The share sale of the state-owned defence equipment maker Bharat Dynamics Ltd is a pure offer for sale that will see the government sell a total of 22.45 million shares, representing a stake dilution of about 12%. Photo: Bloomberg
The share sale of the state-owned defence equipment maker Bharat Dynamics Ltd is a pure offer for sale that will see the government sell a total of 22.45 million shares, representing a stake dilution of about 12%. Photo: Bloomberg

Brokerages upbeat on Bharat Dynamics IPO, first by a state-run company in 2018

The price band for the Bharat Dynamics IPO, the first IPO of a state-run company in 2018, is fixed at Rs413-428 per share. The issue closes on Thursday.

Mumbai:Brokerages have recommended subscribing for state-owned defence equipment maker Bharat Dynamics Ltd’s Rs. 960-crore initial public offer (IPO) opening on Tuesday, citing strong return ratios and sound track record on profitability.

The price band for the first IPO of a state-run company in 2018 is fixed at Rs413-428 per share. The issue closes on Thursday.

In a note on Monday, Kotak Securities said at the upper end of the issue price band, the stock is valued at 16.1 times fiscal year 2017 earnings.

The brokerage firm said that Bharat Dynamics was valued at a discount to listed peers such as Bharat Electronics Ltd (BEL), which trades at 22 times FY17 earnings, even as the latter scores over former in terms of higher revenue visibility provided by its order book.

“Given attractive valuations and good return ratios coupled with steady future growth, we advise investors to subscribe to the issue," Kotak analyst Sanjeev Zarbade said in the note.

The share sale is a pure offer for sale that will see the government sell a total of 22.45 million shares, representing a stake dilution of about 12%.

Bharat Dynamics was incorporated in 1970 and is engaged in the manufacture of surface-to-air missiles (SAMs), anti-tank guided missiles (ATGMs), underwater weapons, launchers, countermeasures and test equipment, and supplies them to the Indian armed forces.

Motilal Oswal Securities Ltd. concurred that the company traded at a discount to peer BEL.

“Given BDL’s (Bharat Dynamics Ltd) dominant position as a government owned enterprise in the defence sector, strong return ratios, negative working capital management, strong growth track and superior balance sheet (debt-free) makes us positive on the company," Siddhartha Khemka, an analyst with Motilal Oswal said in a note on Monday.

As on 31 January, the company had an order book of Rs10,543 crore.

The company has posted sales and profit after tax CAGR (compounded annual growth rate) of 39% and 11%, respectively, over fiscal years 2014-2017.

A few, however, raised concerns.

Brokerage firm Prabhudas Lilladher Pvt. Ltd warned that while the opportunity is huge, order inflow and execution could be bumpy, given the nature of the defence industry, and it also said it did not expect the stock to log gains on listing.

“While we do not expect listing gains, investors with a long term view can subscribe to play the long-term potential of missile procurement in India over next decade," Prabhudas Lilladher analyst Kunal Sheth said in a note on 9 March.

The last two state-run IPOs that hit the market in 2017 haven’t fared well on the bourses. New India Assurance Company Ltd and General Insurance Corporation of India Ltd which were launched in November and October respectively, posted losses on the listing day. Currently, these stocks trade 14.88% and 23.25% below their respective issue prices.

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