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Robust competencies and growth outlook

Data Patterns is an established player in the defence and aerospace electronics industry with experience of more than three decades. The company follows an in-house design and development model with capability to supply both sub-systems and complete products in the areas of Satellites, Radars, Electronic Surveillance & Monitoring and Communication Systems. Its building block approach (1000+ developed in house) sets it apart from integration based approach followed by many other defence companies. Data Patterns has been scaling up rapidly and had an order backlog of INR 9.7bn as on June-23 (2x TTM revenue). The Indian defence industry is undergoing a structural shift towards domestic sourcing, development and manufacturing as also rising exports (FY23: c.INR 160bn). The company has repeat order win prospects of INR 20-30bn in coming years in its targeted areas. We expect revenue/EPS CAGR of 32%/37% over FY23-25E with improved cash conversion and return ratios. Recent capital raise through QIP has strengthened the balance sheet and gives it the financial muscle to invest in emerging technologies and platforms. The coverage stands transferred to Ashish Shah. We maintain BUY with price target of INR 2720 based on 55x Sept’25 EPS.

* Diverse product range in the defence and aerospace electronics industry: Data Patterns’ key products/solutions include missile fire control systems, tracking radars, electronic warfare systems, surveillance radars, test equipment, digital flight control computer, avionics, countdown systems for satellites among others. Many of these solutions are also capable of being deployed in civilian fields, including wind profile radars, doppler weather radars, and data buoy sub-systems and tsunami warning sub system applications.

* In-house development a key differentiator; drives higher margins: Data Patterns’ in-house capabilities including PCB design (20+ layers), firmware algorithms, operating system porting, device drivers, graphical user interface, signal processing, streaming protocols among others. This gives it end-to-end capabilities to build and deliver complete systems and reduces the overall development time and cost. This is a key differentiator for Data Patterns vis-à-vis import and transfer of technology (“ToT”) dependent DPSUs and private sector entities. Data Patterns often receives orders on single vendor basis. These competencies have led to average gross margins of 66% over the last 5 years.

* Greater push for local content in defence sourcing a huge positive: The total defence expenditure in areas addressed by Data Patterns (source: QIP prospectus) stands at USD 9bn in 2023 and is estimated to rise to USD 19.4bn by 2032 (CAGR of 8%). Given a greater push towards local sourcing, development and manufacturing prospects for inhouse development led companies like Data Patterns are likely to grow much faster.

* Maintain BUY with TP of INR 2720: Data Patterns’ order backlog stood at INR 9.7bn in June-23 (2x TTM revenue) and is pursuing repeat order win prospects of INR 20-30bn. We expect revenue/EPS CAGR of 32%/37% over FY23-25E led by robust growth prospects and sustained margins. Data Patterns’ development led business model and robust growth prospects support elevated valuations of 56x/42x FY25E/26E EPS. Maintain BUY with TP of INR2720 valuing at 55x Sept’25E EPS. Key risk: Weak order intake.

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