This Smallcap Aerospace & Defence Stock is Ready for Liftoff After a Rs 1,250 Crore Deal

The one sector in the Indian market that has been a recent favourite of investors is aerospace and defence. These stocks have consistently delivered impressive returns for investors, turning their initial investments into significant wealth.

This sector is a juggernaut, encompassing companies that manufacture the tools that keep our nation safe and propel us into the future.

From the intricate components of an aircraft to the imposing strength of a tank, these companies are the backbone of India's aerial and defensive capabilities.

But the story doesn't end there. Fuelled by the Indian military's ambitious modernisation and self-reliance programs, the aerospace and defence sectors are on the cusp of a galactic leap.

This exciting development has thrust these companies into the spotlight. One aerospace and defence stock among them, that has grabbed the limelight, is DCX Systems.

This stock skyrocketed 16% in a day.

Read on for details.

About DCX Systems

DCX Systems is among the leading Indian players in the manufacture of electronic sub-systems and cable harnesses.

The company commenced operations in 2011 and has been a preferred Indian offset partner for foreign original equipment manufacturers (OEMs) for executing aerospace and defence manufacturing projects.

DCX Systems had 26 customers in Israel, the United States, Korea, and India, including certain Fortune 500 companies, multinational corporations, and start-ups.

The company's customers include domestic and international OEMs, private companies and public sector undertakings in India across different sectors, ranging from defence and aerospace to space ventures, and railways.

DCX System's key customers include Elta Systems Limited, Israel Aerospace Industries Limited - System Missiles and Space Division, Bharat Electronics Limited, and Astra Rafael Comsys Private Limited, among others.

Why DCX Systems Share Price is Rising?

DCX Systems saw its shares surge by 16% to reach a record high of Rs 440 each early today (2 July 2024), following a major order win.

# Mega Order Win

This came after the company on Monday announced securing a substantial order worth Rs 12.5 bn from Larsen & Toubro.

This order, disclosed in a filing on Monday, involves the manufacture and supply of electronic modules. The order has to be executed over three years.

This achievement marks DCX Systems' second significant win in less than two weeks. Previously, it had secured an order valued at Rs 332 m for the supply of cable and wire harness assemblies to both domestic and overseas clients.

# Expanding Global Footprint

The company has made significant strides in its operations. It entered into a supply and services agreement with Israel Aerospace India Services Private for the supply and repair services of spare parts and electronic components, focusing on maintenance, repair, and overhaul (MRO).

Additionally, the company secured a purchase contract/order worth US$ 1.9 million (m)from Lockheed Martin Corporation, USA.

It also received export orders from overseas customers for about US$ 55.1 m.

These developments highlight the company's growing international footprint and its capability in the aerospace and defence sectors.

What Makes DCX Systems a Unique Player?

DCX Systems stands out as a unique player in the Indian defence and aerospace sector for several reasons:

• Comprehensive Expertise and Capabilities:

  • DCX Systems is a leading manufacturer of electronic subsystems and cable harnesses, specialising in system integration and the production of a wide array of cables and wire harness assemblies.
  • The company excels in system integration for radar systems, sensors, electronic warfare, missiles, and communication systems, providing comprehensive product assembly and integration services to meet diverse customer requirements.

• Advanced Testing and Manufacturing Facilities:

  • DCX Systems operates a state-of-the-art manufacturing facility at the Hi-Tech Defence and Aerospace Park SEZ in Bengaluru, Karnataka, established in 2020 and spread over 30,000 square feet.
  • The facility is equipped for complete in-house environmental and electrical testing and wire processing, ensuring the highest quality and reliability of final products under varying environmental conditions.

• Cutting-Edge Technology and Equipment:

  • The company possesses capabilities to manufacture complex, high-end, high-power microwave modules used in radars, antennas, electronic warfare systems, receiver subsystems, and missile systems.
  • It employs advanced inspection and testing equipment, including cable testers, network analysers, crimp pull testers, microscopes, leak test equipment, high voltage testers, micro-ohm meters, automatic testing equipment for PCBAs and module testing, electrodynamic vibration shaker systems, contact retention testers, and vernier height gauges.

