Reblog: Bharat Dynamic IPO review

Bharat Dynamics Ltd. (BDL) is one of the leading defense PSUs in India engaged in the manufacture of Surface to Air missiles (SAMs), Anti-Tank Guided Missiles (ATGMs), underwater weapons, launchers, countermeasures and test equipment. It is the sole manufacturer in India for SAMs, torpedoes, ATGMs and also the sole supplier of SAMs and ATGMs to the Indian armed forces. Additionally, it is also engaged in the business of refurbishment and life extension of missiles manufactured. BDL is also the co-development partner with the DRDO for the next generation of ATGMs and SAMs. It currently has three manufacturing facilities located in Hyderabad, Bhanur and Vishakhapatnam. BDL enjoys Mini Ratna (Category – 1) status.

Off late Foreign Direct Investment (FDI) rates have increased in sectors like defense, insurance and other sectors. Under the ambit of the ‘Make in India’ initiative, investment procedure, license applications, declarations and other processes has been streamlined to boost investor confidence. Applications for permits have been digitized and a new uniform tax regime (Goods & Services Tax) has been implemented to reduce complexity in taxation. The nation also has a vibrant micro, medium and small enterprise (MSME) sector to support manufacturing units set up in India. The MSME sector is expected to perform a vital support function to the manufacturing sector and will be crucial to India’s agenda to raise the share of manufacturing in India’s GDP from 16% to 25% by the end of 2025. The central government, as well as state governments, are also trying to incentivize domestic and foreign players to ramp up defense manufacturing in India through a combination of tax benefits, infrastructure incentives, and other methods. The Indian defense market is in a state of transition, as a result of new policies promulgated by the government. BDL is in the process of setting up to new plants – one at Hyderabad, AP and another at Amaravati – Maharashtra.

The three services have several modernization plans underway, some of which have been delayed. The Indian government seeks to address this through the new Defense Procurement Policy (DPP) 2016, which seeks to streamline procurement and give more leeway to suppliers, opening up Foreign Direct Investment, allowing single vendor participation for tenders, and initiating a “Strategic Partner” model.

To dilute Government holding and listing benefits, BDL is coming out with a maiden IPO of 22451953 equity shares of Rs. 10 each by an offer for sale (OFS) via book building route with a price band of Rs. 413 – 428 per share to mobilize Rs. 927.27 – Rs. 960.94 cr. based on lower and upper price bands. The issue opens for subscription on 13.03.18 and will close on 15.03.18. It has reserved 458203 shares (0.25% of the issue) for eligible employees. The company is offering a discount of Rs. 10 per share to Retail investors and eligible employees. Minimum application is to be made for 35 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. Issue constitutes 12.25% of the post issue paid-up capital of the company. BRLMs to this offer are SBI Capital Markets Ltd., IDBI Capital Markets & Securities Ltd., and Yes Securities (India) Ltd. Alankit Assignments Ltd. is the registrar to the issue. Its entire equity is issued at par. It has also issued bonus shares in the ratio of 1 for 4 in November 2016 and 1 for 1 in February 2018. It has bought back few shares at in the price range of Rs. 115.28 and Rs. 147.49 per share in March 2016 and September 2017 respectively. Being OFS, its equity post issue remains same at Rs. 183.28 cr.

On the performance front, BDL has posted turnover/net profits of Rs. 3253.23 cr. / Rs. 443.55 cr. (FY15), Rs. 4601.38 cr. / Rs. 562.07 cr. (FY16) and Rs. 5198.07 cr. / Rs. 490.32 cr. (FY17). Despite the higher turnover, it has posted lower net for FY17 and the first half of current fiscal due to a fall in other income as due to buybacks in last 4 years, its cash surplus reduced affecting interest income. For the first half of the current fiscal ended on30.09.17, it has earned a net profit of Rs. 172.59 cr. on a turnover of Rs. 2190.25 cr. For last three fiscals, it has posted an average EPS of Rs. 19.40 and an average RoNW of 25.67% on the basis of fully diluted current equity. The issue is priced at a P/BV of 4.81 based on its NAV of Rs. 88.96 as on 30.09.17 (on fully diluted current equity). If we annualize latest earnings and attribute it to its post-issue equity then asking price is at a P/E of around 23. It has no listed peers to compare with. Company’s current order book as of January 31, 2018 is Rs. 10543 crore.

On BRLMs’ front, the three merchant bankers associated with the offer have handled 26 public issues in the past three years out of which 7 issues closed below the issue price on listing date.

Conclusion / Investment Strategy
Although defense sector is in the transition mode with opening up of the sector for private players and FDI liberalization, considering status enjoyed by the company coupled with its track record and the order book position, investors may consider investment for long term.

The original review is penned by Dilip Davda, appears on and is available here.

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