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DATAPATTNS is expensive but ideally positioned to sail through sectoral tailwinds
Data Patterns Ltd (NSE: DATAPATTNS) is one of India's leading defence plays, building indigenously solutions and catering to the entire spectrum of space, air, land and sea.
DATAPATTNS is the only Indian company offering building blocks that can be used on multiple end systems, boasting design capabilities covering the entire range of electronics - including processors, power, RF and microwave, embedded software, and firmware. The company has a Make in India cost advantage leading to higher win rates in exports.
Defence is a key focus sector backed by higher budgetary allocation and the ‘Make in India’ initiative
The broader Defence and Aerospace segment in India was sized at c. $11bn (INR 85,000cr) as at 2021…expected to reach $70bn (INR 5,60,000cr) by 2030. If any indication, the GOI has allocated $72bn (INR 5,94,000cr) to the country’s defence budget already in FY24, an increase of 13% on y o-y basis. India has been witnessing a paradigm shift from being a defence importer to an exporter in the light of the ‘Make in India’ initiative. Exports stood at $1.7bn (INR 14,000cr) as at 2022, expected to touch $3.0bn (INR 25,000cr) mark by 2025.
Improving operational efficiency combined with increasing market share
The revenue mix of DATAPATTNS comprises 56% Production contracts, 42% Development contracts, and 2% Service contracts. Revenue/EBITDA in FY23 was INR 453.45cr/ INR 171.81cr (38% margin), at L3Y CAGR of 43%/56%. Net profit in FY23 is INR 124cr (27% margin) with L3Y CAGR of 80.5%. FY23 order book inflows increased by 94% at INR1008cr (including orders finalized in April’23 & May’23). Leverage is fairly accommodative with Debt/Equity Ratio of less than 1 and Interest coverage of 22.3x. CRISIL upgraded DATAPATTNS rating to CRISIL A-/Positive/CRISIL A2+ (from CRISIL BBB+/Stable/CRISIL A2) in FY23. ROCE stood at 22% with ROE at 17% for FY23. CAPEX has grown annually by 65% from INR 9.3cr in FY18 to INR 113cr in FY23. DATAPATTNS recently completed a QIP of INR 500cr for new product development. Strong liquidity is evident thanks to a healthy Cash ratio of 4.33x.
Pricing is at the higher end
DATAPATTNS is currently trading at a P/E of 80.53x. Close comps Bharat Electronics (NSE: BEL) trade at 28.9x, Syrma Sgs Technologies (NSE: SYRMA) at 57.9x & Honeywell Automation (NSE: HONAUT) at 82.87x. DATAPATTNS’s higher multiples are driven by a higher net profit growth (5years) of 45.6% vs. BEL’s 4.1% and HONAUT’s 6.5%. The promoters hold 42.41% share, while retail investors hold substantial 40.88% followed by DIIs holding 11.64% and FIIs holding 5.08%.
WC intensive operations and high dependency on govt. entities are downside factors
The company operates a WC intensive model, having an elongated collection cycle of 308 days vs. BEL’s 0 days, HONAUT’s 99 days and, Syrma’s 72 days and high inventory days at 412 vs. BEL 269, HONAUT 33, Syrma 139 in FY’23. DRDO, MoD, and Brahmos constitute c. 50% of the total revenue pie, showcasing some amount of concentration risk. DATAPATTNS has recently made amendments in contracts and with execution its cash conversion cycle is expected to be improved.
With Make in India and Atmanirbhar Bharat Mission taking a boost, DATAPATTNS certainly has higher growth potential in market justified by their YoY PAT growth of 32% backed by increase in the order book value every year. Dependency on Government entities for majority of its revenues and a prolonged cash conversion cycle are potential risks to be considered. With the stock trading at a high P/E multiple we recommend keeping it on watchlist accumulating on significant dips considering upside at present levels appears capped.
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Disclaimer: The views expressed above are the views of Arkvega Partners LLP, and are subject to change at any time based on market and other conditions. This is neither an offer nor solicitation for the purchase or sale of any security, and should not be construed as such. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. We strongly advise you to do your own research and consult an accredited investment advisor before investing based on what you read in a newsletter. Arkvega Partners LLP or its employees may have exposure in the financial instrument discussed above and can close positions in the future without prior intimation.