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Execution and margins expected to improve

Astra Microwave (AMW) has reported strong performance in Q2FY23. Key highlights: 1) visible shift to defence sector; 2) targeting high-margin domestic market; 3) Sep’22 orderbook at Rs18.5bn, (2x revenue) executable over next 12-36 months; and 4) order inflow in H1FY23 is worth Rs3.42bn vs revenue booking of Rs2.9bn. Going ahead, in the near term, management is targeting >Rs2bn revenue in Q3FY23 and >Rs10bn in FY24. Besides, management is confident of converting Rs80bn of Rs145bn-150bn business potential through to FY28 into confirmed orders and has delineated key strategic focus areas to achieve the same. We remain positive on AMW’s prospects and reinitiate coverage with a BUY rating. Our target price of Rs380 is based on DCF methodology, and implies 27x FY24E EPS.

* Good Q2FY23 performance with improved margins. Astra’s Q2FY23 EBITDA margin of 23.7% was the highest since Q3FY20 owing to focus on defence segment and domestic market. Key highlights: 1) EBITDA of Rs405mn (up 3.8x YoY; 62% QoQ) was driven by the higher-margin domestic market; 2) revenue from domestic market was 72% in Q2FY23 vs 42% in Q2FY22; 3) order inflow in H1FY23 was Rs3.4bn, of which Rs3.2bn is for defence; 4) revenue mix in favour of domestic business is expected to further improve to 70% over next 2-3 years. In the earnings concall, management indicated a revenue target of >Rs2bn in Q3FY23 and Rs10bn over FY24. With revenue mix shifting in favour of profitable domestic operations, we expect EBITDA margin to improve to 23.6% by FY24 – similar to that in Q2FY23.

* Multiple triggers in sight. Going ahead, we see robust potential business inflow, higher share of domestic revenue and focus on defence as the key stock-triggers. Key highlights: 1) of the Rs145bn-150bn in potential orders through to FY28, management expects to book Rs50bn with full certainty and the rest with 30-50% possibility (being competitive tenders), resulting in another Rs30bn worth of business; 2) defence portfolio – Array transmitter receiver unit for jamming pod in Tejas, AAAU for Uttam AESA radar, AAAU for AEW&CS, AAAU for LRMFR, long-range radar (part of ballistic missile shield) transmit receive module, BSNs, power systems, etc., and iv) medium power radar DTRMs; 3) increasing proportion of domestic revenue (fetching higher margins) is likely to lead to higher profitability.

* Outlook: Earnings growth with better margins. In our view, AMW’s capability for designing, developing airborne radars for fighter jet platforms dovetails with MoD’s modernisation plan as well as development of Uttam airborne radar for LAC Mk1A. This would enhance AMW’s participation in the domestic defence sector. We reinitiate coverage with a BUY rating and target price of Rs380 based on DCF methodology.

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