by Welcome to Traders Ideology, where you learn how to invest in the stock market and create wealth. In this article, we will discuss the Fundamental Analysis of Paras Defence and Space Technologies Limited. We will discuss its business model, company financials also we will study its valuations, and at the end, we will check if stock is available at a good level to buy.
Disclaimer: This article is only for educational purposes. I do not recommend buying or sell so please consult your advisor and do your own research before investing.
Also Read: Fundamental Analysis of Newgen Software & Fundamental Analysis of Happiest Minds
Introduction
Paras Defence And Space Technologies 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 the Indian defence sector i.e. defence and space optics, defense 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 defense and space programs, and the only Indian company with the design capability for space-optics and optomechanical assemblies.
Its defence electronics operations include providing a wide array of high-performance computing and electronic systems for defence applications, including subsystems 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 nanotechnology machining center for producing high-quality optics and ultra-precision components and is engaged in the manufacturing of Optics, Design, Development, Manufacturing, and Integration of Electronics and EMP protection products and solutions.
Fundamental Analysis of Paras Defence and Space Technologies Limited
Fundamental Analysis of Paras Defence and Space Technologies Limited are as follows:
First, let’s know how the company has used its IPO money yet. Use of funds raised through company’s IPO:
- To purchase machinery and equipment.
- To fund the working capital requirements.
- To reduce their debt &
- For the general corporate purpose.
Company Overview
Now let’s discuss the overview of the business of the company and discuss in which fields the company operates.
Paras Defense and Space Technologies Limited is an Indian private sector company engaged in defense and space engineering products and solutions’ designing, developing, manufacturing, and testing.
The company offers five primary products.
The company offers five primary products are as follows:
Defense and Space Optics
In this segment, the company is engaged in manufacturing high-end optics for Defense and Space applications such as Infrared lenses, Night vision cameras, Optical domes for missile systems, etc.
Defense Electronics
The second is Defense Electronics. In this vertical, the company provides a wide range of computing and electronic systems for defense applications.
EMP Protective Solutions
The third is EMP Protective Solutions. In this segment, the company is engaged in designing, developing, and manufacturing solutions for Electro-Magnetic Pulse (EMP) protection.
Heavy Engineering for Defense
The fourth is Heavy Engineering for Defense. In this vertical, the company provides mechanical manufacturing support for the rest of its business vertical. In addition, the company also provides heavy engineering products and solutions for defense equipment.
New Technologies
Lastly, New Technologies. In this vertical, the company sources technology from its exclusive partners and manufactures them for Indian and foreign clients.
Company Financials
- Now let’s talk about the company’s Financials and IPO details. This tale shows company’s financials and the figures are in crores.
- As you can see, there’s an increase in total assets of 20 crores. But total revenue and profit after tax are decreasing
- from the financial year 2020 to 2021.
- Total assets were 342.39 crores which came up to 362.76 crores in the financial year 2021. Talking about revenue,
- it was 149.05 crores in FY20. It decreased a bit to 144.61 crores in FY21. Profit after-tax showed declined
- As you can see 19.657 crores decreased to 15.786 crores in FY21. now let’s talk about the company’s financial ratios.
- The net profit margin is 10.92%. The operating profit margin is 30.89%. ROE is 7.64%. Earning Per Share is 5.55.
- PE ratio is 31.53. Compared to the industry PE ratio, it is 20.55. Debt to Equity is 0.45 which is quite manageable.
- Its 2year profit CAGR is -8.78%. Its 2year sales CAGR is -4.08%.
- Its IPO Opening Date is 21 Sept 2021. IPO Closing Date is 23 Sept 2021. The IPO price band is ₹165 to ₹175 per equity share.
- The lot size is 85 shares. Its Listing date is 1 Oct 2021. Its Issue size is ₹170.78 crores where
- The fresh issue is ₹140.60 crores. The offer for sale is ₹30.18 crores.
Revenue
- If we look at the revenue, it has been stagnant in the last 3 years, in FY 19, it was 144 crore and in FY 21 it was 157 crore, its profits are also stagnant from 15.7 crores to 18.9 crores.
- Hence, as far as growth is concerned in the last 3 years, the company’s revenue and profits have been stagnant.
ROE
- If you look at the Return on equity, it has been falling in the last 3 years.
