Business Analysis 25: DCX Systems
Considering the opportunity size, there's huge demand in the Indian defence sector for companies like DCX
Is it possible to find out defence names right now? Because Indian defence sector stocks have gained popularity again after Operation Sindoor. They are trading their 52-week high or near their highs.
So, in this situation, it becomes really difficult to find out names for investing purpose. You might get some in fact at a reasonable price. DCX Systems is one such name. The stock hasn't done much as compared to its peers. It's still trading near its QIP price which was at ₹341 in Jan 2024.
It's a defence manufacturing company offering end to end solutions in cable & wire harness, system integration & PCB assembly.
Their business mix includes -
1. Manufacturing - cable & wire + EMS ((PCB assembly)
2. System integration - IOP + Non IOP
3. Others - kitting + MRO
Let's see everything in detail.
Cable and wire business includes manufacturing radio frequency cables, coaxial, mixed signal, power, data cables used in communication system, sensors, surveillance systems, missile systems, military armoured vehicles and other electronics warfares systems.
PCBA assembly includes manufacturing high end RF/microwave assemblies, digital, analog, power and mixed signal assemblies for the electronics systems including radar, surveillance systems, electronic warfare systems, control and communication systems, missile systems used in ground, naval, and airborne applications.
System integration services include electronic and electro mechanical assemblies used in radar communication, surveillance and missile systems.
Kitting includes assembly ready kits of electronic and electro mechanical parts. And MRO business includes maintenance and repair services.
Cable and wire segment is higher margin busines than the others. They are present in India, USA, Korea, and Israel. They were recognised as a 4-star export house by Directorate General of Foreign Trade in FY24.
Orderbook stands at 3359 cr as of 31st Dec 2024. Their clients include some big names such as Lockheed Martin, Ametek Inc, IAI Elta, L & T, Collins Aerospace, BEL and many others.
Their recent investment in Raneal Advanced Systems opens us more opportunities in future. Raneal is used in defence, aerospace, industrial, electronics, medical electronics etc. They have expanded into railways also through joint venture. Joint venture with ELTA Systems will develop obstacle detection solutions for railway industry.
So, the opportunity size is big enough for such a small company which is doing around 1400-1500 cr topline. In fact, total offset obligation pending with foreign OEMs is around $13.21 bn of which DCX is targeting $1 bn opportunity.
Industry Overview
1. Global defence spending growing from $2.18 trn in CY22 to $2.65 trn in CY27 at 3.99% CAGR
2. Global defence electronics market growing feom $142 bn in CY22 to $237 bn in CY30 at 6.61% CAGR
3. Indian defence electronics market growing from $2.57 bn in CY22 to $7.2 bn in CY30 at 13.71% CAGR
4. Indian defence export growing from $200 mn in FY17 to $2.63 bn in FY24 at 13.71% CAGR
5. Cable and wire business in India growing from $541.20 mn in 2022 to $1.47 bn in 2029 at 15.4% CAGR
6. EMS industry in India growing from $400 mn in 2019 to $4.51 bn by 2025 at 49.7% CAGR
7. MRO industry in India growing from $77 mn in 2022 to $165 mn in 2031 at 8.80% CAGR
8. China's military spending is at $296 bn whereas India stands at only $83.6 bn.
Considering the opportunity size, there's huge demand in the Indian defence sector for companies like DCX. Some more defence companies will be listed in future. There's good order coming from govt. Because the company is backward integrated, they can deal with pricing pressure properly.
If you see their financial performance, first 2 quarters are typically slower than the last two quarters due to set up times for reading procurement, regulatory approvals, and logistical arrangements. So, it is expected that Q4FY25 will be better. If you have 3-5 years time horizon, these businesses have good potential to do well. Every dip could be an opportunity for buying. Investors who missed the previous rally have a scope to load on to some defence names, of course, selectively.
Thanks for reading
Take care
Rabi
Disclaimer: I'm not SEBI registered. This content is for educational purposes only. Do your own diligence.