Bharat Dynamics IPO recommendations: Subscribe is the call


Bharat Dynamics IPO opens tomorrow for subscription and the offer has garnered positive reviews from equity research firms and analysts. The full OFS (Offer For Sale) issue will be keenly watched after the muted listings of HG Infra Engineering and Aster DM Healthcare. The government seems to have done a good job of not pricing the offer at high valuations. Here is a snapshot of Bharat Dynamics IPO recommendations:

Angel Broking has advised investors to subscribe to the offer. “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 BDL’s peers like Bharat Electron and Apollo Micro System (trading at 33.6x and 40.7x of 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,” said analyst Amarjeet S Maurya.

Bharat Dynamics IPO recommendations received further support from Choice Broking which put a subscribe rating on the upcoming IPO. The equity research firm said that competition is expected to increase in future from the private players, although there will be certain limitations of the production capabilities of the private players. “On valuation front, at higher price band, the company is demanding a P/E valuation of 16x (to its restated FY17 EPS of Rs. 26.8) as compared to peer average of 23.4x. With respect to its FY18E and FY19E earnings of Rs. 27.3 and 32.4 per share, respectively, it is demanding a P/E valuation of 15.7x and 13.2x, respectively, as compared to peer average of 20.9x and 17.9x. The issue seems to be attractive in terms of valuation, amid concerns relating to long gestation period of the defence projects and stringent regulations,” said the research firm.

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Quality business at reasonable price is how ICICIdirect described the offer. “BDL’s product offerings are capable of addressing 53.5% of the total market and will have access to $11.38 Billion worth of opportunities in India. We believe this congruence in the product portfolio of BDL with the requirements of armed forces places the company in a sweet spot to capitalise on emerging opportunities,” said the brokerage house while putting a Subscribe For Long Term rating.

Citing strong execution skills, Nirmal Bang has also placed a Subscribe call on the IPO. “On  the valuation front, at the  given upper price band  of Rs.  428,  BDL  is  being offered at PE of  11.3x / 15.9x its  FY17 /  FY18E  EPS and EV / EBITDA  of 7.9x / 9.4x its FY17 / FY18E EBITDA. Based on the business capabilities, growth prospects and valuations, we believe BDL is attractively priced and recommend subscribing to the issue,” said the brokerage house in its report.

Prabhudas Lilladher termed Bharat Dynamics a proxy play on huge missile procurement opportunity over next decade but also warned that there may not be listing gains. “The GOI through an OFS is raising Rs9.6bn. At upper price band of Rs428, the post money market cap works out to ~Rs79bn which is 16xFY17 earnings. While opportunity size is huge, order inflow/execution could be bumpy, given the nature of the defence industry,” said analyst Kunal Shah in the IPO note while putting a subscribe rating.

Another positive word in Bharat Dynamics IPO recommendations came from Reliance Securities which sees merit in India’s leading defence PSU, increase in indigenisation of products, and its strong order book and established financial track record. “At upper price band of Rs428, the issue is available at 16 P/Ex FY17 (diluted EPS). Based on our back-of-the-envelope calculation, the Issue is available at 13.7x P/E FY20 at its upper price band, which looks attractive. Thus, we recommend SUBSCRIBE to the issue,” noted the research note.

LKP Securities sounded a cautionary note, citing delay in contract allocation, reduction in order inflow, higher dependence on traded business, absence of any meaningful R&D and overdependence on DRDO as well as absence of any export contracts. “Reducing topline and bottomline, Balance Sheet stress owing to stretched working capital cycle, weak cashflows (negative FCF in FY17) and return ratios (ROE down from 30% in FY16 to 22% in FY17) are expected to reduce the likelihood of a strong listing,” said the brokerage house while adding that the stock is trading at ~10x on FY17 EPS of INR40 and can be avoided.

We will add more Bharat Dynamics IPO recommendations in this article. Meanwhile, feel free to visit our discussion page on the offer to see what fellow investors think about the company and the IPO.



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