DCX Systems
DCX Systems is coming out with a 100% book building; initial public offering (IPO) of 2,53,80,710 Equity Shares of face value of Rs 2 each in a price band Rs 197-207 per equity share.
Not less than 75% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not more than 15% of the issue will be available for the non-institutional bidders and the remaining 10% for the retail investors.
The issue will open for subscription on October 31, 2022 and will close on November 02, 2022.
The shares will be listed on BSE as well as NSE.
The face value of the share is Rs 2 and is priced 98.50 times of its face value on the lower side and 103.50 times on the higher side.
Book running lead manager to the issue are Edelweiss Financial Services, Axis Capital and Saffron Capital Advisors.
Compliance Officer for the issue is Nagaraj R Dhavaskar.
Profile of the company
The company 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. It is primarily engaged in system integration and manufacturing a comprehensive array of cables and wire harness assemblies and are also involved in kitting. It commenced operations in 2011 and has been a preferred Indian Offset Partner (IOP) for foreign original equipment manufacturers (OEMs) for executing aerospace and defence manufacturing projects. It is a rapidly growing company in the Indian defence space and its revenue from operations have grown at a CAGR of 56.64% between Fiscal 2020 and Fiscal 2022. It is also one of the largest Indian Offset Partner (IOP) for ELTA Systems and Israel Aerospace Industries, System Missiles and Space Division (together, the IAI Group), Israel, for the Indian defence market for manufacture of electronic sub-systems and cable and wire harness assemblies. Over the years, it has expanded its manufacturing capabilities and grown its order book.
The company classifies its operations under the following business verticals:
System Integration: The company undertakes system integration in areas of radar systems, sensors, electronic warfare, missiles, and communication systems. It provides product assembly and system integration services of various complexities to address customers’ requirements. System integration services are part of a comprehensive array of electronics and electro-mechanical assembly and enclosure assembly. It also provides product repair support for the parts that it manufacture.
Cable and Wire Harness Assemblies: The company manufactures a comprehensive array of cables and wire harnesses assemblies such as radio frequency cables, co-axial, mixed signal, power, and data cables for a variety of uses including communication systems, sensors, surveillance systems, missile systems, military armored vehicles, and other electronic warfare systems for the aerospace and defence industries as per the customers’ requirements.
Kitting: The company supply assembly ready kits of electronic and electro-mechanical parts and undertake all aspects of procurement including sourcing components from suppliers approved by its customer along with a ‘Certificate of Compliance’ for traceability, controlled storage of moisture sensitive devices to ensure that customers receive complete, assembly-ready kits when required when they are needed for production.
In addition, the company also undertakes certain job work services that includes assembly and testing of materials that have been supplied directly by its customers.
Proceed is being used for:
Repayment/ prepayment, in full or part, of certain borrowings availed of by the company.
Funding working capital requirements of the company.
Investment in its wholly owned Subsidiary, Raneal Advanced Systems, to fund its capital expenditure expenses.
General corporate purposes.
Industry overview
The Indian Defence Industry is a mix of Defence Public Sector Undertakings (DPSUs), large private players, and smaller but niche suppliers such as DCX. There are roughly 16 public sector undertakings under the administrative control of the Department of Defence Production, MOD. The DPSUs fuel the growth of Tier 2 and Tier 3 companies. Whilst the origin of Indian DPSU was tied India’s ambitions to indigenize production of major defence platforms, the path taken had several drawbacks. DPSUs were driven to cover the entire spectrum of defence manufacturing, including development of platforms, and production of all tiers of subsystems and components. This led to inefficiencies within the system and a lack of specialization, due to which India lagged behind on the development of several key “critical technologies” (jet propulsion and naval engines for example), and the development of air and land platforms. The current political dispensation seeks to address these deficiencies, by containing the focus of DPSUs to platform development, whilst leaning on several private defence companies to fulfil tier 2 and tier 3 roles. Several DRDO projects such as Design and Development of Integrated Active Circular Antenna, DSP Design for FMCW Radar, Wideband antenna and RF front end for transceiver module, etc., could lead to product production plans with a high involvement of indigenous private companies.
