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Paras Defence IPO: Facts, Stats, Opportunities and Risks

Editor, TRANSFIN.
Sep 30, 2021 3:43 AM 4 min read
Editorial

Bucking the broader trend of IPO fatigue that was seemingly plaguing the capital markets, the ₹171cr ($23.22m) offer of Paras Defence & Space Technologies closed last Thursday with an oversubscription of 304 times - making it the most subscribed IPO in Indian market history.

In doing so, it beats Salasar Technologies (273x), Apollo Micro Systems (249x) and Astron Paper (242x). And as far as 2021 is concerned, Paras Defence’s offer trumps the MTAR Technologies IPO, which was oversubscribed 201x (and, incidentally, also engaged in the defence supplies business).


Fast Facts

  1. The offer includes a ₹140cr ($19m) fresh issue and a ₹30cr ($4m) OFS by the promoters.
  2. The IPO opened on September 21st and closed on September 23rd. The allotment status was announced on Tuesday while the listing date is October 1st.
  3. The price band was ₹165-175 ($2.24-2.37) per equity share.
  4. At the higher price band, the company sees a P/E multiple of 43.4x (based on its FY21 EPS).
  5. The shares enjoyed a strong GMP of ₹260 ($3.53) per share, 150% above the price band.
  6. The portion reserved for NIIs was subscribed 928x while the portions for retail and institutional investors were subscribed 113x and 170x respectively.
  7. Post-issue, the promoter holding will fall to 59.71% from 79.4%.
  8. The net proceeds of the issue are intended to be used for purchase of machinery and equipment, incremental working capital requirements, repaying certain borrowings, and general corporate purposes.
  9. Link to DRHP

 

About the Company

Navi Mumbai-based Paras Defence is engaged in the manufacturing of various defence and space engineering products and solutions. These include space optics, night-vision cameras, defence electronics, electro-magnetic pulse protection solutions, heavy engineering products, critical imaging components, etc.

The company has two manufacturing facilities in Navi Mumbai and Thane. Its customers include GoI, BEL, HAL and TCS. It also sells supplies to customers in South Korea, Israel and Belgium.

 

Macro and Money Matters

The company's revenues have remained around the same level in the last three fiscal years. And its overall financials have been rather muted. However, there are several macro-level tailwinds in the sector that might prompt an uptick in financials.

Paras Defence’s EBITDA margin was 26-30% between FY19 and FY21. The total debt on the balance sheet was ₹106cr ($14.4m) with its net debt-equity ratio at 0.6 in FY21 (vis-a-vis 0.7 in FY19).

  

Opportunities

The defence and space segments are both promising ones. Moreover, both these industries have high entry barriers, so new competition is not particularly a concern. (However, there are many large existing players including MTAR, Mahindra Defence, Larsen & Toubro, Godrej & Boyce etc.).

The space sector is poised for robust activity in the near-term. ISRO plans no less than 321 satellite missions in the next two years, including manned missions and ventures to the sun. Private sector involvement in the country’s space programme is also expected to jump in the next five years, with 70% of all upcoming space mission orders going to India Inc. Paras Defence is also the sole Indian supplier of critical imaging components such as large size optics and diffractive gratings for space applications.

The defence sector is equally promising. It is likely to reap the rewards of the Union Government’s Atmanirbhar Bharat and Make in India initiatives. Favourable policies include the Defence Acquisition Procedure, which focuses on significantly boosting indigenous production and turning India into a global manufacturing hub for weapons and military platforms. The Department  of  Military  Affairs has also  prepared  a  list  of  101  items  for  which  there  would  be  an  embargo  on  the  import (“Import  Embargo  List”). Some of these listed products, such as EMP racks and EMP filters, are manufactured by Paras Defence. Indian defence spending has been steadily on the up since 2000 growing at 11%+ CAGR and was estimated at $61bn in 2020. There’s also the drone sector, which was recently liberalised with the Drone Rules 2021

 

Risks

When it comes to risks, the company is overly dependent on GoI entities. In particular, revenue from its top five customers on a consolidated basis constituted 73.71%, 72.27%, 58.65% and 75.58% of the total consolidated revenue for 6MFY21, FY20, FY19 and FY18 respectively.

At the same time, the reducing fiscal allocation for defence and space spending might be a cause for some concern, considering the company’s reliance on Government orders. In this front, stronger macroeconomic trends in the coming fiscals might help the company’s margins, since this might encourage more state allocations for relevant orders.

Raw material supply disruptions are an ongoing worry, especially at a time when global supply chains remain delicate. Paras Defence was grossly affected by the COVID-19 pandemic since its early stages, given the reliance on imports from South Korea. Its revenue last year fell on account of non-completion of certain orders and non-inspection and lower number of visits/clearances by customers. Presently, while the economy has largely reopened and the vaccine rollout is picking up pace, a Third Wave and/or the emergence of new virus variants could prolong the pandemic and hurt the company's order book.

However, all said and done, investors seem to have placed strong bets on Paras Defence. The perception is that its strengths - which include a strong customer base and R&D capabilities, besides backing by Government policies and positive sectoral trends - far outweigh the perceived risks.

FIN.
 

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