Data Patterns (India) Ltd - Stock Valuation and Financial Performance

About the Company:

Data Patterns (India) Limited is one of the fast-growing companies in the Defense and Aerospace Electronics sector in India and has proven in-house design and development capabilities with experience of more than three decades in the field. It caters to the entire spectrum of Defense and Aerospace platforms – space, air, land and sea. The Company has capabilities from design to delivery which provides it a significant competitive advantage in terms of overall development time and cost when bidding for projects. These platform specifc products along with products certified for ongoing programs will allow Data Patterns to be the preferred OEM (original equipment manufacturer) supplier for such qualified product requirements, driving growth and revenue visibility over many years.

The company's achievements include the development of critical systems for the BrahMos missile program and the Indian government space organization, among others. Their products, pre-approved by customers, are integrated into end platforms. It has received several awards and recognitions for its contributions to the industry.

About the Industry:

The Indian defence industry has undergone significant evolution over the decades. Initially focused on low technology weapons, it relied heavily on foreign OEMs for major military programs. In subsequent years, the Indian government initiated programs led by the DRDO and joint ventures with countries like Russia, as seen with BrahMos, to develop and produce advanced defence systems. The Indian defense sector remains a significant focus for the government, as evidenced by the allocation of Rs. 5.94 lakh crores in the current union budget, marking a notable 30% increase. Additionally, the Ministry of Defense has set ambitious targets, aiming to achieve a turnover of Rs. 1.75 lakh crores within the aerospace and defense manufacturing sectors by 2025, including export targets of around Rs. 35,000 crores. This favorable industry outlook further underscores Data Patterns' promising growth prospects.

In the Union Budget for FY 2023-24, the Indian Government has allocated a significant non-salary

revenue outlay of Rs. 90,000 Cr for the Defence Sector, representing a 44% increase compared to the previous year's allocation. This increase in budget is intended to close critical gaps in combat capabilities, equip the forces with ammunition and sustain weapons and assets to ensure they are battle-ready. The increased budget allocation demonstrates the government's commitment to sustainable modernization and infrastructure development of defence services. The Agnipath scheme, targeting the reduction of hefty allocations towards personnel and pensions (51% of the defence budget), is expected to free up substantial funds for crucial defence capital procurement.

Recent industry trends have been shaped by various government policies:

• Aatmanirbhar Bharat: A policy aimed at promoting self-sufficiency in key industries, including defence, by limiting imports and encouraging domestic production.
• Defence Acquisition Policy 2020 (DAP 2020): Focused on improving indigenous manufacturing, streamlining procurement processes, and promoting innovation.
• Defence Offsets: A shift from components to technology investments, with expanded opportunities for foreign entities to transfer critical technologies to Indian defence companies.
• Defence Production and Export Policy 2020: An ambitious plan to double India's aerospace and defence industry size by 2025, emphasizing exports.

These policies are driving growth in India's defence industry, with a focus on indigenous manufacturing, technology development, and export expansion. The private sector, rather than public sector units, is taking the lead in defence exports, and companies specializing in niche products are poised to benefit from this trend.

At present Defence Electronics make up only 25-35% of the cost of platforms used by the Indian armed forces, which is expected to increase in the future. However, at present over 60% of the electronic components used are supplied by foreign OEM’s. As indigenisation efforts continue, future procurement will see a large portion of defence electronics sourced locally.

Business Profile:

(DRDO: Defence Research & Development Organisation, MOD: Ministry of Defence, DoS: Department of Space)

Business Performance:

3 Year Revenue / PAT CAGR has been impressive 43% /81% respectively. The Company reported a 46% growth in revenue from Rs. 311 crore in FY22 to Rs. 453 crore in FY23. The EBIDTA margin was 38% in FY 2022-23 as compared to 45% in FY 2021-22 due to varying margin profiles of the projects executed during the year. Sales as well as the order book of the company can show significant fluctuation as is the nature of the industry as there are bulk orders and deliveries. However, 3 Year  ROE & ROCE profile has been good at 19% & 30% respectively.

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Management:

Srinivasagopalan Rangarajan, is the Chairman and Managing Director of the company. He has been associated with the company since its incorporation. He holds a Bachelor’s Degree of Technology in Chemical Engineering from University of Madras and a Master’s Degree in Science from the IIT Madras. He has over three decades of experience in business development, corporate affairs, finance and marketing.

Desinguraja Parthasarthy, is the CTO of the company. He holds a Bachelor’s degree in engineering from University of Madras. He has over three decades of experience in Product Development.

Thomas Mathuram Susikaran, is the Senior VP-Business Development. He holds a Bachelor’s degree in engineering from Madurai Kamaraj University and a Master’s degree of technology in electrical engineering from IIT Madras. He has over 21 years of experience in business development and marketing.

Competition:

Data Patterns has a balanced and comprehensive set of capabilities across 12 segments. This positions the company to seize emerging opportunities and contribute to the development of India's defense and space-related capabilities.

Data Patterns’ present across all product segments vis-a-vis competitors

The Indian defense industry is undergoing a significant transformation, with a shift towards specialization in defense primes, integrators, and component suppliers. Similarly, the space industry is expanding, with new players entering the market to offer services that were previously monopolized by ISRO(Indian Space Research Organisation) Thus in the coming years the competitive landscape in these segments shall intensify substantially  as outlined below:

Strenghts:

1. Comprehensive Expertise: Data Patterns excels in a wide range of defense and aerospace electronics solutions, including Radars, Electronic Warfare, Communication systems, Avionics, and Satellite Systems. This robust domain capability positions the company as a go-to partner for diverse defense projects.
2. End-to-End Capabilities: The company has the unique advantage of having all product development competencies under one roof. This streamlined approach ensures efficient collaboration and synergy across different phases of product development, from design to delivery.
3. In-House Design and Manufacturing: With a 100% in-house design and manufacturing capability, Data Patterns has greater control over quality and timelines. This reduces reliance on external vendors and minimizes potential bottlenecks.
4. Scalability: Data Patterns has the potential to build complete systems, making it a valuable partner for large-scale defense projects. This scalability allows the company to adapt to the specific needs of different programs.

Overall, these strengths position Data Patterns as a preferred OEM supplier for qualified product requirements in the defense and aerospace sector.

Risks:

1. Change in Defence Spends:Data Patterns’ business is largely dependent on contracts from the Government of India and associated entities including defence public sector undertakings and government organizations involved in space research. A decline in the Indian defence or space budget can result in significant risk to its future order inflow.
2. High Customer Concentration: The Company depends on a limited number of customers such as DRDO, Defence PSUs such as MoD, BrahMos Aerospace and the Indian government space organization for a significant portion of its revenue. The loss of any of these customers may adversely affect the business & financial condition of the company.
3. High Working Capital Requirement:The company requires high working capital to supplement its growth (ranging from ~300-400 days). High gestation period of projects along with any delays in payment by its customers might significantly impact its cash flow position.