IPO Note | Defence

Mar 09, 2018

Bharat Dynamics Ltd

sue Open: Mar 13, 2018

Issue Close: Mar 15, 2018

Incorporated in 1970, Bharat Dynamics Limited (BDL), a Government of India

(GOI) Enterprise under the Ministry of Defense (MOD) was established in

Hyderabad to be a manufacturing base for guided missiles and allied defense

Issue Details

equipment. BDL, a Miniratna Category-I Public Sector Unit (PSU), is amongst the

Face Value: `10

few industries in the world having capabilities to produce state-of-the-art guided

weapon systems.

Present Eq. Paid up Capital: `183.2cr

Healthy order book indicates strong revenue visibility: BDL current order book

Fresh issue: Nil

stands at `10,543cr, comprising the Akash Weapon System, LR SAM, MR SAM,

INVAR (3 UBK 20) ATGM and the Konkurs-M ATGM. This puts the revenue visibility

Post Eq. Paid up Capital: `183.2cr

for next two years at 2.2x (on FY17 revenues of `4,832cr). Going forward, the

strong order book will further help the BDL to boost its top-line.

Issue size (amount): `961cr

Offering wide Range of Products: BDL is one of the leading defence PSUs in India,

engaged in the manufacture of Surface to Air missiles, Anti Tank Guided Missiles,

Price Band: `413-428

under water weapons, launchers, counter measures and test equipment.

Lot Size: 35 shares and in multiple

Additionally, BDL is also involved in the business of refurbishment and life

thereafter

extension of missiles manufactured. BDL is co-development partner with the DRDO

Post-issue implied mkt. cap: *`7570cr -

for the next generation of ATGMs & SAMs, and capable of catering to India’s

**`7844cr

emerging guided missile and torpedo requirement.

Promoters holding Pre-Issue: 100.0%

BDL to benefit from Make in India initiative: The government’s new thrust towards

Promoters holding Post-Issue: 87.75%

Make in India seeks to fast-track defence procurements with indigenous

*Calculated on lower price band

manufacturing being given the highest priority. This would benefit the defence

players like BDL.

** Calculated on upper price band

Outlook & Valuation: In terms of valuations, the pre-issue P/E works out to 22.7x

Book Building

1HFY2018 annualized earnings (at the upper end of the issue price band), which is

QIBs

50% of issue

lower compared to BDL’s peers like Bharat Electron and Apollo Micro System

(trading at 33.6x and 40.7x of its 1HFY2018 annualized earnings respectively).

Non-Institutional

15% of issue

Further, BDL has a strong order book and revenue visibility, coupled with superior

Retail

35% of issue

return ratios compared to peers. Hence, considering the above positive factors

including growth in the defence industry, we recommend SUBSCRIBE on the issue.

Post Issue Shareholding Patter

Key Financials

Y/E March (` cr)

FY2015

FY2016

FY2017

1HFY18

Promoters

87.7%

Net Sales

2,841

4,079

4,833

1,806

Others

12.3%

% chg

43.6

18.5

Net Profit

444

562

490

173

% chg

26.7

(12.8)

OPM (%)

9.7

12.6

11.8

13.6

EPS (`)

24.2

30.7

26.8

9.4

P/E (x)

17.7

14.0

16.0

P/BV (x)

4.7

4.2

3.5

Amarjeet S Maurya

RoE (%)

26.8

30.4

22.2

+022 39357600, Extn: 6831

RoCE (%)

12.6

24.8

22.9

[email protected]

EV/Sales (x)

1.5

1.1

1.3

EV/EBITDA (x)

15.2

9.0

10.7

Angel Research; Note: Valuation ratios based on pre-issue outstanding shares and at upper end

of the price band

Please refer to important disclosures at the end of this report

Bharat Dynamics Limited | IPO Note

Company background

Incorporated in 1970, Bharat Dynamics Limited (BDL), a GOI Enterprise under the

MOD was established in Hyderabad to be a manufacturing base for guided

missiles and allied defence equipment. Nurtured by a pool of talented engineers

drawn from DRDO and aerospace industries, BDL began its journey by producing

the 1st Generation Anti -Tank Guided Missile (ATGM) - the French SS11B1. On

successful completion of the SS11B1 project, BDL embarked on production of 2nd

generation ATGMs - the French MILAN-2 and Russian Konkurs. Currently BDL has

been working closely with both the end-user and the OEMs in the upgradation of

ATGMs to the class of tandem warhead ATGMs. The lead taken by the Nation to

develop indigenous, sophisticated and contemporary missiles through the

Integrated Guided Missile Development Program (IGMDP), gave BDL an

opportunity to be closely involved in the program, wherein it was identified as the

Prime Production Agency.

Exhibit 1: Journey of the company

Source: Company, Angel Research

Mar 09, 2018

Bharat Dynamics Limited | IPO Note

Issue details

BDL is raising ~`961cr through offer for sale of equity shares in the price band of

`413-428. The company will dilute 12.3% (at upper price band) of its post-offer

paid-up equity share capital.

Exhibit 2: Pre and Post IPO shareholding pattern

No of shares (Pre-issue)

% No of shares (Post-issue)

Promoters

18,32,81,250

100.0%

16,08,29,297

87.7%

Others

2,24,51,953

12.3%

18,32,81,250

100.0%

18,32,81,250

100.0%

Source: Source: RHP, Note: Calculated on upper price band

Note: A discount of `10 per equity share is offered to Retail Investors & Employees.

