Paras Defence IPO grey market premium: Analysts bullish on Paras Defence; should you go whole hog on this IPO?

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New Delhi: The Rs 170.78 crore initial public offering (IPO) of Paras Defence and Space Technologies (PDSTL) opened for subscription on Tuesday, and most of the analysts sounded positive on this defence sector play.

The IPO comprises a fresh issue of shares worth Rs 140.6 crore and an offer for sale of up to 1.72 million shares by the promoters and existing shareholders of the company.

Brokerage firm Reliance Securities, however, has a word of caution for investors, and has not given any rating to the issue. It finds the IPO richly valued, which diminishes possibility of strong listing gain.

“While the company states there are no comparable peers for it, other defence companies like Hindustan Aeronautics and Bharat Dynamics are trading at discounts despite generating healthy cash flows and enjoying healthy free cash flow yields,” it said.

The grey market is super-excited on the IPO. While the company has fixed the IPO price band at Rs 165-175 apiece, the shares traded at a hefty premium of Rs 195-200, or 120 per cent, in the unofficial market.

Brokerage firm Hem Securities is bullish on the company, citing its strong order book of Rs 304.99 crore as of June 30, 2021, its position as a key player in high precision optics manufacturing for space and defence application in India and its strong relationships with a diverse customer base.

“The company has a wide range of products and solutions for both defence and space applications. It is well positioned to benefit from the government’s ‘Atmanirbhar Bharat’ and ‘Make in India’ initiatives,” Hem Securities said, and recommended a ‘subscribe’ rating on the issue for listing gain as well as long-term holding.

Marwari Financial Services has also issued a ‘subscribe’ rating to the IPO, echoing similar sentiment. There are no listed entities in India whose business is comparable with PDSTL, it said.

The minimum bid size is 85 shares and thereafter, in multiples of 85 shares per lot. Half of the offer is reserved for qualified institutional buyers, 15 per cent for non-institutional investors and 35 per cent for retail investors.

Considering its niche product profile & technology, dominant market positioning and vast growth potential, Choice Broking has assigned a ‘subscribe’ rating to the issue. “At a higher price band, PDSTL is demanding a P/E multiple of 43.4 times (to its FY21 EPS of Rs 4).”

Paras Defence designs, develops, manufactures and tests defence and space engineering products and solutions. It has two manufacturing facilities in Navi Mumbai and Thane (Maharashtra).

The company intends to use the net proceeds of the issue for purchase of machinery and equipment, incremental working capital requirements, repaying certain borrowings and general corporate purposes.

Religare Broking has mentioned a decline in allocation to defence and space budget by the government and more reliability on top customers for revenues as the key risks to the issue.

“The company’s financial performance has been muted over the last three years due to several challenges in the sector,” it said.

Anand Rathi Advisors is the book running lead manager to the issue, whereas Link Intime India is the registrar.

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