Betting on Space [Part 3]: Paras Defence
In the previous two articles — I wrote about L&T, HAL, Centum Electronics and MTAR Technologies. These companies are not pure play space companies, and cater to various industries like Defense, Aerospace, Energy, Infrastructure and a few others.
So, buying into these companies gives you exposure to various industries. A few high growth ones like Defense and Aerospace. A few stable ones like Energy, Infrastructure and Transportation.
However — there are MANY other companies that could benefit from the growth in the space sector in India and the geek in me can’t get enough.
I have been following Paras Defence for quite some time now, and I thought this will be a good opportunity for me to take a deeper dive into the business and see if it is actually worth the hype.
#5 Paras Defence & Space Technologies
If you had applied to the IPO of Paras Defence and you’re still holding the stock, you’ve had one WILD ride. The stock was UP by 185% on the listing date [i.e. 01 October 2021] and delivered an almost 7X return in 21 days — backed by optimism (and euphoria) around defence and space stocks.
The stock then had a significant drop and still hasn’t touched the levels it saw in the first few weeks of October 2021, but if you’ve managed to hold onto the stock from the IPO price of INR 175 — you’re sitting on some sizable gains.
Goes on to show, that you cannot time the market. Unless you got insider information.
Well, they’ve captured their business in their name. It’s a private sector company — which means it’s not owned by the Government — primarily engaged in designing, developing, testing and manufacturing of various defence and space engineering products and solutions.
The Company operates in 3 broad categories viz:
Defence Electronics [35% of total revenue]: The Company offers high performance computing and electronic systems for defence applications, including subsystems for missiles, tanks and naval applications. Product portfolio includes:
Rugged control systems, consoles & wired cabinets — systems that automate mission critical functions like target tracking, fire control and command control.
Non-contact proximity sensor — sensors that are able to operate in challenging underwater conditions used in naval applications.
Military grade communication systems — subsystems that are engineered for military grade performance fortified to excel in the most demanding conditions.
Defence & Space Optics [33% of total revenue]: The Company manufactures ultra-high precision optics for cutting edge defense & space applications like thermal imaging and space imaging systems. It supplies products like:
Infrared Lenses — which are crucial in thermal imaging cameras and night vision equipment used by the Armed Forces.
Optimal Domes — components that are integrated into missiles to ensure precise target acquisition.
Large Size Optics / Metal Mirrors — used in space telescopes for earth observation satellites.
Gyroscope components — components that have an impact on a device’s positional accuracy and enhances the accuracy of navigation systems.
Heavy Engineering [32% of total revenue]: The Company specializes in the manufacturing of high performance precision mechanical systems for critical defence applications which includes:
Flow Formed Tubes — metal tubes which are essential mechanical components of rockets and missiles.
Border Defence System — frontline surveillance and land defense system which can detect threats and activate weapon systems to neutralize potential dangers. [insert the sound of a buzzing drone]
Reading the annual report, I get the feeling that they want to build high quality innovative products which can command a premium in the market. But is that translating into more sales and better margins? Let’s take a look.
The Company has an order book of approx. INR 618 crore as of June 2023 which is almost 3 times it’s FY23 revenues. It has 30+ Government customers. Private clients like L&T, Godrej, Rafael Defence, Israel Aerospace etc. The Company could be a key beneficiary from the growth in defence and space spending.
It became the only Indian private company in the APAC region to build an Optronic Periscope for a submarine. It also won a contract to build glass cockpits, avionic suites and auto pilot functionality for the Saras MK-II program.
Developed and delivered a hyperspectral camera for space missions. Collaborating with >2 Non ISRO missions for their hyperspectral payload development.
Developed a high precision border defence system and expects a projected requirement of 4000+ units over the next 5-10 years.
Investing in drone and anti-drone technologies. Secured a contract to supply agri-drones. It is developing next generation jammers for Europe’s leading anti-drone company. Paras Defence wants to be one of the biggest players in the drone segment which is poised to be a INR 1.7 TRILLION market by 2030.
It is the only Indian company providing Electro-Magnetic Pulse (EMP) protection solutions across applications like defence, security, banking, IT & Communications.
You can see from the list above that the Company is doing / planning to do to a lot of exciting things, however the same are not getting reflected in the numbers. 3Y Revenue CAGR was only 14%. Operating profit margin has reduced YoY. 3Y Average RoE is only 9%.
The Company’s working capital requirement is quite high with increase in debtors and inventory levels which explains the low return ratios. However, the bad debts written off has gone down compared to previous year.
Paras Defence wants to be one of the biggest players in Drone Manufacturing, however currently the drone business contributes to <5% of the total order book. More orders need to flow in for the Company to capitalize the high growth potential of the drone industry.
The Company has contingent liabilities of INR 102 crores — which if it materializes — would have a direct impact on profitability.
From a valuations perspective, the Company is trading at a P/E of 82 times (approx.) — which makes it very expensive for an entry point. Net profit has grown by 33.5% YoY, but to justify this kind of valuation, profit growth [and revenue growth] has to be in triple digits.
I think Paras Defence has a lot going for it.
A robust order book. Sticky government contracts. Renowned domestic and international clients. Building niche categories that it can dominate like EMP protection solutions. Targeting the growing drone manufacturing opportunity in India with the vision to become the largest player in the anti-drone segment. Innovating and building high precision defense products.
Good revenue mix. Zero debt. High promoter holding which shows you that the owners are invested in the company for the long haul.
I would like to watch the next few quarters, given that the stock is trading at a high P/E at the moment. But, sometimes the P/E is not relevant. You have to look at the strength of the business. And the industry. And believe in your intuitions. Paras Defence looks like a VERY promising company and it’s only getting started.
Close monitor the company. Keep it in your watchlist. See if they’re able to grow revenues and execute on the Order book. See if the operating margin expands. Wait for price corrections to accumulate the stock and then you may hold it for the long term.
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[Note: The author is not a SEBI registered investment advisor and the contents of this article do NOT constitute investment advice. Always do your own research before you invest in a company]