Paras Defense and Space Technologies IPO Analysis

IPO Analysis of Paras Defense and Space Technologies

Paras IPO : 8 Point Analysis

IPO Details

promoters Sharad Virji Shah will sell 1.25 million shares and Munjal Sharad Shah will offload 50,000 shares.

Objectives of the Issue

1. Purchase of machinery and equipment

2. Funding incremental working capital requirements

3. Repayment or prepayment of all or a portion of certain borrowings/outstanding loan facilities.

4. General corporate purposes

Company Overview

• Primarily engaged in the designing, developing, manufacturing, and testing of a variety of defense and space engineering products and solutions.

• Company Promoters: Sharad Virji Shah (Chairman and Nonexecutive Director) and Munjal Sharad Shah (M.D.)

• The five major product category offerings – Defence & Space Optics, Defence Electronics, Heavy Engineering, Electromagnetic Pulse Protection Solutions, and Niche Technologies.

• The only Indian company with the design capability for space-optics and optomechanical assemblies and is one of the leading providers of optics for various Indian defense and space programs.

• Also delivers customized turnkey projects in the defense segment.

• Partnered with some of the leading technology companies around the world to indigenize advanced technologies in the defense and space sectors for the Indian market.

• 2 manufacturing plants in Maharashtra and is in the process of expanding its current manufacturing facility at Nerul in Navi Mumbai.

Industry Overview

• Global defense spending touched $ 1.93 trillion in 2019, which was an increase of 3.6% over such corresponding spending in 2018, and the largest annual growth since 2010.

• Indian defense spending has been steadily increasing since 2000 and is estimated to be $ 61.23 billion in 2020.

• Defence optics segment is forecasted to grow from approximately $ 92.42 million in 2020 to approximately $ 415.22 million in 2029.

•Airborne Combat and ISR capability expansion will be a major driver of defense optics, along with land forces modernization.

• The five largest spenders, accounting for 62% of the total global spend, were the United States, China, India, Saudi Arabia, and Russia.

• Rise in geopolitical disputes, such as the ongoing flare-up between the United States and China, was the major reason fuelling this increase in spending.

• As per Frost & Sullivan, there are five major trends that govern the nature of defense equipment related to demand and military research & development, namely, i) ISR, ii) signature reduction, iii) network-centric warfare, iv) autonomy; and v) system resilience.

Indigenous Industry Drivers

• Atmanirbhar Bharat initiative: The FDI limit under the automatic route has been increased from current 49% to 74% in the Consolidated FDI policy of 2020

• Defence Acquisition Procedure: The two main underlying principles of the procurement policy are making the acquisition procedure as transparent as possible and promoting the indigenous industry in line with the Atmanirbhar Bharat initiative.

• Defence offsets: Aim is to offset the foreign import bill by ensuring that the vendor directs 30% (or as applicable under the particular category) of the total contract cost to either source defense equipment and components from India or facilitate transfer technology.

• Geopolitical Risks: China and Pakistan

• Internal Security Risks: Left-wing extremism, Terrorism.

• Modernisation Drive for the armed forces

Forecast and Opportunities

According to Frost & Sullivan, like modernization of the Indian Defence sector becomes more technology-oriented, four major segments will become key contributors to most emerging programs, namely, Defence Electronics, Defence Optics, EMP Protection, and Heavy Engineering.

Frost & Sullivan defines the four segments as follows: (CAGR- ~20%)

Global Space Industry

• Global space industry and trends As of September 30, 2020, the Frost & Sullivan forecast expects 23,329 satellites to be launched between 2020 and 2030, while 2,046 small satellites have been launched between 2015 and 2020.

• The availability of affordable launch capabilities has enabled new small-satellite operators without specific satellite engineering experience to enter the space industry, especially in downstream value-added services.

• Access to affordable and relevant launch services remains a primary concern since the launch services market currently lacks the capacity and capability to meet the rising demand.

• Participants are forced to depend on secondary ride-sharing opportunities. which implies long waiting periods to place their satellites in orbit or settling for a random orbit.

• Government agencies are pushing their space market agenda forward globally. Enhancing their respective space economies, enabling their respective market participants to fit into the global space industry value chain. One such effort gaining global prominence is deep space missions targeting the moon, sun, planets, and asteroids.

Current Trends and Opportunities

• ISRO has been involved in technology transfer such as computerized systems, electro-optical systems. Ground-based technology for satellite systems since the 1980s to private industries and state-owned enterprises. Initial engagement of these private establishments was limited to component or system-level manufacturing. However, with the capability advancement of the private firms and time constraints.

ISRO has outsourced the development of 2 complete navigation satellites to a consortium of 125 companies led by Alpha Design Technologies Private Limited.

• India is a successful country to have developed launch vehicle capability, launching multiple satellites for downstream services and interplanetary missions.

• Further, India has a large base of small and medium-sized enterprises catering to the space agency-driven model.

• Future Outlook for Domestic Players Domestic commercial participants are agile in their approach by addressing the emerging market demand.

• Once the National Space Policy and the Space Activities Bill are passed, a regulatory framework will be established for operation within the Indian space market. This will attract new participants, increasing local competition.

• With multiple international players willing to enter the Indian market and open to partnership.

The domestic space private space ecosystem will flourish in the medium term.

Financial Performance

Peer Comparison

Among its competitors, the Company is the only company that is present across all four main product segments.

Key Strengths & Risks

Imposition of liquidated damages and invocation of performance bank guarantees/indemnity bonds by our customers.

§ Most of the contracts with their customers require the  Company to pay liquidated damages in the event of delay in delivery of products.

§ The value of the liquidated damages typically ranges from 5% to 10% of the value of the contract.

§ For the Fiscals ended 2021, 2020, and 2019, they have incurred late delivery charges amounting to ₹ 7.51 million, ₹ 8.96 million, and ₹ 6.28 million and respectively to their customers.

Valuation