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Mar 13, 2018 11:10 AM IST | Source:

Bharat Dynamics IPO opens: Should you subscribe?

The government will sell a total of 22,451,953 shares of Bharat Dynamics, diluting its stake by about 12 percent.

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Bharat Dynamics, a government enterprise under the Ministry of Defense, is coming out with its initial public offering (IPO) to raise Rs 961 crore.

The price band of the issue is Rs 413-Rs 428 per equity share with face value of Rs 10 each.

The issue is scheduled to open on March 13, and close on March 15, 2018.

The government will sell a total of 22,451,953 shares of Bharat Dynamics, diluting its stake by about 12 percent.

SBI Capital Markets, IDBI Capital Markets and Securities and Yes Securities will manage the public issue.

Bharat Dynamics is engaged in the manufacture of surface-to-air missiles (SAMs), anti-tank guided missiles (ATGMs), underwater weapon launchers, counter measures and test equipment for the defence sector.

The bids can be made for a minimum of 35 equity shares and in multiples of 35 equity shares thereafter.

Brokerage: Angel Broking | Rating: Subscribe

The company's current order book stands at Rs 10,543 crore, which puts the revenue visibility for next two years at 2.2x (on FY17 revenues of Rs 4,832cr). Going forward, the strong order book will further help the company to boost its top-line.

Angel broking recommend subscribe on the issue with strong order book and revenue visibility, coupled with superior return ratios compared to peers.

Brokerage: Centrum Wealth Research | Rating: Subscribe for long term

At the higher end of the price band of Rs 428, the issue is priced at P/E of 16x (post dilution) on FY17 and 22.7x on H1FY18 (annualized) basis. At this valuation, the issue seems reasonably priced.

Given the reasonable valuations and growth prospects, investors can subscribe to the issue from a long term perspective.

Brokerage: Prabhudas Lilladher Securities | Rating: Subscribe

The company has posted Sales/PAT CAGR of 39%/11%, respectively, over FY14-17 with ROE of 20-25% over the last five years.

The company intends to offer products such as Akash SAM, light weight torpedoes and countermeasure dispensing system to the international markets.

At upper price band of Rs 428, the post money market cap works out to Rs 79 billion which is 16xFY17 earnings. While opportunity size is huge, order inflow/execution could be bumpy, given the nature of the defence industry.

Brokerage: ICICIdirect | Rating: Subscribe only for long term

Bharat Dynamics is setting up two more manufacturing facilities (in addition to existing three) at Ibrahimpatnam, near Hyderabad and Amravati in Maharashtra at a cost of Rs 400-500 crore. These facilities will be used to manufacture MRSAMs and VSHORADMs, respectively.

The company has a strong execution capability, which is reflected in its topline and bottomline growth of 38.3% and 15.9% CAGR, respectively, in FY12-17. It also has a healthy balance sheet with nil debt and cash balance of Rs 1311 crore.

Brokerage: LKP Research | Rating: Avoid

Bharat Dynamics functions in a lucrative and attractive sector having strong backing from the government, yet faces challenges driven by the government itself.

Delay in contract allocation, reduction in order inflow, higher dependence on traded business, absence of any meaningful R&D and overdependence on DRDO as well as absence of any export contracts (lack of diversion from single client concentration), reducing topline and bottomline, Balance Sheet stress owing to stretched working capital cycle, weak cashflows (negative FCF in FY17) and return ratios (ROE down from 30% in FY16 to 22% in FY17) are expected to reduce the likelihood of a strong listing.

The stock trading at 10x on FY17 EPS of Rs 40, can be avoided.
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