PARAS DEFENCE Getting Support @ Previous ALL Time High

5. Aug.PARAS

Positive factors – The outlook will be revised to Stable if the company demonstrates a material improvement in its working
capital cycle and liquidity position, along with improvement in earnings and scale of operations.


Healthy order book provides medium-term revenue visibility – The company’s fresh order inflows over the past four fiscals
remained adequate, with orders worth ~Rs. 621 crore added in the last 21 months ending December 31, 2023.


The pending order book of Rs. 526.3 crore as on December 31, 2023 (OB/OI ratio of 2.4 times of the OI in FY2023) provides medium-term
revenue visibility.


Comfortable capital structure and healthy coverage indicators – The company’s capital structure remains comfortable with
TOL/TNW of 0.3 times as on September 30, 2023, supported by equity infusion of Rs. 162.3 crore during FY2021-FY2022 and
low debt levels.

The interest coverage stood at 12.2 times in 9M FY2024 due to the limited dependence on external borrowings
to fund its working capital. Going forward, ICRA expects the coverage indicators to remain comfortable, benefitting from the
scale-up in operations, given the strong order pipeline.

Extensive experience of management team – PDSTL’s promoters have more than three decades of experience in designing,
developing and manufacturing a wide range of engineering products and solutions for the defense and space sector in the
domain of optics, heavy engineering and electronics. Its long presence in the defence and space sector has helped to establish
strong relationships with its customers as well as suppliers. It has developed a strong management and execution team
comprising several ex-employees of BEL and DRDO, among others.


High working capital intensity due to elongated receivables cycle – The business is working capital intensive with NWC/OI of
88.3% and 114.8% in FY2023 and H1 FY2024, respectively, owing to the high inventory holding period and long receivables
cycle.

The inventory levels are high because of additional stocking of critical raw materials to avoid any disruption in the
delivery schedules and high work-in-progress due to elongated manufacturing cycle.

PDSTL has been partly managing its
working capital cycle by stretching its trade payables by more than three months as it has a longstanding relationship with
most of its suppliers and availing mobilisation advance for part orders. Going forward, the company’s ability to alleviate its
working capital intensity while scaling up its revenues and improving its operating margins will be the key rating monitorable.


Moderate scale of operations – Though the company reported a robust YoY revenue growth of 21% and 10% in FY2023 and
9M FY2024, respectively, supported by healthy order book and the timely execution of orders, the scale of operations still
remains moderate. Given the Government’s thrust on ‘Make in India’ in the defence sector, PDSTL has been mainly catering
to domestic demand (~84% of OI contributed by domestic orders in FY2023). Driven by the healthy order book status, ICRA
expects the company to sustain its revenue growth in FY2024 and FY2025.


High customer concentration risk, though largely mitigated by reputed customer base and repeat orders – The company
faces client concentration risk with top three clients contributing 46% to the total order book as on December 31, 2023 and
top five clients accounting for 51% of the revenue in FY2023. The client profile mostly comprises government organisations
with repeat orders received over the years, largely mitigating the counterparty credit risk. A major part of PDSTL’s clientele
included reputed government organisations, namely Laboratory for Electro-Optics Systems (a unit of ISRO), BEL, Instruments
Research and Development Establishment (a unit of DRDO) and private companies like RRP S4E Innovation Private Limited and
Unifab Engineering Project Private Limited. The company has long standing relationships with most of its clientele. PDSTL also
exports to companies based in Israel, Singapore and USA.