What Drives the Success of Data Patterns India Limited in Defence Electronics?

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Company Introduction

Data Patterns India Limited (DPIL) is one of India's fastest-growing Defence and Aerospace Electronics companies. DPIL specializes in manufacturing Radars, Electronic Warfare systems, Avionics, and Launching systems. The company collaborates closely with major public sector undertakings in the defense sector, including Bharat Electronics Limited (BEL), Defence Research and Development Organisation (DRDO), BrahMos Aerospace, and Hindustan Aeronautics Limited (HAL). Leveraging its R&D capabilities, DPIL successfully delivered 9 precision approach radars to the Ministry of Defence, Air Force, and Indian Navy during FY24.

FY24 Financial Performance

  • Total Revenue increased by 22% from INR 463 Cr.  in FY23 to INR 566 Cr. in FY24.
  • EBITDA witnessed a 29% growth, rising from INR 172 Cr. in FY23 to INR 222 Cr. in FY24.
  • Profit Before Tax (PBT) increased by 47% to INR 242 Cr.  in FY24, up from INR 165 Cr. in FY23.
  • Profit After Tax (PAT) surged by 47%, reaching INR 182 Cr.  in FY24, compared to INR 124 Cr. in FY23.
  • PAT margin improved significantly, from 27% in FY23 to 35% in FY24.
  • Secured new order worth ~INR 670 Cr. during FY24 and the Total order book as of March 31, 2024, stood at INR 1,083.01 Cr.

Key Drivers and Investment Thesis

Diversified Order Book and Strong Growth Prospects:

  • DPIL's order book stood at INR 1,083.01 Cr.  as of FY24-end, growing at a CAGR of 30% since FY21.
  • With a diversified order book (64% from Radar and 21% from Avionics), the company is well-positioned to capitalize on the growing demand from the Indian defence sector.
  • The management has guided for a revenue growth of 20-25% in FY25, driven by product development initiatives and the rollout of new systems like radar, electronic warfare, and communication systems.

Strong R&D Capabilities and Product Development Focus:

  • The company aims to spend 20-25% of its total sales on product development, showcasing its commitment to innovation and technological advancement.
  • With a focus on developing in-house products instead of relying on foreign OEMs, DPIL can maintain higher margins (40% for in-house products vs. 35% for integrated products).

Healthy Profitability and Margin Profile:

  • DPIL maintained a gross margin of ~68% and an EBITDA margin of ~43% in FY24, reflecting its strong profitability.
  • The management has guided for an EBITDA margin range of 35-40% in FY25.
  • The company's IP on products and single-vendor contracts have enabled it to sustain high margins.

Robust Financial Position and Cash Generation:

  • DPIL continues to be debt-free, with cash and liquid investments of ~INR 750 Cr.  as of March 2024.
  • The company's cash conversion cycle is expected to improve to 270-280 days over the next 2-3 years, indicating better working capital management.

Export Opportunities and Geographical Expansion:

  • DPIL has successfully expanded into new geographical markets, including Europe and East Asia, where it has competed effectively with foreign OEMs.
  • The company has an export order worth INR 70 Cr., which will be executed in the next 12 months, providing further revenue diversification.

Robust Order Visibility and Growth Potential:

  • DPIL expects an order inflow of INR 1,000 Cr. each in FY25 and FY26, representing single-vendor contracts with a recurring nature.
  • The company has visibility for a healthy order book of INR 2,000-3,000 Cr.  over the next two years, underpinning its growth prospects.

Capacity Expansion and Investment in Infrastructure:

  • The company has planned a capex of INR 150 Cr. over the next two years for additional factory and testing infrastructure, supporting its growth ambitions.

Valuation and Recommendation

We value the stock at 60x FY2027E Earnings Per Share (EPS), with a target price of INR 3,430, a projected upside of 25% over the next 12-18 months.

We recommend a "BUY" rating on Data Patterns India Limited based on robust guidance for the order book and margin expansion over FY26-27.

Data Patterns India Limited (DPIL) is a fast-growing Defence and Aerospace Electronics company specializing in radars, electronic warfare systems, and avionics. In FY24, it achieved a 22% revenue increase to INR 566 Cr. and a 47% rise in PAT to INR 182 Cr. With a diversified order book of INR 1,083.01 Cr., strong R&D focus, and robust financial health, DPIL is poised for significant growth.

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