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Tuesday, 21 September 2021
CM RATING49/100
 

Paras Defence and Space Technologies

Defence and space optics play

Wide product offerings for niche space of optics as well as EMP

Paras Defence and Space Technologies is primarilyengaged in designing, developing, manufacturing and testing of a wide range of defence and space engineering products and solutions. It is one of the leading 'Indigenously Designed Developed and ManufacturedCompany' (IDDM)category private sector companiesin India with its product offerings catering to four major segments of Indian defence sector i.e. defence and space optics, defence electronics, electro-magnetic pulse (EMP) protection solution and heavy engineering for defence and niche technologies. It is also the sole Indian supplier of critical imaging components such as large size optics and diffractive gratings for space applications in India.

Its defence and space optics operations include manufacturing high precision optics for defence and space applications such as thermal imaging and space imaging systems. It is one of the leading providers of optics for various Indian defence and space programmes, and the only Indian company with the design capability for space-optics and opto-mechanical assemblies.

Its defence electronics operations include providing a wide array of high performance computing and electronic systems for defence applications, including sub systems for border defence, missiles, tanks and naval applications. It believe that its domain expertise in electronics for defence applications has allowed it to contribute to some of the most prestigious defence programmes of the country.

Its EMP protection solutions include designing, developing, manufacturing and commissioning various solutions for EMP Protection. It have the ability to undertake and deliver customized turnkey projects in the defence segment, especially in the defence electronics and EMP protection segments. It is one of the few companies with specialized technology capabilities such as manufacturing EMP protection and it is expected to be an integral stakeholder in a majority of future sourcing of defence and space optics and EMP protection solutions.

Its heavy engineering for defence operations involves providing heavy engineering products and solutions, such as components for rockets and missiles along with providing mechanical manufacturing support to other verticals of the business of the company. It specialises in high end manufacturing for defence and space applications and have been providing its customers with customised and exclusive mechanical products since inception.

Under the niche technologies division, the company have identified and partnered with some of the leading technology companies around the world in order to indigenise advanced technologies in the defence and space sectors for catering to the Indian market. This also affords the company an opportunity to serve as manufacturing partner for global requirements of such overseas technology companies.

The company currently have two manufacturing facilities in Maharashtra, located at Nerul in Navi Mumbai and Ambernath in Thane. Its Nerul facility is an advanced nano technology machining centre for producing high quality optics and ultra -precision components and is engaged in manufacturing of Optics, Design, Development, Manufacturing and Integration of Electronics and EMP protection products and solutions. The Ambernath facility is engaged in manufacturing of heavy engineering products such as flow-formed motor tubes, vacuum brazed cold plates, titanium structures and assemblies, large and heavy dynamic structures with built-in automation for strategic applications, indigenously designed and manufactured flow-forming machines and mechanicalracks, cabinets and consoles for various defence applications.

The company has strong R&D capabilities that include product design, product engineering, product simulation, prototyping and testing and is carried out at its centres at Nerul in Navi Mumbai, Maharashtra and Bengaluru, Karnataka. Its research activities are focused on creating new products and solutions which are customised to meet customer expectations and end-user preferences and improving its production processes and improving the quality of its existing products. With R&D capabilities, the company is currently developing several new products and solutions, such as hyper spectral space camera, ARINC-818 based avionic display, naval periscopes and optical solar reflectors.

Revenue highly dependent on projects and programmes undertaken by GoI and associated entities, such as defence public sector undertakings and government organizations involved in space research and GOI Entities together contributed about 50.84% of revenue in FY21, 28.75% in FY20 and 35.62% in FY19. The company though primarily cater to the requirements of the Indian market its export revenue from defence and space sector stands at 16.87% and 12.50% in FY21 and FY20.

Further, as part of growth strategy, it seek to expand into the UAV integration solutions and services segment. Paras Aerospace Private Limited aims to offer UAV integration solutions and UAV services for a wide range of applications such as agriculture, power transmission, oil and gas, mining and construction. The flagship product of Paras Aerospace Private Limited will be a Cloud based NPNT Solution (offered as software-as-a-service) and Indigenous Multispectral Camera for various applications including agriculture. Paras Anti-drone Technologies, another subsidiary will design sub modules and the company will be involved in integrating the solution. Paras Anti drone Technologies will create its own intellectual property and technical know-how in collaboration with the company. The company has also forged partnership with proven international player for make in India of defence and space products.