Objectives of the Offer

Company’s objectives of the offer are:

 to achieve the benefits of listing the Equity Shares on the Stock Exchanges.

 general corporate purposes

Outlook & Valuation

In terms of valuations, the pre-issue P/E works out to 22.7x 1HFY2018 annualized

earnings (at the upper end of the issue price band), which is lower compared to

BLD’s peers like Bharat Electron and Apollo Micro System (trading at 33.6x and

40.7x its 1HFY2018 annualized earnings respectively). Further, BDL has a strong

order book and revenue visibility, coupled with superior return ratios compared to

peers. Hence, considering the above positive factors including growth in the

defence industry, we recommend SUBSCRIBE on the issue.

Key Risks

 Delay in order inflow or execution of current order book can impact both

the top-line and bottom-line.

 Increase in competition from other players can impact the business of

BDL.

Mar 09, 2018

Bharat Dynamics Limited | IPO Note

Income Statement

Y/E March (` cr)

FY2015

FY2016

FY2017

1HFY18

Total operating income

2,841

4,079

4,833

1,806

% chg

43.6

18.5

Total Expenditure

2,566

3,566

4,265

1,561

Raw Material

2,000

2,818

3,222

1,132

Personnel

312

326

448

222

Others Expenses

253

421

594

206

EBITDA

275

513

568

245

% chg

86.7

10.7

(% of Net Sales)

9.7

12.6

11.8

13.6

Depreciation& Amortization

EBIT

208

460

506

215

% chg

120.9

10.0

(% of Net Sales)

7.3

11.3

10.5

11.9

Interest & other Charges

Other Income

439

385

230

(% of PBT)

68.2

45.7

31.4

26.0

Share in profit of Associates

Recurring PBT

644

841

732

288

% chg

30.6

(13.0)

Tax

200

279

242

115

(% of PBT)

31.1

33.2

33.0

40.1

PAT (reported)

444

562

490

173

% chg

26.7

(12.8)

(% of Net Sales)

15.6

13.8

10.1

9.6

Basic EPS (`)

24.2

30.7

26.8

9.4

Fully Diluted EPS (`)

24.2

30.7

26.8

9.4

% chg

26.7

(12.8)

Source: Company, Angel Research

Mar 09, 2018

Bharat Dynamics Limited | IPO Note

Exhibit 3: Balance Sheet

Y/E March (` cr)

FY2015

FY2016

FY2017

1HFY18

SOURCES OF FUNDS

Equity Share Capital

115

122

Reserves& Surplus

1,538

1,753

2,090

1,539

Shareholders’ Funds

1,653

1,851

2,212

1,631

Total Loans

Deferred Tax Liability

Total Liabilities

1,653

1,870

2,212

1,631

APPLICATION OF FUNDS

Net Block

525

698

767

760

Capital Work-in-Progress

135

125

130

176

Investments

Current Assets

7,689

8,738

7,546

7,148

Inventories

1,476

2,058

2,251

2,159

Sundry Debtors

335

145

356

130

Cash

3,669

3,242

1,738

1,311

Loans & Advances

Other Assets

2,204

3,286

3,194

3,541

Current liabilities

6,759

7,771

6,388

6,654

Net Current Assets

930

967

1,158

493

Deferred Tax Asset

155

197

Total Assets

1,653

1,870

2,212

1,631

Source: Company, Angel Research

Mar 09, 2018

Bharat Dynamics Limited | IPO Note

Exhibit 4: Cash Flow Statement

Y/E March (` cr)

FY2015

FY2016

FY2017

1HFY18

Profit before tax

644

841

732

288

Depreciation

Change in Working Capital

(747)

(61)

(506)

754

Interest / Dividend (Net)

Direct taxes paid

(220)

(278)

(335)

(148)

Others

(347)

(275)

(50)

Cash Flow from Operations

(599)

284

(23)

876

(Inc.)/ Dec. in Fixed Assets

(291)

(216)

(136)

(70)

(Inc.)/ Dec. in Investments

354

365

139

Cash Flow from Investing

149

(4)

Issue of Equity

Inc./(Dec.) in loans

(199)

(451)

Dividend Paid (Incl. Tax)

(61)

(125)

(124)

(1)

Interest / Dividend (Net)

(42)

Cash Flow from Financing

(61)

(324)

(166)

(451)

Inc./(Dec.) in Cash

(598)

109

(186)

420

Opening Cash balances

722

124

233

Closing Cash balances

124

233

466

Source: Company, Angel Research

Mar 09, 2018

Bharat Dynamics Limited | IPO Note

Exhibit 5: Key Ratios

Y/E March

FY2015

FY2016

FY2017

Valuation Ratio (x)

P/E (on FDEPS)

17.7

14.0

16.0

P/CEPS

15.4

12.7

14.2

P/BV

4.7

4.2

3.5

Dividend yield (%)

0.0

EV/Sales

1.5

1.1

1.3

EV/EBITDA

15.2

9.0

10.7

EV / Total Assets

2.5

2.8

Per Share Data (`)

EPS (Basic)

24.2

30.7

26.8

EPS (fully diluted)

24.2

30.7

26.8

Cash EPS

27.8

33.6

30.1

Book Value

90.2

101.0

120.7

Returns (%)

ROCE

12.6

24.8

22.9

Angel ROIC (Pre-tax)

(10.3)

(33.0)

107.3

ROE

26.8

30.4

22.2

Turnover ratios (x)

Inventory / Sales (days)

190

184

170

Receivables (days)

Payables (days)

120

113

Working capital cycle (ex-cash) (days)

167

Source: Company, Angel Research

Mar 09, 2018

Bharat Dynamics Limited | IPO Note

Research Team Tel: 022 - 39357800

E-mail: [email protected]

Website: www.angelbroking.com

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Mar 09, 2018