IPO Note: Bharat Dynamics Ltd-Not Rated

Issue Opens: March 13, 2018
Issue Closes: March15, 2018
Face Value: Rs10
Price Band: Rs413-428
Issue Size: ~Rs961cr
Public Issue: 2.25crore shares
Bid Lot: 35 Equity shares       
Issue Type: 100% Book Building

Source: RHP

Company Background

Bharat Dynamics Ltd. (BDL) is one of the leading defence public sector undertakings (PSUs) in India. It manufactures Surface to Air missiles (SAMs), Anti-Tank Guided Missiles (ATGMs), underwater weapons, launchers, counter measures and test equipments. BDL is the only manufacturer for SAMs, torpedoes, ATGMs in India. It also undertakes refurbishment and life extension of missiles. BDL has three manufacturing facilities located in Hyderabad, Bhanur and Vishakhapatnam. Its customers are the MoD (Ministry of Defence), other defence PSUs, government bodies under MoD and other countries.

Objective of the Offer

The offer consists of offer for sale of up to 2.25 cr shares (Rs961cr) by the government of India (GOI). It includes employee reservation of 4.58 lakh shares. There is a discount of Rs10per share (at the cut-off price) to the retail investors and employees. The net offer consists of ~ 2.2cr shares. The object of the offer is to carry out disinvestment plan of GOI.

Financials

Source: Company, 5 Paisa Research; *EPS & Ratios at higher end of the price band. **non-annualized numbers

Key Points

1. The company is developing new generation SAMs, ATGMs, and heavy weight torpedoes, which will support revenues. The company is also the joint development partner with the Defence Research and Development Organization (DRDO) for the next generation of ATGMs and SAMs. Further, the Ministry of Defence (MoD) has identified BDL as the production agency and the lead integrator for one of the new generation SAMs and the nominated agency for the third generation of ATGMs. We believe that development of new products will enable the company to diversify its offerings.
2. The company is being encouraged by GOI to augment its exports.  Currently, the company is exporting light weight torpedoes. Further, it intends to offer products such as Akash SAM, light weight torpedoes and countermeasure dispensing system for exports.
3. BDL constantly modernizes all its manufacturing facilities in order to cater to the needs of the Indian armed forces without any interruptions. In order to meet the growing demand, the company is establishing manufacturing facilities at Ibrahimapatnam and Amravati. These facilities will be used to manufacture SAMs (including a new generation of SAMs) and very-short-range air defence missiles (VSHORADMs) respectively.

Key Risks

1. BDL’s primary customer is MoD, from which the company derived 98.3%, 97.3%, of total revenue for H1FY18 and FY17 respectively. Therefore, a decline or reprioritization of the Indian defence budget, the reduction in their orders, termination of contracts or failure to succeed in tendering projects and deviations in the short term and long term policies of the MoD/ the Indian armed forces in the future will have a material adverse impact on its business. 
2. The company’s EBITDA margin has improved from 9.7% in FY15 to 11.8% in FY17, however, its net profits have grown tepidly at 5.1% CAGR (FY15-17). The major reason for slowdown in profits is decline in interest income, as the company had to pay regular dividends to GOI. As per CPSE Capital Restructuring Guidelines, all central public sector enterprises are required to pay a minimum annual dividend of 30% of profit after tax or 5% of the net-worth. Similarly, overall FY18 performance is projected to be subdued owing to technical issues in one of the manufacturing facilities which impacted its revenues for H1FY18. The order inflow has also been tepid at an average run rate of ~`2,000-2,500cr over the last 3-4 years.

Research Disclaimer