Acquisition unfolded a plethora of high-growth defence opportunities: AXISCADES Engineering Technologies Ltd (ACETL), an engineering design IT services company, would emerge as a play on the fast-growing defence business with the management’s decision to acquire its privately held entity AXISCADES Aerospace & Technologies Ltd (ACATL), which caters to leading global defence equipment companies and is approved/certified vendor of Indian defence forces. The combined entity will entail its presence across the value chain of aerospace and defence space and widen the market opportunities with cross-sell opportunities and deeper mining of 12+ marquee clients of combined entity.
Favourable swap ratio and earnings accretive acquisitions remove overhang on the stock: The scheme of arrangement of acquisition of ACATL is in attractive terms for investors. Consequently, the acquisition is earnings accretive from day one, with EPS increasing to Rs8.8 from Rs7.3 (FY2015 pro-forma numbers). Moreover, the consolidated entity would have a better margin profile with the blended margins of 14.3% from 13.2% of the existing stand-alone business. The favourable terms of acquisitions allay the fear of higher-than-expected equity dilution.
Widen market opportunities; revenues to grow by 3.0-3.5x in the next 5 years: The combined entity will benefit from a higher scale of operations, a unified ‘go to market’ strategy and a higher share of the potential business in the aerospace and defence space. Also, the management is confident of leveraging its strength to partner with global OEMs in Make in India programmes, which is expected to be a humongous opportunity in the defence space. Overall, the management aspires to grow its revenues by 3.0-3.5x in the next five years from the current level of Rs530 crore (combined revenues) and also the synergy benefits to play out to improve the blended margins gradually over the next few years.
Valuation still to reflect the full potential of combined entity; scope for multi-fold returns in next 3 years: The impetus of government to accelerate the Make in India programmes and increasing attractiveness of Indian vendors as a partner for global OEMs in aerospace and defence space provides bigger market opportunities for players like ACETL. Also, the acquired entity (ACATL) is a certified vendor for Indian Army, Navy and Airforce, which makes it among the front runners to get the defence contracts and partner in the Make in India campaign. At the current market price of Rs329 (market cap works out to Rs1,230 crore on fully diluted equity of 3.77-crore equity shares), the stock trades at EV of 17.5x its combined EBITDA for FY2015 which is an attractive defence play considering the growth prospects of the company. We expect the stock to have multi-fold returns in the next two to three years (for long-term investors). We have a positive view on the stock and expect the stock to give an upside of 20-25% in near to medium term.
Risk: 1) Slowdown in global economics will adversely affect the financial prospects of the company
2) Majority of revenues is coming from global OEMs from engineering, aerospace and defence space; any conflicts of interest with OEMs will have a negative effect.
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