Should you subscribe to Paras Defense IPO despite weak financials?

Paras Defense IPO is priced at Rs 165-175 per share and looks to raise Rs 171 crore at the upper end of the price band

The three-day initial public offer (IPO) by Paras Defense and Space Technologies kicked off on Tuesday and sailed through within minutes of opening. Despite a weak financial position and high valuations, investors lapped up the issue, banking on the future growth prospects of the company. The hefty grey market premium of Rs 195 per share or 114-118 per cent also added to the allure, especially for investors looking to make a quick buck. The IPO is priced at Rs 165-175 per share.

Tiny issue size and focus on the defence sector are the factors that may generate huge fancy in the IPO, Manan Doshi, co-founder at UnlistedArena.com said.

The issue, meanwhile, is valued at 43x FY21 earnings, which does not look to be appealing as per Reliance Securities' senior research analyst Vikas Jain. While the company states there are no comparable peers for it, other defence companies like Hindustan Aeronautics and Bharat Dynamics are trading at discounts despite generating healthy cash flows, Jain noted.

That said, analysts believe the government's initiatives and higher budgetary allocation for the defence sector are likely to favour companies like Paras Defense. Also, liberalised policies and PLI schemes for drones will further aid such companies, Doshi noted, however, adding that even against all positives, growth seems to be muted.

Indeed, the company's financial performance over the last two years has been unimpressive. While the revenue recorded a negative 4 per cent CAGR over FY19-FY21, net profit recorded a negative 9 per cent CAGR during the same period. Notably, the cash flow generation has also not been impressive for the company, with cumulative OCF and FCF generation standing merely at negative Rs 10 crore and negative Rs  30 crore, respectively over FY19-FY21. Elevated working capital cycle (325 and 393 days in FY20 and FY21, respectively) was the prime reason for muted cash flows.

The company's order book as of June 30, 2021, stood at Rs 305 crore which is 2.13x FY21 revenue and offers decent revenue visibility, notes Jain.

Basis the company's order book position, Choice Broking estimates a 13.6 per cent CAGR rise in top-line over FY21-24E to Rs 210 crore in FY24E. EBITDA and PAT are expected to increase by 12.1 per cent and 29 per cent CAGR, respectively. EBITDA margin, however, is likely to contract by 117bps, mainly on account of lower finance costs, it said.

Another positive working in favour of Parag Defense is its strong relationship with a diverse customer base. While the company deals with government arms and government agencies, its clientele also includes names like HAL, DRDO, ISRO, BEL, BARC, TCS, amongst many others.

"We believe the company's long-term prospects to be favourable, owing to the strong government support and an increasing private sector investment in the defence sector. Additionally, increased customer demand for the company's space optics products would boost revenue and profitability going forward," brokerage KR Choksey said while assigning a Subscribe rating to the issue.

Similarly, Choice Broking and Hem Securities also remain bullish on the IPO. While the former has assigned a Subscribe rating to the issue basis the company's niche product profile and technology, dominant market positioning and vast growth potential, Hem Securities expects it to benefit from the government’s Make in India and Atmanirbhar Bharat programmes.