Paras Defence IPO review (May apply)

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Review By Dilip Davda on September 18, 2021

•    First private sector Indian company in defence and aerospace product solutions.
•    It has witnessed declining trends in top lines for the last three fiscals.
•    FY21 has seen the impact of pandemics resulting in lower top and bottom lines.
•    Based on financial data, the issue is fully priced.
•    Initial listing will be in the "T2T" group, restricting price movement. 

ABOUT COMPANY:
Paras Defence and Space Technologies Ltd. (PDSTL) is an Indian private sector company engaged in designing, developing, manufacturing and testing a wide range of defence and space engineering products and solutions. It is one of the leading 'Indigenously Designed Developed and Manufactured' ("IDDM") category private sector companies in India, which caters to four major segments of the Indian defence sector i.e. defence and space optics, defence electronics, electro-magnetic pulse ("EMP") protection solution and heavy engineering. (Source F&S Report).  PDSTL is also the sole Indian supplier of critical imaging components such as large size optics and diffractive gratings for space applications in India (Source F&S Report). Its goal is to become one of the leading global companies for optics for the defence and space sector.

The company has five principal categories of product offerings: defence and space optics, defence electronics, EMP protection, heavy engineering for defence and niche technologies. Its defence and space optics operations include manufacturing high precision optics for defence and space applications such as thermal imaging and space imaging systems. Its defence electronics operations include providing a wide array of high-performance computing and electronic systems for defence applications, including subsystems for border defence, missiles, tanks and naval applications. 

The company's EMP protection solutions include designing, developing, manufacturing and commissioning various solutions for EMP Protection. It has the ability to undertake and deliver customized turnkey projects in the defence segment, especially in the defence electronics and EMP protection segments (Source: F&S Report). Under its niche technologies division, PDSTL has identified and partnered with some of the leading technology companies around the world in order to indigenize advanced technologies in the defence and space sectors for catering to the Indian market. 

The company has two manufacturing facilities in Maharashtra, located at Nerul in Navi Mumbai and Ambernath in Thane. Nerul facility is an advanced nanotechnology machining centre for producing high-quality optics and ultra-precision components and is engaged in the manufacturing of Optics, Design, Development, Manufacturing and Integration of Electronics and EMP protection products and solutions. 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. It is also in the process of expanding its manufacturing facility located at Nerul in Navi Mumbai, Maharashtra. PDSTL's client list includes BEL, HAL, BDL, HSL, ECIL, TCS etc. The company has orders on hand worth Rs. 305 cr. as of June 30, 2021. 

ISSUE DETAILS/CAPITAL HISTORY:
To part finance its plans for the purchase of machinery and equipment (Rs. 34.66 cr.), incremental working capital needs (Rs. 60.00 cr.), repayment/prepayment of all or a portion of certain borrowings (Rs. 12.00 cr.)  and general corporate fund needs, PDSTL is coming out with a maiden book-building route IPO having a combo of fresh equity issue worth Rs. 140.60 cr. as well as an Offer for Sale (OFS) for Rs. 30.18 cr. making an overall issue size worth Rs. 170.78 cr. The company has fixed a price band of Rs. 165 - Rs. 175 per share of Rs. 10 each. Minimum application is to be made for 85 shares and in multiples thereon, thereafter. The issue opens for subscription on September 21, 2021, and will close on September 23, 2021. Post allotment, shares will be listed on BSE and NSE. At the upper cap, PDSTL will issue 8034285 fresh equity shares and 1724490 shares under OFS, thus the total number of shares to be issued will be 9758775 shares.  The issue constitutes 25.02% of the post issue paid-up capital of the company. 

The issue is solely lead managed by Anand Rathi Advisors Ltd. and Link Intime India Pvt. Ltd. is the registrar to the issue. Allocation in this IPO is 50% for QIBs, 15% for HNIs and 35% for retail investors. 

Having issued initial equity at par, the company raised further equity in the price range of Rs. 125 to Rs. 1000 per share between November 2018 and July 2021. It has also issued bonus shares in the ratio of 4 for 1 in March 2020. The average cost of acquisition of shares by the promoters is Rs. 0.00, Rs. 1.21 and Rs. 3.36 per share. 

Post issue PDSTL's current paid-up equity capital of Rs. 30.97 cr. will stand enhanced to Rs. 39.00 cr.  At the upper price band of the IPO, the company is looking for a market cap of Rs. 682.50 cr.

FINANCIAL PERFORMANCE: 
On the financial performance front, on a consolidated basis, for the last three fiscals, the company has posted turnover/net profits of Rs. 157.17 cr. / Rs. 18.97 cr. (FY19), Rs. 149.05 cr. / Rs. 19.66 cr. (FY20) and Rs. 144.61 cr. / Rs. 15.79 cr. (FY21). Thus it has posted declining trends in its top and inconsistency in the bottom lines for these periods. 

For the last three fiscals, PDSTL has posted an average EPS of Rs. 6.20 and an average RoNW of 11.94%. The issue is priced at a P/BV of 3.17 based on its NAV of Rs. 55.23 as of March 31, 2021, and at a P/BV of 2.12 based on its post-issue NAV of Rs. 82.53 per share (at the upper cap). If we attribute FY21 earnings on fully diluted post issue paid-up equity, then the asking price is at a P/E of 43.21, making this offer fully priced. 

COMPARISON WITH LISTED PEERS:
As per offer documents, PDSTL has claimed that it has no listed peers to compare with. According to management, they are working with clients referred here above on a No-Clash basis, so invariably they become listed peers. But the company and merchant banker has perhaps preferred to ignore this. 

DIVIDEND POLICY:
The company has not declared any dividend for the last three fiscals and till the filing of RHP for this offer. It will adopt a prudent dividend policy post listing on the basis of its financial performance and future prospects.

MERCHANT BANKER'S TRACK RECORDS:
For the last four fiscals including the ongoing one, Anand Rathi Advisors has not handled any issue and hence it has no track records for the said periods.

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