharat Electronics, Data Patterns, Paras Defence, Astra Microwave, and Centum Electronics as its listed peers. They are currently trading at a P/E of 27.34, 70.72, 75.08, 63.05, and 37.01 (as of October 21, 2022). 

DIVIDEND POLICY:
The company has not declared/paid any dividend in the reported periods of the offer documents. It will adopt a prudent dividend policy post-listing, based on its financial performance and future prospects. 

MERCHANT BANKER'S TRACK RECORDS:
The three BRLMs associated with the offer have handled 58 public issues in the last four fiscals (including the ongoing one), out of which 25 issues closed below the offer price on the listing date. 

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