InCred Equities, a leading domestic brokerage firm, has initiated coverage on Data Patterns (India), one of the country's leading defence electronics companies, with an 'add' rating, setting a target price of ₹3,000 apiece, based on a P/E of 50x end-Sep 2025F EPS. This target price reflects an upside of 43% for the stock from its previous closing price of ₹2,098.
Although Data Patterns is currently trading at a premium compared to other Indian defence sector companies covered by the brokerage, which have an average P/E of 26x their one-year forward earnings, InCred Equities believes that the company's premium valuation, relative to defence public sector undertakings (DPSUs), will be sustained on the back of company's healthy order backlog, the maturing of development contracts into production contracts, and its experienced management.
The brokerage highlighted the company's strong order wins that doubled in FY23 to ₹9.2 billion, with the order book-to-sales ratio at 2x FY23 revenue. It points out that the company's order book is well-diversified, with 31% production contracts, 64% development contracts, and 5% service contracts.
According to the brokerage, the high share of development contracts is a positive sign for the company, as these contracts could translate into future production and export orders. The order book also includes products that contribute to several indigenous defence programmes, such as the LCA, ALH Dhruv, LUH, and the BrahMos missile programmes, it noted.
Further, the brokerage expects an order inflow of over ₹30 billion over FY24F–26F, highlighting the company's focus on product development for platform-specific products with recurring needs and positioning itself for significant growth in radar, electronic warfare (EW), communication systems, and satellite business sectors.
Additionally, the company is actively exploring opportunities in the export market. The company is also forging partnerships with domestic players to leverage their strengths and expand its market presence further, the brokerage added.
In-house design and development contracts to open new opportunities
The company plans to expand its product portfolio to offer more complex technology-based products. It currently offers electronic solutions developed in areas including complex 20+ layer printed circuit boards (PCB) designing, FPGA-based firmware algorithms, device drivers, and networking layers.
It plans to bid for and participate in higher-value projects that require the use of complex technologies. The company will leverage its strong in-house design and production capabilities to bid for and participate in the tenders for large and complex projects under the Make-in-India program.
The company expects a revenue CAGR of 45% over FY23–26F, given the low base and new development orders. It has 22 development contracts worth ₹5 billion in the order book as of December 2022-end, stated the brokerage.
Plans to grow its service portfolio
Data Patterns is also planning to bolster its service portfolio. The defence and aerospace sectors are characterised by the long life of platforms and products, which presents significant opportunities for service-related offerings.
To capitalise on this, Data Patterns plans to grow its service portfolio to include maintenance, upgrades, and other routine repair services in its portfolio. Revenue from the sale of services is currently driven by AMC contracts, such as the BrahMos missile program, and service income from major development contracts.
Data Patterns has 55 service contracts (including 34 build-to-print) worth ₹509 million as of December 2022-end, the brokerage added.
Stock price history
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. Since its listing, the shares have maintained an upward trajectory and gained 258% to date from their IPO price.
Data Patterns is a vertically integrated defence and aerospace electronics solutions provider headquartered in Chennai, India. The company has been in the business for over 35 years and has supplied products to all the major platforms in the defence and aerospace industries, including the LCA Tejas, Light Utility Helicopter, and BrahMos missile.
It has a strong focus on in-house development and manufacturing and is led by innovative design and development efforts.
04 analysts polled by MintGenie on average have a 'buy' call on the stock.
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