Defence Stock Zooms 10% on Debut. More Details Inside...

Bull market or bear market, defence stocks have been in favour for the past two years and embarked on an upward trajectory.

Defence stocks are rising on the back of growing order books, robust financials, and the government's 'Make in India' initiative.

Not only the established players, but newly listed defence stocks have also benefitted from the sectoral tailwind. One such defence company that made its stock market debut today is CFF Fluid Control.

Listing at a decent premium

CFF Fluid Control's SME IPO was opened for subscription between 30 May 2023 to 2 June 2023.

The issue price of CFF Fluid Control was set at Rs 165 per share.

The company made its stock market debut today and listed at Rs 175, 6% higher than its IPO price.

As the session progressed, CFF Fluid Control extended gains and touched a high of Rs 183.8.

About CFF Fluid Control

Incorporated in 2012, CFF Fluid Control is primarily engaged in the business of manufacturing and servicing shipboard machinery. They manufacture critical component systems and test facilities for submarines and surface ships for the Indian Navy.

The entity also designs, manufacture, and service mechanical equipment and systems for industries like nuclear and clean energy.

The company's promoters and group companies have been in the defence manufacturing space for more than 20 years.

CFF Fluid Control was incorporated with the purpose of having a dedicated new entity focused on meeting the growing requirements of the Indian Navy, Mazagaon Dockyard. This was to undertake the manufacturing and supplying of mechanical equipment for the Scorpene Submarine Program of India.

The company's facilities are situated at Khopoli. The facility is spread over 6,000 square metres and has all the relevant state-of-the-art machinery and testing facilities. At the facility, the company design, manufacture, and service.

Strong growth prospects

India was one of the biggest arms importers. However, the scenario might change soon.

The Indian government is focusing on innovative solutions to empower the country's defence and security via 'Innovations for Defence Excellence (iDEX)', which has provided a platform for start-ups to connect to the defence establishments and develop new technologies/products in the next five years (2021-2026).

In an effort to boost the defence sector and increase the infusion of foreign direct investment (FDI), the government September 2020 revised the regulations and permitted FDI under the automatic route up to 74% and 100% through the government route in any area, where it is likely to provide access to contemporary technologies.

The Defence Ministry has set a target of 70% self-reliance in weaponry by 2027, creating huge prospects for industry players.

Green Channel Status Policy (GCS) has been introduced to promote and encourage private sector investments in defence production to promote the role of the private sector in defence production.

Given the government's emphasis on easing restrictions on foreign investment in order to achieve India's goal of an "Atmanirbhar Bharat," the growth trajectory of the Indian defence sector remain strong.

The Indian Government plays an important role in supporting the ports sector. It has allowed Foreign Direct Investment (FDI) of up to 100% under the automatic route for port and harbour construction and maintenance projects. It has also facilitated a 10-year tax holiday to enterprises that develop, maintain and operate ports, inland waterways and inland ports.

Thus government's intent to develop a robust defence and shipping sector will boost CFF Fluid Control's growth.

That being said, the company faces certain risks like strict regulatory concerns, constantly changing technology, and customer concentration.

The financials...

The company's sales fell by 54.3% in the financial year 2021 as the overall economy dealt with the aftermath of the pandemic.

However, as the economy picked pace, it's the company's total revenue picked up. In the financial year 2022, the company reported total revenue of Rs 469.8 million (m) on the back of a healthy order book.

Healthy relationships with domestic and international clients, and softening input prices helped the company achieve sound profit margins. In FY22, it reported a net profit of Rs 78 m, with a net profit margin of 16.6%.

Financial snapshot (2020-2022)

Particulars	31-Mar-22	31-Mar-21	31-Mar-20
Revenues (Rs m)	469.8	145.2	317.8
Revenue Growth (%)	223.6	-54.3
Expenditure Before Tax	366.8	145.5	301.6
% of Total Income	78.1	100.2	94.9
Net Profit	78.0	2.4	13.2
Net Profit Margin (%)	16.6	1.7	4.2
Net Worth	148.3	70.4	67.9
Return on Net Worth (%)	52.6	3.5	19.6
Basic EPS	5.5	0.2	0.9

Data Source: Company's red herring prospectus (RHP)

In conclusion

Best Defence companies are set for dramatic growth this decade. Along with the sectoral tailwinds, CFF Fluid Control may also benefit from the emerging trend of water ways transport.

However, investors should keep in mind that sectoral tailwinds are built on hopes and expectations. After various instances of unexpected market crash, investors have learnt that hopes and expectation crumble as quickly as they are build.

Carefully consider your investment horizon and goals before making any investments.

Happy Investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...