DCX Systems Ltd

[fabregas]

@fabregas

This is correct. As per the FY23 AR around Rs 750 crores worth raw material was sourced from a promoter owned company.

This is a big red flag. Need to dig deeper into this. Usually such kind of things are done so that the majority of the “juice” is squeezed by the unlisted promoter owned entity. No wonder DCX has an OPM of only around 6% for FY24

So I downloaded the financials of RNSE-Tronics Pvt Ltd from MCA via Tofler. This is the same promoter owned company which supplied components to DCX. Here are my findings.

76% of the shares of this company are owned by the MD.

Margins are not that great. It made a profit of Rs 8.8 Crores on a revenue of Rs 754 crores.

However it does not have any borrowings, meaning payments are made swiftly by DCX.

It has a given a loan of Rs 7.6 crores to the MD pf DCX.

Apart from the loan of 7.6 Cr I do not see any red flag. I fail to understand why the majority of components are sourced from this company.

[IsaacAsimov]

Low profit margins are not the issue here. Its more about the nearly 13% more profit (even more when buying economies of scale etc are considered) , that the minority shareholders didn’t potentially earn.

The company’s trade receivables would be a better indicator of DCX’s payment timeliness - which appears to quite good in FY23. It also seems to be a trading co since it has just INR 55 lacs in fixed assets - so im not sure if it is adding any value here.

Unless an independent supplier offers worse terms or price, I would be sceptical.

[Moonrise]

Few points.

1. If it’s a related party transaction then I am assuming transfer pricing rules will apply. Certainly at these volumes.

2. Therefore, RNSE cannot/should not keep huge margins. And this is good too, meaning they are transferring at a basic cost + system to DCX. (Positive)

3. This may be done to either ensure QA/QC of components, and/or to maintain IP/Know-how in-house, or some other similar reason.