Bharat Dynamics IPO – Should you Invest in this IPO?
Long awaited Bharat Dynamics IPO would open for subscription on 13th March, 2018. Bharat Dynamics is one of the leading defence PSUs in India. It is Mini Rathna (Category-1) categorised by GOI. Govt of India is going to divest some of its stake through this IPO. Bharat Dynamics revenues grew by 1.6 times in the last 2 years. What are the positive factors in Bharat Dynamics Limited IPO? What are some of the hidden factors in Bharat Dynamics IPO? Should you invest in Bharat Dynamics IPO when stock markets are taking correction? Let me provide some insights about this IPO and do the review.
About Bharat Dynamics Ltd
They are one of the leading defence 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. They are the sole manufacturer in India for SAMs, torpedoes, ATGMs. They are also the sole supplier of SAMs and ATGMs to the Indian armed forces. Additionally, they are also engaged in the business of refurbishment and life extension of missiles manufactured. They are also the codevelopment partner with the DRDO for the next generation of ATGMs and SAMs.
They are a wholly-owned GoI company headquartered in Hyderabad and under the administrative control of the MoD, GoI and were conferred the 'Mini-ratna (Category -1)' status by the Department of Public Enterprises, GoI. Founded in 1970, they have over fits decades of experience in manufacturing missiles and countermeasures and its allied equipments.
Bharat Dynamics IPO Issue details
IPO opening date: 13-March-2018
IPO closure date: 15-March-2018
Face Value: Rs 10 per share
Issue price band: Rs 413 to Rs 428 per share.
Issue size: Approx. Rs 960 Crores on higher price band
IPO Lot size: 35 shares and 35 shares there-off
Minimum investment: Rs 14,630
Leading Managers: SBI Capital, IDBI Capital, Yes Securities
Listing: BSE / NSE
Objects of the Bharat Dynamics Limited IPO issue
Below are the objects of this IPO.
The objects of the Offer are
(i) To carry out the disinvestment of 22.45 Mn Equity Shares by the Selling Shareholder constituting 12.25% of Company’s pre-Offer Equity Share capital of the Company.
(ii) To achieve the benefits of listing the Equity Shares on the Stock Exchanges. Company will not receive any proceeds from the Offer and all the proceeds will go to the Selling Shareholder.
Who are Company Promoters?
Since Govt of India is the Promoter of the company, President of India is acting as Promoter through the Ministry of Defence. Promoter along with its nominees, currently holds 100% of the pre-Offer Equity Share capital of the Company.
Company Financials (reinstated)
1) The company generated revenue of Rs 3,253 Crores for the year ended Mar-15 and Rs 5,198 Crores for the year ended Mar-17. Revenues for 6 months ended Sep-2017 was Rs 2,190 Crores.
2) The company posted a profit of Rs 443.5 Crores for the year ended Mar-15 and profit of Rs 490.3 Crores for the year ended Mar-17. Profits for 6 months ended Sep-17 was Rs 172.5 Crores.
3) Its FY17 EPS is Rs 21.57 and 3 years average EPS is Rs 19.4 (after issuing 1:1 bonus on 15th February, 2018).
What are the key strengths of Bharat Dynamics Limited?
Here are the key strengths of the company.
1) Modern facilities and infrastructure to deliver quality products in a timely manner.
2) Increase in indigenisation of its products and implementation of the “Make in India” policy.
3) Quality control of its products.
4) Strong order book and established financial track record of delivering growth.
5) Experienced board and senior management team.
What are the Strategies of Bharat Dynamics Ltd?
Here are the key strategies of the company.
1) Continue to invest in infrastructure.
2) Focus on R&D.
3) Developing new products.
4) Provide its product offerings to the international market.
Reasons to invest in Bharat Dynamics IPO
1) Its revenues grew from Rs 3,253 Crores in FY15 to Rs 5,198 Crores in FY17 which indicates strong revenue growth in the last 2-3 years.
2) Good opportunity to invest in leading defence PSU / Mini Rathna in India.
3) IPO is available at cheap price
4) Retail investors and employees of Bharat Dynamics would get Rs 10 discount on the share price.
Risk Factors / Reasons not to invest in a Bharat Dynamics IPO
1) Profits are on declining trend in the last 3.5 years.
2) They are primarily dependent on a single customer, the Indian armed forces through the Ministry of Defence, Government of India. 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 or the Indian armed forces in the future will have a material adverse impact on its business, financial condition, and results of operations, growth prospects and cash flows.
3) As a result of national security concerns, certain information in relation to its business and operations is classified as ‘secret and confidential’ pursuant to which we have not disclosed such information in this RHP nor provided such information to the BRLMs and other intermediaries and advisors involved in this Offer.
4) Its business operations are based out of three units in Telangana and Andhra Pradesh. The loss of, or shutdown of, its operations at any of its units in Telangana and Andhra Pradesh will have a material adverse effect on its business, financial condition and results of operations.
5) Its future growth and expansion is limited by its production capacities, the requirements of the MoD and the locations at which we operate.
6) We derive its revenues from the MoD contracts on the achievement of certain milestones. its contracts with the MoD are subject to termination.
7) Imposition of liquidated damages and invocation of performance bank guarantees / indemnity bonds by its customers could impact its results of operations and we may face potential liabilities from lawsuits and claims by customers in the future.
8) They are subject to a number of procurement rules and regulations of the MoD, Government regulations and other rules and regulations. its business and its reputation could be adversely affected if we fail to comply with applicable rules.
9) They are continuously dependent on its key original equipment manufacturers (“OEM”) for subassemblies / components, single sitsce suppliers and sub-contractors. Any failure on the performance of any of them could have a material impact on its operations.
10) Its operating and financial performance may be adversely affected by lack of or delays in the award of long-term contracts or cancellation/ modification of existing contracts
11) They manufacture and service products that incorporate advanced technologies. The introduction of new products and technologies involves risks and they may not realize the degree or timings of benefits initially anticipated.
12) They incur and expect to continue to incur research, design and development costs, which may not lead to satisfactory returns or to successful new products in line with changing market demand.
13) They may fail to enhance its market position by failing to improve its research and development capabilities, access new markets and develop new relationships which complement its existing business operations which may have an adverse impact on its business, financial condition and results of operations.
14) There are outstanding legal and tax proceedings involving the Company. Any adverse decision in such proceedings may expose them to liabilities or penalties and may adversely affect its business, financial condition, results of operations and cash flows.
15) Other risk factors (Internal and external) can be viewed in the red hearing prospectus (RHP).
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Recommendation / Investment strategy – Bharat Dynamics IPO
On the upper price band of Rs 428 and on restated FY17 EPS of Rs 21.57, P/E ratio works out to 19.8x. Even based on last 3 years restated EPS of Rs 19.4, P/E ratio works out to 22x. Means, company is asking higher price band of Rs 428 in the P/E ratio of 19.8x to 22x. There are no listed peers. If we consider 22x P/E in general, the IPO price can be considered as fully priced.
Company posted strong revenue growth in the last 3.5 years. Its IPO price is fully priced. However, its margins are on declining trend. Considering the brand of Mini Rathna and all other positive factors, investors can invest in this IPO for 2-3 years tenure. Investors may or may not get listing gains.
Disclaimer: I have an interest in investing in this IPO. The idea of giving positive and negative factors to investors in this article is to create awareness and education about this IPO. One should NOT constitute this as investment advice to buy or not to buy. Please consult your investment advisor before you invest in such high risk investment options.
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Bharat Dynamics IPO – Should you Invest in this IPO