Bharat Dynamics Ltd.’s Akash Weapon System, manufactured by the Defence Research and Development Organization, on display during the Aero India air show in Bengaluru. (Photographer: Dhiraj Singh/Bloomberg)  

Bharat Dynamics IPO: Here’s All You Need To Know

Bharat Dynamics Ltd.’s initial public offering opens today as the government looks to part-sell its stake in the missile maker to raise up to Rs 960 crore.

The government will sell 2.24 crore shares, or 12.25 percent stake, at Rs 413-428 apiece in the three-day offer.

Also Read: Busiest Week For Primary Markets Since Oct. 30

Business

Bharat Dynamics, housed under the Ministry of Defence, is a Miniratna. It manufactures surface-to-air and anti-tank guided missiles, underwater weapons, launchers, counter-measures and test equipment, giving it nearly 54 percent share in India’s missile market. The company is the sole supplier of surface-to-air and anti-tank guided missiles to the Indian Army and it generates nearly all of its revenue from it.

The Hyderabad-headquartered company has three facilities in Hyderabad, Bhanur and Vishakhapatnam. It’s setting up two more in Maharashtra and Telangana.

The company generates revenue from two types of product categories—manufactured and traded.

Manufactured includes products make by the company, while traded comprises ancillary systems sold along with its own equipment.

The company had an order book of Rs 10,543 crore as of Jan. 31, providing a revenue stream over two years. The company, according to ICICI Direct, is likely to receive orders worth up to Rs 25,000 crore for long- and medium-range surface-to-air missiles and very short-range air defence missiles in the next five years.

Financial Highlights

  • Bharat Dynamics’ net worth, as of Sep. 30, stood close to Rs 1,631 crore, translating into a book value of Rs 89 per share. As of Sept. 30, it had more than Rs 1,300 crore in cash.
  • Bharat Dynamics’ revenue has been growing at an annualised rate of 39 percent, while its net profit grew at 11 percent in four years through March 2017.
  • For the first half-year ended September, revenue and net profit stood at Rs 1,806 crore and Rs 173 crore, respectively .
  • Earnings before interest, tax and depreciation and amortisation grew at a CAGR of 90 percent, while Ebitda margins expanded by more than 700 basis points in the last four years to 11.8 percent.
  • For the first half year ended September, Ebitda and Ebitda margin stood at Rs 245 crore and 13.6 percent.
  • The company’s other income, mainly comprising interest income, declined sharply, resulting in a fluctuating bottom line.
  • Bharat Dynamics is debt-free and paid dividend consistently over the last five years.
  • Return on equity has been declining, but other return ratios remained healthy.

Private Competition

Bharat Dynamics is one of the nominated production agencies of the government. With the advent of private players, the company might face stiff competition.

Valuations

  • Earnings per share for 2017-18 on an annualised basis works out to Rs 19 and at the upper end of the price band, translating into a price-to-earnings multiple of 22.7 times, according to BloombergQuint’s calculations.
  • BEML Ltd. and Bharat Electronics Ltd. are not direct rivals but government-owned suppliers of different products to the same client—Indian Army. BEML is in losses.

Brokerage Take

Angel Broking

  • Valuations are lower compared to peers like Bharat Electronics and Apollo Micro System.
  • Bharat Dynamics has a strong order book and revenue outlook, coupled with superior return ratios compared to peers.
  • Recommend ‘Subscribe’ on the issue considering the positive factors, including the growth in defence industry.

ICICI Direct

  • The company has a robust order book, a strong order outlook, best-in-class execution capabilities and a leverage-free balance sheet.
  • The stock is being offered at reasonable valuations.
  • Recommend ‘Subscribe’ for the long term.

Prabhudas Lilladher

  • Don’t expect listing gains
  • Investors with a long-term view can ‘Subscribe’ given the potential for missile procurement in India over the next decade.

Motilal Oswal

  • The company has a dominant position as a government-owned defence enterprise
  • Strong return ratios, negative working capital management, strong growth track and superior balance sheet (debt-free) are a positive.
  • Recommend ‘Subscribe’
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