ICICI Direct upgrades Data Patterns to 'buy', sees over 15% upside; here's why

Domestic brokerage firm ICICI Direct Research, in its latest report, has upgraded the rating on Data Patterns (India) from "hold" to "buy" with a target price of ₹1,555 apiece, which reflects an upside of 15.27%. 

Data Patterns (India) is a small-cap stock with a market cap of ₹7,000 crore. The company is a vertically integrated defence and aerospace electronics solutions provider catering to the indigenously developed defence products industry. The company's offerings cater to the entire spectrum of defence and aerospace platforms -space, air, land, and sea.

The company's shares were listed on the exchanges on December 24, 2021, making it one of the most successful IPOs to date. The stock made a strong debut on the bourses at ₹864 apiece, compared to the issue price of ₹585. 

The stock finished the first day with a listing gain of 29% at Rs. 754. The IPO received a strong response from investors, as it was subscribed to nearly 120 times.

Taking the current market price of ₹1,349 into consideration, the stock is trading 130.6% above its issue price.

Recently, the company completed a ₹500 crore qualified institutional placement (QIP) to raise funds for various purposes. The company proposes to utilise the net proceeds mainly towards funding working capital requirements and investments in product development. Balance fund proceeds will be used for repayment of borrowings, capex & land purchases, and general corporate purposes.

ICICI Direct believes that the company's fundraising for working capital and product development will be beneficial for faster execution of existing contracts and for bidding for more contracts from the defence and space industry.

By leveraging existing competencies, the company aims to expand its portfolio of products with the ultimate goal of developing proprietary products, it says.

The brokerage identified several key factors that could impact the future performance of the company, such as a robust order inflow with a healthy pipeline of orders worth ₹2,000–3,000 crore over the next two to three years, providing a strong visibility.

Additionally, the brokerage noted that there is an opportunity for ₹1.5 lakh crore in the next four to five years in the defence electronics sector, driven by the armed forces' need for advanced systems.

Key orders in the pipeline for DPIL in FY23 include the fire control system for the BrahMos missile, avionics for the LCA, RWR for fighter aircraft, ELINT for airborne and ground platforms, and radar subsystems.

Furthermore, a significant proportion of electronic components used in Indian defence platforms is currently supplied by foreign OEMs. However, as indigenisation efforts continue, a considerable portion of future defence electronics procurement is expected to be sourced locally, the brokerage added. 

The company's revenue and PAT CAGR for FY19–22 were 18.9% and 40.7%, respectively. In FY22, the revenues surged by 39% YoY with an EBITDA margin of 45.4%. In the same fiscal year, PAT rose by 69% YoY to ₹94 crore. 

According to the brokerage, the company is in a favourable position to deliver revenue and PAT CAGR of 29.3% and 28.5%, respectively, over FY22–25E.

The brokerage stated that as of the end of January 2023, the company's order backlog was Rs. 1,014 crore, which is 2.3 times its TTM revenues. 

Out of the total order backlog, 56% are development contracts. The order book saw a significant increase in the first nine months of FY23, with Rs. 430 crore of development contracts from DRDO, it added. 

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.