Multibagger DCX Systems stock trades at 25 per cent discount from its recent peak. Time to buy?

Shares of DCX Systems – a company specializing in system integration and cable & wire harnessing – have been on a downward trend for most of August, resulting in an 11.25 per cent decline — the largest monthly drop since September 2023.

Investors sold off the stock after the company's June quarter performance fell short of market expectations. This decline caused the stock to correct by 25 per cent from its July all-time high of ₹452 per share.

The company's revenue and net profit both declined in the reporting quarter. Revenue for the quarter stood at ₹138.08 crore, down from ₹170.10 crore in Q1 FY24. Analysts noted that DCX Systems has traditionally been lackluster in the first quarter, and this quarter was no different.

However, Raneal Advanced Systems (DCX's PCBA arm) delivered revenue of ₹42.4 crore. At the same time, NIART Systems (a railway joint venture) is now ready for mass production, with assets totalling ₹475.2 crore, according to analysts.

Operationally, DCX Systems experienced a 19 per cent year-on-year revenue decline to ₹138 crore due to the typically slow Q1. Rising raw material costs led to an operating loss of ₹4.8 crore, and net profit fell 69 per cent year-on-year to ₹2.9 crore.

Management emphasized that the increased raw material costs will be recovered from customers under the BOM guarantee. Much of these costs are tied to one or two programs, and the company expects to receive the funds within two to three months.

The order book at the end of the June quarter was ₹1,937 crore, executable over two years, with a significant portion of ₹1,250 crore, coming from L&T for the manufacturing and supply of electronic modules. The management is also anticipating strong order conversion in the future.

The company is seeing strong demand from both domestic and international customers for the supply of cable and wire harness assemblies. It received orders worth ₹32 crore for these assemblies and continues to experience strong traction in its order pipeline.

DCX is also focused on improving its margins and is confident about achieving double-digit margins. This will be supported by three key factors: utilizing Raneal Advanced Systems for internal consumption, NIART Systems preparing its obstacle detection equipment for mass production, and an increased mix of cable and wire harnessing, as per the analysts.

Strong order book and diversification efforts to drive growth

Despite the company missing analysts' estimates for the June quarter, domestic brokerage firm DevenChoksey emphasizes that DCX should not be evaluated on a quarter-to-quarter basis, particularly in the first quarter, which has historically been lackluster. The brokerage expects Q2 to provide more clarity on growth acceleration, supported by the company's robust order book of ₹1,937 crore.

As a result, the brokerage has maintained its earnings estimates for FY25E and FY26E, driven by the strong order book, increased focus on cable and wire harnessing, and the commercial production of Raneal Advanced Systems. It continues with its 'buy' rating on the stock with a target price of ₹519, valuing it at 36x on FY26 earnings.

The target price suggests a potential upside of 53 per cent for the stock from its recent closing price of ₹340 per share. Notably, despite the recent correction, the stock has still achieved a 146% gain over the past 17 months.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.