Bharat Dynamics Ltd IPO - Should you subscribe?

Arjuna : Lord Krishna..!! Bharat Dynamic Limited is going to hit the primary market? Should I apply or avoid?

Krishna : Arjuna, I will provide you facts and figures. Based on them, you have to decide whether you want to apply or avoid.

Arjuna : Noted.

Krishna : Arjuna, as a part of 72000 Crore disinvestment plan for Fiscal 2018, the GoI (Govt of India) has come up with IPO of BDL (Bharat Dynamics Ltd).  BDL is a wholly-owned GoI company headquartered in Hyderabad and under the administrative control of the MoD (Ministry of Defense), GoI and were conferred the 'Mini-ratna (Category -1)' status by the Department of Public Enterprises, GoI.

Arjuna : What does company do?

Krishna : 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. It is 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. It is also the co development partner with the DRDO for the next generation of ATGMs and SAMs.

Arjuna : What about manufacturing facilities? 

Krishna : The company has three manufacturing facilities located in Hyderabad, Bhanur and Vishakhapatnam. Its Hyderabad manufacturing unit is engaged in the manufacture of SAMs, Milan 2T ATGMs, countermeasures, launchers and test equipment. Its Bhanur unit is engaged in the manufacture of the Konkurs – M ATGMs, the INVAR (3 UBK 20) ATGMs, launchers and spares. Its Vishakapatnam unit is engaged in the manufacture of light weight torpedoes, the C-303 anti torpedo system, countermeasures and spares. The company is also in the process of setting up two additional manufacturing facilities at Ibrahimpatnam (near Hyderabad) and Amravati in Maharashtra which shall be used to manufacture SAMs and Very Short Range Air Defense Missiles (VSHORADMs) respectively.

Arunja : Hummm....I 've gained the little idea about the business. Can you please brief the issue details?

Krishna : Sure. My friend. Here it is.

Arjuna : I apply in Retail category. Retail allocation? Any idea?

Krishna : Yeah. 35% shares are reserved for Retail Investors after reducing Employees Reservation. Look at the table.

Arjuna : What is the object of the offer?

Krishna : As this is 100% Offer For Sale,  the objects of the offer are (i) to carry out the disinvestment of 2,24,51,953 Equity Shares by the selling shareholders constituting 12.25% of company's pre-offer equity share capital of the company and (ii) to achieve the benefit of listing the Equity Shares on the stock exchanges. The company will not receive any proceeds from the offer and all the proceeds will go to the selling shareholders.

Arjuna : 100% offer for sale are always risky, right? 

Krishna : Not necessary, neither can be ruled out completely.

Arjuna : Can you give me some statistics of revenue and profitability?

Krishna : Anything for you my dear friend, Arjuna. The Company has been making consistent profits since five years. Its revenue from operations and profit for the year has increased from 2840.82 Crore and 443.55 Crore respectively, in Fiscal 2015 to 4832.76 Crore and 490.32 Crore, respectively, in Fiscal 2017 at a CAGR of 30.43% and 5.14% respectively. The summary is given below:

Arjuna : What should I gauge out of this?

Krishna : Prima facie, the company seems fundamentally very strong.

Arjuna : Does share is fairly priced ? What is the PE at upper and lower price band?

Krishna : Look my friend, the company has set price range between Rs. 413 - Rs. 428 per share. The EPS as on March 31, 2017 is Rs. 21.57 (After adjustment of 1:1 bonus issue as on February 15, 2018). At lower and upper price band, PE Multiple ranges between 19.15 - 19.85.  The company is engaged in the business of manufacturing missiles. There are no listed peers in India which are engaged in the similar line of business. So, peer comparison is not possible. However, at this level of operations and having seen the consistent track record, price seems reasonable. From P/B Angle (Price / BV), the selling shareholders are asking the price which is 4.64 - 4.81 times of its book value as on September 30,2017 i. e. Rs. 88.96. From this point, valuation seems a at bit higher side.  

Arjuna : Is it paying dividend?

Krishna : Very much excited to reply. The company has been very liberal in declaring dividends so far. The company has been consistently paying dividend to its shareholders. In Fiscal 2017, it declared 128.87% dividend. Can you believe it? Should I repeat? The company declared 128.87% dividend in Fiscal 2017. Look at the trend in the given chart. 

But but but, mind you gentleman,  it cannot be guaranteed that the same liberal approach may continue in future as well. However, rest assured is that 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, whichever is higher, subject to the maximum dividend permitted under the extant legal provisions. I would rather say, declaration of dividend always depends on many others factors.

Arjuna : What about future?

Krishna : The company's current order book as of January 31, 2018 is 10543 Crore. The plate is already full. BDL founded in 1970, it has over four decades of experience in manufacturing missiles and countermeasures and its allied equipment. Further, NaMo Government's initiative to increase indigenization of products and implementation of the “Make in India” policy may further push the growth of the company. 'Mitro, mere pyaare desh vasiyo, mere desh ki missiles to mere desh me hi banegi, bhale hi wo fute na..'

Arjuna : Everything is positive ? 

Krishna : Wait my friend. I am finding RoNW has been on decreasing trend. Even the NAV has been decreasing. Ideally, that should not happen. Look at the table below.

Arjuna: Anything else which I should know?

Krishnna : Yes. The company primarily depends on a single customer i.e. MoD. It completely works under government control. The Government changes, things may change. Things may improve, things may worsen. Now a days, new types of scams are stemming up within the Government Undertakings. You may not know what can happen with any Government undertakings and BDL is no exception. I hope you've understood.

In such type of business, it takes a lot of time to complete the contract/project/assignment whatsoever received from the customer. There is always crores of rupees go waste on liquidated damages and cost overrun and they hit on debit side of P & L. It ultimately affects the profitability of the company. Nevertheless, PAT is always after considering all that though.

  

There are ten indirect tax litigations pending involving 404.31 Crore. Rs. 404.31 Crore is too much for 4832.76 Crore turnover company. And important thing is, pending litigations show your administrative inefficiencies.

Arjuna : Hmmmm...so what should I do? Apply or avoid?

Krishna : Ha..ha..ha...my friend. I told you before and I am telling you again, I give the information. It is you who has to decide. Its your hard earned money, so you have to take the call. I suggest to read more reviews, get more insights about the company, the IPO market. Many analysts and knowledgeable people write about the IPO, read them. Get the idea, feel the sentiments. Grey Market Premium can also give fair idea about the success or failure of any IPO. And top of that, rest can be done is when IPO opens for subscription, wait for first two days to vouch for subscription status, and then decide. Doesn't make sense?

Arjuna : Thank you my friend, Krishna....

Thank you for reading...Jai Hind

CA Prashant Seta

(Note : I write reviews based on my knowledge and understanding. Readers of this article should their own research before applying)

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