Offer and object of the issue

The Offer comprises of a freshissuance of Equity Shares aggregating up toRs140.6 crore and offer for sale of up to 17,24,490 Equity Shares. The offer for sale comprises sales of 1250000 equity shares by Sharad Virji Shah and 50000 equity shares by Munjal Sharad Shah the promoter selling shareholders. Balance portion of offer for sale comprise sale of 300000, 62245 and 62245 equity shares respectively by Ami Munjal Shah, Shilpa Amit Mahajan and Amit Navin Mahajan, the individual selling shareholders. Post issue the holding of promoter selling shareholders on expanded equity will come down to 18.65% and 25.28% for Sharad Virji Shah and Munjal Sharad Shah respectively.

The Company intends to utilize the net proceeds from the Fresh Issue towards purchase of machinery and equipment amounting Rs 34.657 crore, funding incremental working capital requirements amounting Rs 60 crore, repayment or prepayment of all or certain borrowings amounting Rs 12 crore and for general corporate purposes.

As of July 31, 2021, its aggregate outstanding indebtedness was Rs 115.827 crore.

Strenghts

The company is a leading IDDM category private sector company in India which caters to four major segments of Indian defence sector with wide range of products across defence optics, defence electronics, EMP protection solution and heavy engineering offering one -stop solution to all its customers. As of June 30, 2021, it has a range of 34 different categories of products and solutions, with multiple variations in each category. Its diverse products and solutions portfolio enables it to distribute its revenue across various verticals instead of excessive dependence on a particular product/vertical.

Order book of the company as of June 30, 2021, remains healthy at Rs 304.992 crore, which is 2.13 times of its FY21 consolidated sales. Of the order book about 66.4% is from defence & Space optics, 23.1% from defence electronics & EMP protection solutions and 10.4% is from Heavy Engineering for Defence. While the defence orders are not long term the space sector order are more long term.

The company is one of the few manufacturers in India with comprehensive in-house capabilities of designing, developing and manufacturing optics for space and defence application in India. With strong experience in working with Government space organizations on critical space missions and being the sole Indian supplier of diffractive gratings used in hyper-spectral imagers and infrared lenses, it has established itself well in the Indian space market. It also specialises in large-sized optical mirror and are the only Indian company with the design capabilities for space-optics and opto-mechanical assemblies. It is also the sole Indian supplier of diffraction gratings used in hyper-spectral imagers, large size optics. As a supplier to government organizations involved in space research, the company has been a part of most of the earth observation and space exploration missions since 2018. This positions it as one of the key participants of value for all exploratory and observatory missions involving large space telescopes.

Company's horizontal integration makes it well positioned to undertake turnkey projects in the defence sector while also being capable of supporting major tier 1 Indian defence suppliers. As one of the few companies with specialized technology capabilities such as EMP protection solutions, the company is likely to be an integral stakeholder in a majority of future programmes involving local sourcing of defense and space optics and EMP protection solutions.

Some of the products manufactured by the company such as EMP Racks, EMP filters used for protection of data and power lines within a rack / shelter / room against electro-magnetic pulse or interference are listed in the Import Embargo List of 110 items put out by Department of Military Affairs, Ministry of Defence. The Defence Acquisition Procedure which has come into effect from October 1, 2020, focuses on significantly boosting indigenous production and turning India into a global manufacturing hub of weapons and military platforms in alignment with the Aatmanirbhar Bharat mission of Government of India. The company with the expertise and technological know-how and strong R&D is poised to take advantage of the expected growth in India ’s defence industry.

At the domestic front, the Company's customer base ranges from government organizations involved in defence and space research to various defence public sector undertakings like Bharat Electronics Limited (BEL), Electronic Corporation of India Limited (ECIL) and Hindustan Aeronautics Limited (HAL); and supply products and solutions to private entities including Tata Consultancy Services Limited, Solar Industries India Limited and Alpha Design Technologies Limited. Its foreign customers include Advanced Mechanical and Optical Systems (AMOS), Belgium, Tae Young Optics Company Limited (South Korea), and Green Optics (South Korea) etc. Further, the company partner with international players such as Holland Shielding Systems BV Netherlands, HPS, Gmbh and Invent, Gmbh to provide its customers in India with products and technologies for defence and space applications.

The company have been and are currently associated with some of the critical projects in India and abroad.

Weakness

Most of contracts usually bagged by the company are fixed-price contracts and required the company to pay liquidated damages for delay in delivery and/or quality issues. The value of the liquidated damages typically ranges from 5% to 10% of the value of the contract. Thus any cost overruns, delays in delivery or failures to meet contract specifications may have an adverse effect on its business, financial condition and results of operations. For the Fiscals ended 2021, 2020 and 2019 the company have paid late delivery charges that was equivalent to 0.52%, 0.61% and 0.41%, of the revenue from operations for the respective Fiscals.

