Paras Defence And Space Technologies coming with an IPO to raise upto Rs 179 crore

Paras Defence And Space Technologies

• Paras Defence And Space Technologies is coming out with a 100% book building; initial public offering (IPO) of 1,02,45,702 shares of Rs 10 each in a price band Rs 165-175 per equity share.
• Not more than 50% 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 35% for the retail investors.
• The issue will open for subscription on September 21, 2021 and will close on September 23, 2021.
• The shares will be listed on BSE as well as NSE.
• The face value of the share is Rs 10 and is priced 16.50 times of its face value on the lower side and 17.50 times on the higher side.
• Book running lead manager to the issue is Anand Rathi Advisors.
• Compliance Officer for the issue is Ajit Sharma. 
  

Profile of the company

The company is an Indian private sector company engaged 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 Manufactured’(IDDM) category private sector companies in India, which caters 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. It is also the sole Indian supplier of critical imaging components such as large size optics and diffractive gratings for space applications in India.

The company has five principal categories of product offerings: defence and space optics, defence electronics, EMP protection, heavy engineering for defence and niche technologies. 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. The company has 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.

Proceed is being used for:

• Purchase of machinery and equipment.
• Funding incremental working capital requirements of the company.
• Repayment or prepayment of all or a portion of certain borrowings/outstanding loan facilities availed by the company.
• General corporate purposes.

Industry overview

Global defence spending touched $ 1.98 trillion in 2020, which was an increase of 2.6% over such corresponding spending in 2019. The five largest spenders, accounting for 62% of the total global spend, were the United States, China, India, Saudi Arabia and Russia. Rise in geopolitical disputes, such as the on-going flare up between the United States and China, was the major reason fuelling this increase in spending. The defence budget has 4 main components: MoD (Civil), Defence Services Revenue, Capital Outlay on Defence Services, and Defence Pensions, and not all of it is available to the defence industry participants. Examination of the allocation for different code heads for defence budget of FY 2022 ($ 64.62 B). The Indian defence modernisation has faced delays and cancellations due bureaucratic inefficiency in the past, which has led to reduced and obsolete inventory. The current situation is untenable in face of the increased geo-political uncertainty. Frost expects that the modernisation program will be given due priority in the next decade. Frequent delays in acquisition, cancellation of programs, and limited capital and revenue budget compared to the size of the armed forces have led to low level of equipment across the Army, Navy, and Air Force.

The Indian Army’s modernization effort has been lagging behind the other two services and many projects are expected to be realized over the next 3-7 years. The major indigenous defence platforms being developed for the Indian Army are Arjun MKIII, Abhay Infantry Fighting Vehicle (IFV) and TATA Kestrel. For air operations, 36 Rafale fighter aircraft were recently procured and there are immediate plans to acquire 100 additional fighter aircraft under the strategic partnership model. This is over and above the additional procurement of 83 indigenous Tejas Mk1 A aircraft. Recently, the IAF and Army have also processed procurement of AH-64 Apache and Chinooks from Boeing. The Indian Navy’s modernization plan has had success in integrating anti-submarine, anti-missile, support and communication capabilities. The current focus is extensively on submarine recapitalization and anti-submarine warfare in order to match Chinese naval capabilities.

Pros and strengths

Offer wide range of products and solutions for both defence and space applications: The company offers a wide range of products and solutions for defence as well as space applications. As of June 30, 2021 it has a range of 34 different categories of products and solutions, with multiple variations in each category. The company is a leading IDDM category private sector company in India which caters to four major segments of Indian defence sector i.e. defence optics, defence electronics, EMP protection solution and heavy engineering offering one -stop solution to all its customers. Most other companies specialize only in one or two segments. Its wide range of products and solutions catering to specific customer needs enable it to successfully service core strategic sectors in India such as defence and space in India. This allows company’s customers to source most of their requirements from a single vendor and enables it to expand its business from its existing customers base, as well as address a larger base of potential customers.

Strong R&D capabilities with focus on innovation: The company place strong emphasis on R&D which has helped it develop a wide range of products and solutions in the defence and space sector. It has invested in precision manufacturing infrastructure and human resource in its dedicated R&D centres located at Nerul in Navi Mumbai, Maharashtra, and Bengaluru, Karna taka. Its R&D centre at Nerul is recognised by and registered with DSIR. As of June 30, 2021, it has employed 31 engineers and officers at its R&D centres. Its partnership with some of the leading and proven overseas technology companies around the world, also provides an added impetus to R&D. It has had several significant achievements in R&D. For instance, it has successfully developed and delivered remotely controlled surveillance and defence systems recently which will enhance its defence capabilities.

Strong relationships with diverse customer base: The company has a diversified customer base which ranges from Government arms and government organizations involved in defence and space research, to various defence public sector undertakings such as Bharat Dynamics, Bharat Electronics and Hindustan Aeronautics, to various private entities such as Tata Consultancy Services, Astra -Rafael Comsys Pvt. Ltd., Solar Industries India, Alpha Design Technologies, etc. It also service international customers including Advanced Mechanical and Optical Systems (AMOS), Belgium, Chaban (Israel), Tae Young Optics Company (South Korea), and Green Optics (South Korea). Its established heritage of experience in designing, developing and manufacturing components for diverse customers in defence and space sector, has enabled it to develop a deep understanding of the sectors and customers’ requirement. Its partnership with overseas technology companies also enables it to serve as manufacturing partner for global customers of such companies.

