DCX Systems Ltd

The management has stated during the concalls that the revenues and cash flows are lumpy. The company works on a Cost-plus model with its customers. In electronics manufacturing, there are typically these stages:

1. PCB design
2. PCB fabrication
3. BoM procurement
4. PCB Assembly
5. PCB qualification/acceptance testing
6. Delivery

I am guessing DCX gets the PCB designs from its customers and its role starts from fabrication onwards.

Since these are defence & aerospace PCBs the entire process could take up to 6-7 months to complete, because the PCBs have to undergo many tests during each of the above steps. For eg. there is something called as a burn-In test, where the assembled PCBs are kept in a thermal chamber at an elevated temperature for ~100 hours (will vary from product to product). After every few hours they have to be functionally tested while still in the chamber. Some of these tests happen on the entire lot while some happen only on a small % sample. Then there are also some tests which will happen at the customer’s end.

I am guessing that DCX gets some mobilization advance payment from the customer when the contract is started. This is for component procurement etc. The invoicing likely happens when the customer finishes all the tests at their end after the PCBAs have been delivered to them.

So it might happen that while the work related to a contract happens throughout the year, the billing will only happen in one of the quarters. So instead of tracking the company on the Q-to-Q basis it is better to track it on an annual basis. The primary metric to keep a track of is the order book. As long as they have ~2 years worth of orders that is fine.

Stake sale by the promoter is a very big negative. Especially the manner in which it was done i.e. in-between a fantastic quarter and a very poor quarter in terms of numbers. As a general thumb rule I am skeptical of promoters in small & mid caps. Trust only develops after many many quarters of walking-the-talk. So while I am still invested in DCX (<5% of my portfolio), I will be cautious.