Growth of the company depend on its ability to qualify for and win bids undertaken by GoI Entities for awarding contracts. Moreover, its ability to win orders also depend on its ability to remain competitive as well as continued growth of the defence and space sector in India and timely tendering and awarding. The defence projects are known for long delays from time of programmed conceived or announced to awarding.

Considering heavy dependence on Indian defence and space sector any decline or reprioritisation of the Indian defence or space budget, changes in GoI Entities defence or space requirements and geo-political circumstances, reduction in orders, termination of existing contracts, delay of existing contracts or programmes will have a material adverse impact on the business of the company.

Top 5 customers accounted for about 59.6% and 72.27% of the revenue in FY21 and FY20 respectively. Considering higher customer concentration any loss of business by key customer or blacklisting by any of the key customer will impact the business of the company.

The business of the company involves high level of working capital as its activities was characterised by long product development periods and production cycles.

The company is yet to place orders worth Rs 27.932 crore which constitutes 80.59% of the total estimated cost in relation to the purchase of machinery and equipment relating to proposed expansion of Nerul and Ambernath facilities.

Its ability to complete projects in a timely manner and maintain quality standards is subject to performance of its sub-contractors. As on June 30, 2021, 53.37% of its total workforce was hired on contractual basis.

Optics operating margin is higher at 50% compared to 15-25 in case of Heavy engineering and electronics leading to swing in margin depending on revenue mix for the year.

Valuation

Sales for FY 2021 were down by 3% to Rs 143.33 crore and the decrease was primarily due to disruption in supply chain and slowdown in India due to the Covid-19 pandemic. With operating profit margin expand by 360 bps to 30.3%, the operating profit was up 11% to Rs 43.40 crore. Sharp jump in OPM is largely due to change in revenue mix with the contribution of optics stood higher at 45.3% compared to 34.8% in corresponding previous period. The share of defence electronics and heavy engineering stood at 28.3% and 26.4% for the year compared to 21.6% and 43.6% in corresponding previous period. After accounting for lower other income which was down 36% to Rs 1.28 crore, the PBIDT was up 8% to Rs 44.68 crore. The interest cost was up 27% to Rs 12.41 crore and deprecation was down 1% to Rs 9.65 crore. Thus, the PBT was up 4% to Rs 22.61 crore. After accounting for 220% jump in taxation, the PAT was down 20% to Rs 15.79 crore. Jump in taxation is largely as the company opt for tax rate under Section 115BAA of the Income Tax At and accordingly remeasured the deferred tax asset or liabilities based on the rate prescribed in the relevant section in This decrease was primarily due to the change in the tax regime where the Company has opted for the tax rate under Section 115BAA 247 of the Income Tax Act and accordingly remeasured the deferred tax asset or liabilities based on the rates prescribed in the relevant section in last year ended March 2020. The net profit after MI was down 20% to Rs 15.73 crore.

The EPS for FY2021 based on post issue expanded equity on higher price band was Rs 4 and thus the PE works out to about 43.8 times.

The company states there is no comparable peers with similar product profile. But companies catering to defence and space segment such as Bharat Electronics, Hindustan Aeronatics, Sika Interplant are quoting at a PE of 23.4, 14.2 and 19.8 times respectively.

Paras Defence and Space Technologies: Issue Highlights

Fresh Issue (in Rs Crore)

140.60

Offer for sale (in equity share nos.)

1724490

Price band (Rs.)

Upper

175

Lower

165

Post-issue equity (Rs crore)

in Upper price band

39.00

in Lower Price Band

39.49

Post-issue promoter (including promoter group) stake (%) #

59.71

Minimum Bid (in nos.)

85

Issue Open Date

21-09-2021

Issue Close Date

23-08-2021

Listing

BSE, NSE

Rating

49 /100

Paras Defence and Space Technologies: Re-stated Consolidated Financials

1903 (12)

2003 (12)

2103 (12)

Sales

154.40

147.04

143.33

OPM (%)

27.7

26.7

30.3

OP

42.83

39.27

43.40

Other income

2.77

2.01

1.28

PBIDT

45.60

41.28

44.68

Interest

9.39

9.77

12.41

PBDT

36.22

31.51

32.27

Depreciation

9.41

9.71

9.65

PBT

26.81

21.79

22.61

EO Exp

0.00

0.00

0.00

PBT after EO

26.81

21.79

22.61

Tax

7.84

2.14

6.83

PAT

18.97

19.66

15.79

Minority Interest

0.00

0.00

0.06

Net profit

18.97

19.66

15.73

EPS (Rs)*

4.9

5.0

4.0

* on post IPO expanded equity (on upper price band) of Rs 39 crore. Face Value: Rs 10

EPS is calculated after excluding EO and relevant tax

# EPS can not be annualised due to seasonality in operations

Figures in Rs crore

Source: Capitaline Corporate database