It is one of few players in high precision optics manufacturing for space, defence application in India: The company is one of the few manufacturers in India with a comprehensive in-house capabilities of designing, developing and manufacturing optics for space and defence application in India. Its manufacturing facility in Nerul, Navi Mumbai has uniquely positioned company to cater to the demand for optics for space and defence application. It houses equipment and machinery, inter alia, for nano technology, machining, grinding, polishing and turning coupled with a robust testing set up for measuring the performance parameters of the optical components. Its in-house facilities include single point diamond turning machines, grinding and polishing machines for precision optics and large size space optics, optical thin film coatings with fully equipped metrology with contact and non-contact measurements. It has uniquely positioned itself to cater to demand from Government space organisation for optics in earth observation and space exploration missions.

Risks and concerns

Depends on contracts from GoI and associated entities: The company is involved in designing, developing, manufacturing and testing of a wide range of engineering products and solutions for defence and space applications. Consequently, its business is 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 (collectively, the GoI Entities). While there is an increase in the total defence and space allocations over a period of time, the level of defence and space spending and changes in the tax policies by the GoI in the future is difficult to predict and may be impacted by numerous factors such as the evolving nature of the national security concerns, foreign policy, domestic political environment and macroeconomic conditions. A 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 its business.

Depends on limited number of customers for significant portion of revenue: The company has in the past derived a significant portion of its revenue from limited number of customers and it may continue to derive a significant portion of its revenue from such customers. As its business is currently concentrated to a select number of customers, any adverse development with such customers, including as a result of a dispute with or disqualification by such major customers, may result in it experiencing significant reduction in its cash flows and liquidity. If its customers are able to fulfil their requirements through any of its existing or new competitors, providing products with better quality and / or cheaper cost, it may lose significant portion of its business. Additionally, consolidation of any of its customers may also adversely affect its existing relationships and arrangements with such customers, and any of its customers that are acquired may cease to continue the businesses that require products manufactured by it.

Significant working capital requirement: The company’s business requires significant working capital including in connection with its manufacturing operations, financing its inventory, purchase of raw materials and its development of new products which may be adversely affected by changes in terms of credit and payment. It is required to maintain a high level of workin g capital because its business activities are characterised by long product development periods and production cycles. Delays in payment under on-going contracts or reduction of advance payments due to lower order intake or inventory and work in progress increases and/or accelerated payments to suppliers, 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.

Operate in competitive business environment: The manufacturing of products and solutions for defence and space applications is competitive, and it experiences rapid technological developments and changes in customer requirements. Its ability to meet the qualification criteria in its various business areas is critical to being considered for any project. It competes on the basis of its ability to fulfil its contractual obligations including the quality of products and the timely delivery of the products. Additionally, while these are important considerations, price is a major factor in most tender / bid awards and its business is subject to intense price competition. Its competitors may have substantially greater financial, management, research and marketing resources than it has as a result of which they may be able to utilise their resources and economies of scale to develop improved products, divert sales away from it by winning broader contracts or hire its employees by offering more lucrative compensation packages.

Outlook

Paras Defence and Space Technologies are primarily engaged in the designing, developing, manufacturing, and testing of a variety of defence and space engineering products and solutions. The company has five major product category offerings - Defence & Space Optics, Defence Electronics, Heavy Engineering, Electromagnetic Pulse Protection Solutions, and Niche Technologies. It is the only Indian company with the design capability for space-optics and opto-mechanical assemblies and is one of the leading providers of optics for various Indian defence and space programs. The company also delivers customized turnkey projects in the defence segment. The company has partnered with some of the leading technology companies around the world to indigenize advanced technologies in the defence and space sectors for the Indian market. It places strong emphasis on R&D which has helped company develop a wide range of products and solutions in the defence and space sector. On the concern side, the products the company manufactures are highly complex, require technically advanced and costly equipment and involve hazardous materials. Besides, its operations are subject to risks inherent to the engineering and manufacturing industry, such as work accidents, storm, fire, tempest, earthquake, flood, inundation, explosions including hazards that may cause severe damage, including the physical destruction of property, breakdown of machinery and other force majeure events.

The issue has been offered in a price band of Rs 165-175 per equity share. The aggregate size of the offer is around Rs 169.05 crore to Rs 179.29 crore based on lower and upper price band respectively. On the performance front, the company’s revenue from operations decreased by 2.53% to Rs 1,433.30 million for Fiscal 2021 compared to Rs 1,470.43 million for Fiscal 2020. This decrease in revenue from operations was primarily due to disruption in supply chain and slowdown in India due to the Covid-19 pandemic. The company’s profit for the year decreased by 19.69% to Rs 157.86 million for Fiscal 2021 compared to Rs 196.57 million for Fiscal 2020. In order to grow its business, it intends to further diversify its products and solutions portfolio through R&D and partnering with overseas technology companies with specialized technologies in the field of defence and space sector. It also intends to enter into partnership agreements with experienced agents to explore business opportunities in new international markets.