Electronic sub-systems and cable harness manufacturer DCX Systems is enjoying a healthy double-digit premium in the grey market ahead of its initial public offering (IPO) next week.
On October 25, DCX Systems shares traded with a 20 percent premium to the issue price in the grey market, an unofficial platform for trading in IPO shares, analysts said.
Generally, investors look at the grey market to know the expected listing gains in an IPO.
The offer opens for subscription on October 31 and closes on November 2.
The company is planning to raise Rs 500 crore through the IPO, which comprises a fresh issue of Rs 400 crore and an offer for sale of Rs 100 crore, with a price band of Rs 197-207 per share.
The improvement in equity market sentiment may be one of the key reasons for the strong grey market premium as the benchmark Nifty50 has rallied more than 5 percent in the current month.
The premium can also be attributed to the company’s healthy order book, revenue visibility and increasing government's focus on the defence space.
"The reason for the grey market premium can be attributed to its healthy order book of Rs 2,563 crore with operating margins of around 10 percent," Harshad Gadekar, Fundamental Research Analyst at GEPL Capital, said.
Along with this, DCX has a strong track record of 55 percent return on equity and 16 percent return on capital employed for FY22. The company's post-issue market capitalisation would be Rs 2,000 crore which is decent considering the above factors, Gadekar said.
The orderbook has increased from Rs 2,369 crore as of March 2022, to Rs 2,563.6 crore as of June 2022, and will be executed during FY23-FY25.
DCX Systems, which commenced operations in 2011, was among the leading Indian players for the manufacture of electronic sub-systems and cable harnesses in terms of manufacturing capability and revenue in FY22 in the defence and aerospace sector.
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It is primarily engaged in system integration and manufacturing a comprehensive array of cables and wire harness assemblies and is also involved in kitting. It has recorded a growth at 56.64 percent compounded annual growth rate (CAGR) in revenue from operations during FY20-FY22 and in the same period, profit grew at a CAGR of 159 percent and EBITDA at 66 percent. EBITDA is earnings before interest, tax, depreciation and amortisation.
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The fresh issue money will be utilised for repaying debts, working capital requirements and capex of subsidiary Raneal Advanced Systems, besides general corporate purposes.
As of June 2022, it had about 26 domestic and international customers including Elta Systems, Israel Aerospace Industries – system missiles and space division, Bharat Electronics, Astra Rafael Comsys, Alpha-Elsec Defense and Aerospace Systems, Alpha Design Technologies, Astra Microwave Products, Kalyani Rafael Advanced Systems, SFO Technologies, and DCX-Chol Enterprises Inc.
The government has announced various initiatives in the aerospace and defence sectors, raising its defence budget outlay for FY23 to Rs 5.25 lakh crore, up from Rs 4.78 lakh crore in FY22.
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The Indian aerospace and defence sector is poised to reach a value of $70 billion by 2030. Recent initiatives like an increase in foreign direct investment in the Indian defence sector from the current 49 percent to 74 percent under the automatic route are seen as key drivers for the sector.
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