Fortune Scrip     

Published: September 15, 2023
Updated: September 15, 2023

Data Patterns (India)

Growth flies on defence needs : 7-year aim of 30% CAGR profit

Of late, defence has emerged as a sunrise sector on the Indian stock exchanges, particularly in the wake of the ‘Make in India’ policy stance of the Indian government and the opening of the defence space for the private sector. Little wonder that defence stocks belonging to both the public sector and private sector have started attracting growing investment demand. To move with the times, we have selected Data Patterns (India) Ltd, a defence company, as the Fortune Scrip for the current fortnight.

The Chennai-headquartered Data Patterns is among the few vertically integrated defence and aerospace electronics solutions providers catering to the indigenously developed defence products industry. The company has proven in-house design and development capabilities, and an experience of more than three decades in the defence and aerospace electronics space. Its offerings cater to the entire spectrum of defence and aerospace platforms – space, air, land and sea. The company’s portfolio includes COTS Boards, ATE and Test systems, space systems, and radio frequency and microwave. It designs COTS module products that are used in rugged applications and automatic test equipment platforms.

Data Patterns can boast of +modern certified manufacturing facility of international standards: Its in-house design and development capabilities are complemented by its 1,00,000 square feet manufacturing facility located on 5.75 acres of land at the SIPCOT Information Technology Park, Siruseri, Chennai, which has facilities for design, manufacturing, qualification and life cycle support of high reliability electronic systems used in defense and aerospace applications. The company’s facility allows them to be self-sufficient in its requirement of high quality and high complexity production while ensuring functional testing for all its products using internally developed automatic testing equipment.The company is certified for or follows various standards across product life cycles, including for aerospace systems under AS9100D by TUV-SUD, IPC Standards for PCB design, DO 178B for software for airborne systems, software life cycle processes, etc.

The company has grown gradually and steadily, literally from scratch. Initially, it started with developing products for laboratory instrument automation and branded these products for large companies building instruments in India. These products were sold in competition against products of world-renowned companies like Hewlett Packard and Perkin Elmer in the gas chromatography market. Since its inception, the company concentrated on developing competencies and building products. This trait — ability and competence – has led to its emerging as a leading player in defence and aerospace electronics systems. Today, its customers include Defence and Research Organisation (DRO), Bharat Electronics Ltd (BHEL), BDL, the Air Force, Navy and Army, and overseas clients.

HI-SPEED GROWTH

Needless to say, with a steady growth in manufacturing and marketing, the company has made rapid strides in financial performance. During the last nine years, its sales turnover has expanded almost seven times from Rs 63 crore in fiscal 2014 to Rs 453 crore in fiscal year 2023, with operating profit shooting up more than ten times from Rs 17 crore to Rs 172 crore and the profit at net level surging almost 18 times from Rs 7 crore to Rs 124 crore. As the company is being flooded with orders, it goes without saying that its future prospects are extremely promising. Consider:

• Data Patterns has a robust order book which is fattening by the day. As on March 31, 2023, the company’s order book was worth Rs 924 crore, including significant contracts like radar orders valued at Rs 449 crore from DRDO, Bharat Electronics, and the Department of Space. The orders include an electronic warfare development order worth Rs 53 crore from DRDO and production orders for Brahmos for Rs 40 crore. Maintains S Ramchandran, Managing Director, “I anticipate significant order booking in fiscal 2024 and most of them will be single-entry tenders.” What is more, an anticipated order pipeline of Rs 2,000-3,000 crore in the next three to four years provides strong revenue visibility. In fact, defence electronics provides a huge opportunity of Rs 1.5 lakh crore in the next 4 to 5 years, led by the armed forces’ requirements of advanced systems (radar, EV communication and satellite).
• By now, the company has achieved remarkable competence in manufacturing radars, electronic warfare, avionics, fire control systems, check-out systems for Brahmos, etc. Now, after the successful completion of a Rs 500 crore QIP, the company will focus on new product development for the domestic and international markets.

SECURE FUTURE

• According to JM Financial, a leading brokerage house, the company has buoyant repeat order prospects in the coming years in its targeted areas. The brokerage expects revenue/EPS CAGR of 32 per cent/35 per cent over fiscal 2023/ FY2025 with improved cash conversion and return ratios. The recent capital raising through QIP has strengthened the balance sheet and gives it the financial muscle to invest in emerging technologies and platforms.
• The company management is highly optimistic about the outlook of the company. Says Mr S Rangarajan, “I am confident we will continue to grow PAT at 30 per cent for the next seven years. We are in an investment phase and continue investing in people, technology and infrastructure. For fiscal 2024, EBITDA margin will be around 40 per cent.” Pointing out that India is traditionally used to importing major parts for defence purposes, Mr Rangarajan adds, “Delta Patterns will try to build those products which are being imported. These can be ordered in India and we do that with Indian technology. Hence, EBITDA, gross margins and the bottomline that we are looking at will get maintained.”

OPPORTUNITIES GALORE

• The company, an indigenous integrated and strategic defence and aerospace electronics solutions provider which is well positioned to benefit from the ‘Make in India’ opportunity, has strong competitive strengths. The Indian defence industry is rapidly evolving into a self-sustaining one with companies and defence PSUs moving towards specialising as defence prime integrators and components suppliers. Similarly, the space industry is expanding with new space participants offering services which were previously offered by the Indian government’s space organization such as launch services, satellite operations and downstream services. The defence sector has now started outsourcing sub-component manufacturing to the private sector. Thus, there are resultant expanded opportunities for the private sector. Data Patterns has emerged as one of the major beneficiaries of this trend.
• Since its inception, Data Patterns has focused on in-house development and manufacturing capabilities led by innovation and design and development efforts. Just two years ago, the company had more than 500 engineers, many of whom serve in both the design and development departments. The company has in the past initiated development of several projects such as military grade processor modules, cockpit displays, actuator controllers, digital receivers and up/down converters for radars with an aim to utilize these components in subsequent projects. This in turn has also underscored the company’s capabilities.
• Data Patterns has achieved a consistent track record of profitable growth due a scalable business model. With a net profitability growth of 490 per cent between fiscal 2020 and fiscal 2023, the company is one of the fastest growing entities in the defence and aerospace electronics sector in India, with excellent margins and return ratios. It is focused on managing costs by leveraging the inherent efficiencies of its reusable building block-driven business model while consistently growing revenues.

SCRIP IN CLOVER

The company came out with an IPO in 2021, with an issue price of Rs 585, and got listed on December 24, 2021 at Rs 864 (BSE). This shot up to Rs 2,484 in 2023 before settling around Rs 2,252. Prabhudas Lilladher,a well-known brokerage, has set a target of Rs 2,480/2,500. JM Financial has set a target of Rs 2,720.

Discerning investors will do well to accumulate these stocks at every decline, as the stock is fundamentally very strong and its future prospects are highly promising.