DCX Systems Ltd

[Moonrise]

DCX Systems

Seems to be a fantastic play on wiring & systems for defence and aerospace. Not as overvalued as compared to peers in this category.

DCX has a unique business model providing end-to-end solutions of cable & wire harnesses, electronic sub-systems, high-end System Integration and PCB Assembly for Defence & Aerospace Industry.

Key Points

• DCX is a preferred and largest Indian Offset Partner to leading Israeli Defence Company, IAI, for its offset obligations.

• Core competency in electronics manufacturing with focus on backward integration in PCBA’s through 100% subsidiary, Raneal Advanced Systems – both for captive consumption and other markets

• Diverse mix of domestic and international customers across Israel, US, Korea and India

• Strategically located Manufacturing facility in SEZ in Bengaluru, spread over 30,000 sq. ft.

• New 40,000 sq. ft. facility in Bengaluru dedicated for EMS manufacturing

• Healthy CAGR of 43% on revenue growth over the last 5 years

• CAGR of 95% in PAT over last 5 years

• Order book as of September 30th, 2023 is Rs. 1258 crores.

USPs

Over a decade of supplying to one of Israel’s top defence companies. Very strong relationship that has now made DCX from a supplier into a partner, through the recent JV with ELTA

IOP / Non-IOP partner for Israel / US OEMs to supply wide range of products for Aerospace & Defence

Domain expertise in developing & manufacturing aerospace & defence electronics products on Build to Print Model

Equipment for testing etc. supplied by OEMs, thus facilitating asset light business, despite capital intensive product portfolio

Among preferred Indian Offset Partners for defence & aerospace industry across geographies

Backward Integration into EMS to manufacture PCBA’s for defence & civilian sectors

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Industry Overview

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ELTA has developed the tech for optical & radar based anti-collision systems for railways. ELTA has partnered with DCX Systems via a JV. DCX owns 51% while ELTA owns 49%. ELTA will supply the tech, DCX will do the manufacturing. The product will be manufactured by DCX and then sold to the JV company, which will then in turn sell it to the Indian government for railways, and also globally to international clients. The global market for this system is $7billion USD. The tech lies with ELTA, manufacturing with DCX, sales with the JV.

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Found the company and management to be forward thinking and very knowledgable on the domain. Strategic partnerships, backward integrations, end-to-end in-house control, are all very appealing.

Position taken.

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*Disclaimer: I invest on management depth, market leadership, sector growth & demand. My holding periods are long, and I’m alright with drawdowns, as long as corporate & business hygiene is intact. NOT an expert, just a dreamer

[manish100]

Nice write up. The few points from my side:

1. Still OPM is between 6-7 % due to EMS nature of business. It appears a volume play as of now. In Last Con-Call there was discussion on margin expansion-
   
   

Company hopes that once backward integration happens ( Manufacturing PCB by Subsidiary Renal Advanced System) there would be improvement in margin. But, company is not quantifying it.

2. Employee cost is very low. Approx. 1% of Sales. In May 29, 2023 Con call the issue was raised by investor as below:
   
   

As per management company uses hig value products, so employee requirement is low. But, after going through different con-calls it appears that they are not in highly technical field. They are basically in integration and in assemly and now they have started making high value PCBs which they were integrating.

3. There is shrinkage in order book of the company. After Q4 Fy 23 it was Rs 1700 Cr. After Q2 FY 24 it is Rs1260 Cr. Although management is quite confident and some they are expecting orders in some more programs.
   
   

Over all it appears a decent play and value migration may also happen, as company delivers result, enters in JVs and acquire technologies.

Disclosure: Not invested
Disclaimer : I may be wrong in my analysis, I am neitehr SEBI registered analyst nor subject expert. Please do your own due dliligence.

[Moonrise]

@manish100 thank you for contributing.

1. OPM - yes, I expect this will increase. I’m not worried.

2. Employee Cost - yes, it is low. However, it is not concerning. They have managed to build a business while keeping costs low (smart, frugal, etc?). They will ensure below average employee cost structure in the future too, it seems. If they are able to have a lower than industry % on this, it will add to their margins, significantly. My concern would be if they are grossly underpaying the employees, that is, if the employee for the same exact role would get a much higher wage at a competitor – this would raise an alarm bell, for me, as it’s not something I’d like to see in my companies. Employee respect & fair wage is essential and critical.

3. Let’s wait and watch. Let’s address this post Q3 and Q4 numbers. It needs to improve. Considering the recent raise, it should.

[Bornwinner_16]

Fund Raise via QIP- 500cr.

65034f09-4de4-4ea1-89f1-274a08db77ad.pdf

[Bornwinner_16]

One Interesting thing-
[Ajay Upadhyaya] names appears in the shareholding pattern…

[Moonrise]

Correct. Recent QIP should be indicative, as well.

IMHO - well poised and at the cusp of many new developments & initiatives. I feel like it’s the beginning of a solid and long play.

[Ascendant]

What is the point of this company being in HDFC Dividend yield fund? Could this be a hint that they will start giving significant dividends?

[Akshada_Deo]

DCX Systems_.pdf (126.9 KB)

My brief note on the company.

Disclosure: Not invested yet

[Moonrise]

@Akshada_Deo nice write up, thank you. Some questions for you.

1. Your analysis did not include any competitors. Did you study competitors during your research? If yes, can you list them and also your findings?
2. What made you research the company? I’m assuming you are interested in DCX ard/or the segment, hence you looked into it.
3. What is the reason you haven’t yet invested? Is there an order flow, revenue number, or other trigger that you are awaiting - and if yes, what is it?

Thank you.

Invested with 50% allocation, will add 25% + 25% in two tranches, basis fund availability. 3-5yr horizon.

[Akshada_Deo]

Hi,

No I havent done much research on the competition yet. This exercise was just to understand the company, business model and a possible angle for future growth. I came across it through my work. I havent yet personally invested because I’m still trying to value the potential of the company and when that exercise yields positive result i purchase almost immediately

[ganesh_bastwadkar]

nice report by @Akshada_Deo .
are they into Railway KAVACH system also.

[Moonrise]

@Akshada_Deo got it. Look into their agreement with ELTA, and the reason for the same. It’ll give you some indication on the opportunity.

@ganesh_bastwadkar - they have an optical and radar based anti-collision system for railways, targeting the Indian and also global market for the same. Covered it in my earlier notes above.

[Moonrise]

I feel DCX will create a good business in the Indian aerospace market. Let’s wait for announcements and disclosures which may come in Q4.

[vineet_mittal]

Track BEL order book.

Majority of sub-modules will come back to DCX as radars and guidance systems are based on IAI tech .

Disc: Invested today.

[Moonrise]

Can you share some literature or original resources for this ?

[vineet_mittal]

I had heard it in one of management of Interview. Let me search for it.

[Moonrise]

Is there any news today that anyone is aware of? I haven’t been able to find anything specific which may point towards today’s volumes. Do share if you know

[Investorscientist]

@karanthharsha999

t of Borrow

Any idea why IPO proceedings were not used to repay borrowings?

[vineet_mittal]

They don’t have any long term loan . Only borrowing is for Working capital loans which get cleared by March End.

Management had mentioned this in multiple interviews .

[Moonrise]

Results are weak. Let’s wait for tomorrow’s call.

May see some selling pressure, hopefully it doesn’t last too long.