- The Return on equity for FY 21 is 9.1%. It means the profitability is on the lower side.
Cash flow
- If you look at the cash flows, its cash flow from the operating activity was negative in FY 19 and FY 20. Now, that’s a red sign.
- The reason for negative cash flow is due to slow inventory turnover and very high receivable days, its inventory turnover to 281 days in FY 19, 305 days in FY 20, and 418 days in FY 21.
- Its trade receivables day was 197 days in FY 19, 239 days in FY 20, and 239 days in FY 21.
- Clearly, the inventory movement is very slow and the debtors are taking too long in paying the money, due to this the cash flow of the company is not good.
- Although the company expects the situation to improve in the future. In that case, the cash flow would improve.
Debt to Equity
Its debt to equity is 0.45 which is comfortable. Overall the financials for the last 3 years are not looking good.
Future Growth Prospects
- If you look at the future growth, the budget allocation by the Indian government in the 4 segments of defense where Paras Defence operates is expected to increase from approximately $3.21 billion in 2021 to over $14.5 billion by 2031. That’s more than 10 times in the next 10 years.
- Now that creates a huge growth potential for the companies in the defense sector. On top of that, the Indian Government has a strong focus on indigenous suppliers that is Indian companies making products in India.
- This is a part of the AATMA-NIRBHAR BHARAT initiative where the government wants to reduce dependency on foreign companies and want to promote local Indian companies.
- Not only that, under the Make in India initiative, the Indian government also want the Indian defense companies to become the global manufacturing hubs of weapons and military platforms.
- For example, the Department of Military Affairs has prepared a list of 101 items for which there would be an official ban on the Import. It means these products would only be sourced from local companies in India.
- Some of the products include EMP Racks, EMP filters used for protection of data, and power lines within a rack, shelter, room against electro-magnetic pulse or interference are currently manufactured by Paras Defence.
- Paras Defence is looking to encash this rising demand and defense sector for indigenous products and planning to expand its Nerul in Navi Mumbai to cater to the growing demand.
- The company is also collaborating with leading foreign technology companies in the defense sector to enhance its R&D capabilities. In addition, Paras Defence is also planning to diversify its products and solution range.
- For example, Paras anti-drone technologies aim to be one of the first indigenous anti-drone technology development companies in India and are currently collaborating with leading anti-drone technology firms to further develop its expertise in designing customer-specific modules. Its current order book by June 2021 stood at 304 crores.
Key Risk
- While there are bright growth prospects for Paras Defence, there is only one risk with the company.
- The majority of the business is dependent on the Indian government and its public sector undertakings.
- For example, BEL itself has a 15 to 18% contribution to the company’s revenue.
- Now, for a business, it is very very important to avoid dependency on a single customer.
- What if tomorrow the Indian government decided to reduce its budget allocation in the defense sector.
- As far as competitors are concerned, there is no listed competitor for Paras Defence whose portfolio matches with its business.
Strengths and Weaknesses
Strengths and Weaknesses are as follows:
Strengths
- India’s focus is to increase indigenous manufacturing capabilities,
- i.e, India wants to manufacture its defense equipment locally to reduce imports. Hence, good growth is expected in this sector.
- Paras Defense has a diversified customer base.
- Their customers are from Indian government organizations to public sector undertakings like Bharat Dynamics, Bharat Electronics, and Hindustan Aeronautics.
- Apart from this, the company has reputed clients in the Indian private space such as TCS, and Solar Industries India.
- Paras Defense also has international customers in Chaban (Israel), and Green Optics (South Korea).
Weaknesses
- The company has a high dependence on government entities as 50.84% of its revenue comes through them.
- Hence, the government of India has adverse effects on defense and space policies or to lower budget, the company’s business may be affected.
- Although the company’s financials are good their recent trend has been negative. In 2 years, the company’s sales and profit
- have been compounded at the rate of -4.08% and -8.78% i.e. both have decreased.
Conclusion
Overall if we conclude Fundamental Analysis of Paras Defence and Space Technologies Limited has an excellent business and its management, strong competitive advantage, and good financial and bright growth prospect which makes it a fundamentally good company.
It is currently available at a fair valuation due to correction in the market. What is your take on the Fundamental Analysis of Paras Defence and Space Technologies Limited have you invested in it do let me know in the comment box. I hope you find this analysis useful, and if yes please share it with your friends and family.
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