Newsletter
Over the past five years, Paras Defence & Space Technologies has delivered an 88% return to investors. Not exactly a multibagger—but enough to stand out in India’s small-cap defence landscape.
And on paper, the company looks like it’s doing everything right: expanding product lines, winning orders, raising capital, and moving beyond components to full-fledged defence platforms.
But dig a little deeper, and the picture gets more complicated.
Paras has long been known for its work in high-precision optics—used in satellites, missiles, and surveillance systems. But that’s no longer the centre of gravity. In fact, the optics business has seen a 25% revenue decline since FY22.
Instead, the company’s growth is now coming from Defence Engineering—a broader segment that includes missile launch tubes, command control systems, and electronic warfare platforms.
This segment now accounts for 54% of total revenue, up from 49% just two years ago. And the strategic intent is clear: Paras wants to move up the value chain. In January 2025, it received manufacturing licences for light machine guns (LMGs) and naval cannons—a sharp move from sub-systems to system-level products.
It’s also ramping up capabilities in anti-drone systems, EMP protection gear, and border surveillance tech.
The company has been winning contracts too. Over the last 18 months, it booked ₹881 crore in new orders, bringing the order book to ₹630 crore at the end of FY24. FY24 revenue stood at ₹336 crore, and net profit came in at ₹50 crore—a 66% YoY jump. It has also outperformed consensus estimates for several quarters now.
So far, so good. But here’s where things start to wobble.
Despite growth, margins and return metrics haven’t caught up. Return on equity (RoE) has hovered between 7–11%—well below sector leaders like Bharat Electronics (BEL) and Hindustan Aeronautics (HAL). And the company has yet to declare a dividend, despite multiple profitable years. That’s not lost on investors looking for yield, not just growth.
More worrying is the working capital profile. Paras has a cash conversion cycle of 555 days, and debtor days at 285. In simpler terms, it’s taking nearly a year and a half to turn resources into cash—and most of that is tied up in payments from government-linked clients. That slows reinvestment and makes profitability harder to convert into real liquidity.
In late 2024, the company raised ₹135 crore through a QIP. That money, along with ₹500 crore in planned capex, is being used to build India’s first Optical Systems Development Park, along with a new testing and calibration facility in Navi Mumbai. The infrastructure bet is big—and long-term—but it may strain cash flows further before it starts to pay off.
On the partnership front, things look promising. Paras is collaborating with DRDO, Israeli firm Controp, and French defence player CerbAir to co-develop jammers and surveillance systems. It also holds a growing portfolio of defence patents, signaling an effort to build deeper IP instead of relying solely on licences or imports.
But all this comes at a price. The stock currently trades at a P/E of 73 and nearly 8x its book value. That kind of valuation demands flawless execution, consistent cash flows, and rising efficiency metrics—all of which are still a work in progress.
So, what’s the big picture?
Paras is no longer an optics story. It’s shifting toward system-level manufacturing, with a focus on scaling both product complexity and revenue visibility. And in many ways, it’s doing the right things: building IP, forming strategic alliances, and expanding its addressable market.
But unlike some defence peers that enjoy high margins, faster payment cycles, and strong return ratios, Paras is still figuring out how to turn growth into sustainable shareholder value. For now, the stock is riding on vision and order wins. The next phase will be all about execution and capital efficiency.
Final pour:
Paras Defence is evolving fast—no doubt about it. It’s pushing into new verticals, upgrading its infrastructure, and securing high-profile deals. But for investors, the real test isn’t revenue growth—it’s whether the company can turn that growth into free cash, higher returns, and value that justifies its lofty valuation.
It’s worth watching. But not without asking some tough questions.
