Paras Defence IPO analysis

Paras defence and space technologies, primarily indulged in designing, manufacturing, developing and testing of various defence and space engineering products. Main development and product manufacturing around the key areas of defence:

  • Defence and Space Optics,
  • Defence Electronics,
  • Electromagnetic Pulse Protection Solutions and
  • Heavy engineering.

The company runs two manufacturing plants in Maharashtra with highly sophisticated engineering infrastructure and expanding the capacity and facility in tandem with the order book.

Describes the business of Paras Defence

Reason for IPO:

The issue sale’s price band has been fixed at ₹165 to ₹175 per equity share with a lot size of 85 shares. Total fund raised is about 171 crores with a fresh equity sale of 140 crores and the rest on offer for sale. The GMP (Grey Market Premium) trades in the range of 225-230.

  • Capital expenditure and expansion needs.
  • Funding working capital needs.
  • Paying off borrowings and loan availed by the company.

Why to buy Paras Defence?

Paras is the only Indian supplier of critical imaging component for space and defence application.

  • One of the few manufacturers of optics for defence and space applications in India.
  • Almost 50% of the revenue is from government enterprises.
  • Booking orders aligned with Atmanirbar Bharath initiatives.
  • Management contains highly experienced staffs and technicians.
  • High entry barrier and capital intensive sector.
  • The main thing research reports circle around is the import embargo list of the government. The list contains equipments from the electromagnetic pulse segment, and Paras is the only domestic producer.

As projects are funded by the government, the management is educated at the cost of external funding. This puts less pressure on the intellectual development of technicians and they continue to improvise as tenders increase.

Customers of Para Defence:

  • Bharat Electronics
  • Hindustan Aeronautics
  • Bharat Dynamics
  • Hindustan Shipyard
  • Electronic Corporation of India
  • Tata Consultancy Service
  • Solar Industries India.

Foreign orders from the Government of Belgium and South Korea.

Financials:

Order book of 300 crore, which is 150% of FY21 revenue.

For the past three years no consistent or significant growth of revenue and oscillates between 143-154 crores. EBITDA margin of 26-30%. The balance sheet is heavy on debt amounting to 106 crores. Even thought the debt was high, Debt-to-equity ratio stands at 0.7 for the year of FY19.

Potential risk areas:

Collection of revenues takes place with a 8-9 month delay and 30% to 50% of the revenue for the present year was from the previous quarter, meaning the operating cycle stretches to more than 90 days. Businesses generally lend for the short term to fund day to day activities and the it’s easy to connect the dots, concludes the business would still be in need of extra funding post issue if the operating cycle remains as reported.

The customer list can easily be grouped as Government and Non-government that’s how concentrated the customer base is. Government tenders are low margin projects and in no time slips out or switch to other able competitors. 50% of the revenues are from the government and the payments generally gets delayed because job providers have an upper hand and authority over transactions.

Not a fool proof or sustainable business. The business had been affected by Covid-19 which for the first half of FY21 the company showed less to no profits.

Discrepancies

  • The Order book compared with the previous year revenue is meaningless as the business operations were disrupted and the revenue collection cycle is high, comparison of order book with a base year of normal business activity would be fair.
  • Brokers have been almost neutral on the issue (9/19).