• Diverse Product Applications:

  • DCX Systems' fine wire cable assemblies are extensively used in robotic, aerospace, marine, space, and medical applications to ensure high performance.
  • The company designs electromagnetic interference (EMI) shielded cables, harnesses, and assemblies to meet stringent requirements for electromagnetic pulses, electromagnetic compatibility, and TEMPEST solutions. These shielded solutions are applied in commercial airliner landing gear systems, secure communication systems, and more.

• Strategic Partnerships and Customer Relationships:

  • DCX Systems is a preferred Indian Offset Partner (IOP) for foreign original equipment manufacturers (OEMs) in aerospace and defence manufacturing projects.
  • The company sources components from various global manufacturers and suppliers approved by customers, ensuring the supply of assembly-ready kits to machine feeders and beyond, based on customers' bills of materials (BOM).

• Commitment to Quality and Innovation:

  • The company conducts in-house testing, including vibration and environmental stress testing of complex radio frequency products, ensuring the final products' quality and reliability.
  • Its operations are supported by an enterprise resource planning system, and its process engineers are technically trained to meet customer application requirements.

• Continual Growth and Expansion:

  • Incorporated as "DCX Cable Assemblies Private Limited" in 2011, the company has undergone significant transformation, becoming "DCX Systems Limited" in 2022.
  • In 2022, DCX Systems further expanded its capabilities by incorporating Raneal Advanced Systems Private Limited as its wholly-owned subsidiary, strengthening its position in the industry.

A Close Look at its Financials

DCX Systems has demonstrated strong revenue growth recently. From March 2022 to March 2023, the company achieved an 13.7% increase in revenue, followed by growth of 13.6% from March 2023 to March 2024.

The compound annual growth rate (CAGR) of DCX System's revenue from March 2022 to March 2024 is approximately 13.6%. This consistent upward trajectory indicates effective business strategies and robust market demand for their products.

Its net profit too paints a strong picture growing at a CAGR growth of 7.4% in past three years.

DCX Systems' Financial Snapshot (2022-24)

Particulars	31-Mar-22	31-Mar-23	31-Mar-24
Revenue (Rs in m)	11,023.0	12,536.3	14,235.8
Revenue Growth (%)	-	13.7	13.6
Net Profit (Rs in m)	656	716.8	757.8
Net Profit Margin (%)	6	5.7	5.3

Data Source: BSE

Its order book as of 3 March 2024, is over Rs 8 bn.

What Next for DCX Systems?

Looking ahead, DCX Systems is focused on expanding its high-margin system integration business, as highlighted in its investor presentations.

The company is strategically positioned to capitalise on a global increase in defence spending, forecasted to grow from US$ 2,290 bn in 2023 to US$ 2,652 bn in 2027.

This growth is driven by ongoing geopolitical tensions, modernisation efforts within armed forces, evolving global power dynamics, advancing technology trends, and shifts in government policies.

Aligned with these global trends, the defence electronics market is poised for substantial expansion. Projections suggest it will surge from US$ 166.7 bn in 2023 to US$ 213 bn in 2028, at CAGR of 5.1%.

These favourable market dynamics are expected to provide significant opportunities for DCX Systems moving forward.

Conclusion

the Indian defence and aerospace sector presents a promising investment opportunity amid the Ministry of Defence's ambitious modernisation plans and the 'Make in India' initiative.

India's position as one of the largest importers of arms and defence platforms highlights the immense potential for domestic production to meet both domestic and global demand.

The coordinated efforts of the three armed services, supported by specialised inter-service commands and institutions, further reinforce the momentum towards self-sufficiency in defence hardware and infrastructure.

Moreover, India's proactive diplomatic efforts to strengthen bilateral and multilateral relations for defence collaborations and exports add another layer of optimism to the sector's growth trajectory.

These efforts not only bolster India's security architecture but also enhance opportunities for defence exports, thereby contributing to economic growth and global influence.

However, the sector is not without challenges. Risks such as technological obsolescence and the need for expanded management bandwidth to oversee complex projects and partnerships persist.

Nevertheless, prudent strategies and robust government support are expected to mitigate these risks, paving the way for exponential growth in India's defence and aerospace stocks.

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