The defence manufacturing industry in India is an integral segment of the country’s economy. With increased national security concerns, the industry is set to grow substantially. India is noted to be among the top importers of defence equipment over the last five years to gain technological advantages over competing countries such as Pakistan and China. The GOI has taken many measures to stimulate ‘Make in India’ operations through policy support programmes in order to modernize its armed forces and minimize reliance on overseas defence acquisition. The ‘First Positive Indigenisation’ List, which includes 351 new items to be indegenised, was notified in December 2021 as part of the government’s ‘Atma Nirbhar Bharat Abhiyan’ initiative to encourage indigenization in the defence industry. The DPEPP 2020 reforms outline the quality standards imposed on defence production as well as exports. The policy lists goals including increasing the competitiveness of the Indian defence sector by propelling the dynamic and robust production. The aim of the DPEPP 2020 reforms is aimed at reducing imports dependence in India thus furthering the agenda for Atmanirbhar Bharat. India’s present import reliance is noted to be 15% of the global market value. The Defence Production and Export Promotion Policy 2020 is based on 8 pillars, i.e. increasing the market share for Indian Intellectual property and promoting R&D within the Indian defence infrastructure are also some of the objectives to be attained via the DPEPP 2020 reforms. The OFB and DPSUs proposal is poised to address issues concerning with major source delay and stagnation in the manufacturing domain.
Pros and strengths
Preferred IOP for the defence and aerospace industry with global accreditations: The company is a preferred IOP for foreign OEMs for executing defence manufacturing projects. It undertakes “build-to-print” system integration and manufacture cable and wire harness assemblies for both domestic and international OEMs. It is also one of the largest IOP for the IAI Group, Israel, for the Indian defence market for manufacture of electronic sub-systems and cable and wire harness assemblies. It hold a number of key certifications that include AS-9100:2016 certification for quality management systems for aviation, space and defense products manufacturing and its Defence Industrial License from the Ministry of Commerce and Industry, Government of India for the manufacture of defence subsystems that includes microwave components, modules for radar and electronic warfare subsystems, microwave submodules, for command and guidance units for missile subsystems only. It also adheres to global standards and have obtained various global certifications. These certifications ensure that its processes comply with customer specific, industry specific, statutory health and safety, as well as environmental and social and governance requirements. Certain of these standards also require it to undergo audits. Its global certifications help it serve its customers’ stringent quality specifications and assists in new customer acquisition.
Technology enabled and scalable end-to-end capabilities: The company’s system integration services are a part of an array of electronic, electro-mechanical and wired assemblies, and full-system integration services, which can be configured as per its customers requirements. As part of its system integration services, it also does in-house testing to ensure the quality of its final products, and reliability of its products’ functioning under varying environmental conditions. It also specialise in manufacturing assemblies that are used in applications for land, underwater and airborne use. It possess the skillset and technology to manufacture cable and wire harnesses according to customer requirements for various types including radio frequency, coaxial, mixed signal, power, data, submergible, twinnax cables, shielded cable harness, flexible cables and open and closed type harnesses used in aerospace and defence and other allied segments of the industry. It also manufactures test cables, large mechanical jigs and fixtures, and testing programs to meet desired requirements of customer in testing and qualifying the product. In addition, its products are also subjected to various quality assurance tests.
Business model with visibility of cash flows and ability to mitigate operational and technology risk: The company’s manufacturing activity is obsolescence-proof as the technology coupled with intellectual property rights, both vest with its OEM customers. Further, its in-house team monitors the obsolescence factor and provides feedback to its OEM customers for suitable action including drop-in replacements. Its OEM customers also provide training at their facilities to its employees. In its system integration projects that are high value, intellectual property-sensitive and classified, it perform risk mitigation including handling of its finished goods under special standard operating procedure provided by customers which includes a dedicated vehicle with freight forwarders to escort the consignment from its premises to dedicated area in airport. This enables security of classified products till they reach the end-customer in various locations. For certain products which do not meet the required specification after subjecting them for the defined testing processes, it is able to rectify the failure based on available technical data and its expertise.
Strategically located in aerospace Special Economic Zone: In 2020, the company commissioned its new manufacturing facility at the Hi-Tech Defence and Aerospace Park SEZ in Bengaluru, Karnataka. Its facility is spread over an area of 30,000 square feet and is located in the same city as its key domestic customers which ensures shorter delivery times. The facility is secured by digital security cameras coupled with alarm systems with restricted access control for individual manufacturing divisions. Its facility is situated within a SEZ that offers it duty free imports, exemption from GST and supplies that are zero rated under extant regulations. Being situated in an SEZ ensures that it is also not subject to levies imposed by the state government and its operations are eligible for single-window clearance by the relevant authority. Its facility is equipped with advanced machinery and equipment including laser wire maker, automatic wire cutting and stripping machine, coaxial stripping machine, crimp tools, controlled torque tools, vacuum pump and desiccator, tinnel welding machine and temperature controlled soldering station.
Risks and concerns
Required to maintain a high level of working capital: The company is required to maintain a high level of working capital because its business activities are characterised by inventory holding periods and production cycles. It usually finances its working capital requirements mainly through arrangements with banks. The scope and quantity of its transactions with the overseas OEM customers has, from time to time, increased working capital requirements because of increases in projects and programmes. Delays in payment under on-going contracts or in disbursements under its financing arrangements and/or in particular, reduction of advance payments due to lower order intake could adversely affect its working capital, lower its cash flows and materially increase the amount of working capital to be funded through external debt financings.
Dependent on the performance of the electronic subsystems market: The company derives a significant portion of its revenue from operations from its system integration business which involves the manufacture and supply of electronic sub-systems involved in the defence and aerospace sector. As a result, its business and financial condition are heavily dependent on the performance of the electronic sub-systems market for the defence and aerospace sector globally and in India and it is exposed to fluctuations in the performance of these markets. In the event of a decrease in demand for electronic sub-systems in India or abroad, it will experience pronounced effects on its business, results of operations, financial condition, cash flows and prospects. The electronic sub-systems market may be affected by, among others, changes in government policies, government initiatives, economic conditions, income levels and interest rates, which may negatively affect the demand for and the valuation of its products. These and other factors may materially adversely affect its business, financial condition, results of operations and cash flows.
Face significant competitive pressures in industry: The company faces competition in its business from other manufacturers and suppliers of integrated electronic sub-systems and cable and wire harness products. The industry and markets for its products are characterized by factors such as rapid technological change, the development of new end products and their rapid obsolescence, evolving industry standards and significant price erosion over the life of a product. There can be no assurance that it will maintain its competitiveness in any of these areas with respect to any of its products. While it work consistently to offset pricing pressures, produce new products, advance its technological capability, improve its services or enhance its production efficiency to reduce costs, such efforts may not be successful.
Business involves significant risks and uncertainties: The company’s business relates to manufacturing advanced defence systems and products. New technologies may be untested or unproven. Failure of some of these products and services could result in extensive loss of life or property damage in some circumstances. While it may be entitled to certain legal protections or indemnifications from its customers, either through contractual provisions, qualification of its products and services or otherwise, it may rely on its insurance to cover all claims and liabilities, which may not be adequate. Further, it is not possible to obtain insurance to protect against all operational risks and liabilities. Further, in case its claims under any insurance maintained by it is rejected, it may have an adverse effect on its financial condition.
Outlook
DCX Systems is among the leading Indian players in the manufacture of electronic sub-systems and cable harnesses. The company commenced operations in 2011 and has been a preferred Indian Offset Partner (IOP) for foreign original equipment manufacturers (OEMs) for executing aerospace and defence manufacturing projects. In 2020, the company commissioned a new manufacturing facility at the Hi-Tech Defence and Aerospace Park SEZ in Bengaluru, Karnataka. As of June 30, 2022, DCX Systems had 26 customers in Israel, the United States, Korea and India, including certain Fortune 500 companies, multinational corporations and start-ups. The company's 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. On the concern side, the company has from time-to-time experienced cost fluctuations of its raw materials, particularly in the aforementioned components due to volatility in the commodity markets. Since the selling prices of its products are affected by the prices of its raw materials, strong and rapid fluctuations in the prices of these raw materials and the inability to pass on the cost increase to its customers could negatively affect its operating results.
The issue has been offered in a price band of Rs 197-207 per equity share. The aggregate size of the offer is Rs 500 crore to Rs 525.38 crore based on lower and upper price band respectively. On performance front, total income increased by 64.56% from Rs 6,83.24 crore in Fiscal 2021 to Rs 1124.33 crore in Fiscal 2022. It has recorded a profit after tax for the year of Rs 65.60 crore in Fiscal 2022, as compared to Rs 29.55 crore in Fiscal 2021. Meanwhile, the company intends to expand its existing cable and wire harness assembly operations to better serve the requirements for its global customers. It intends to increase cross-selling of its product to increase customer base in various product verticals and expand into new or adjacent product verticals with its existing customers. It will continue to leverage its existing customer relationships to expand into new product categories. It intends to horizontally integrate its business model by entering into new verticals like EMS for the aerospace and defence industries.
