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Better execution leads to strong revenue growth

About the stock: Data Patterns (India) (DPIL) is a vertically integrated defence and aerospace electronics solutions provider catering to the indigenously developed defence products industry.

* The company delivered revenue, PAT CAGR of 18.9%, 40.7%, respectively, in FY19-22. FY22 revenues increased 39% YoY with EBITDA margin at 45.4%. FY22 PAT increased 69% YoY to | 94 crore

Q1FY23 Results: Revenues were better than estimates while margins came lower.

? Revenue at | 68.4 crore; up 83.7% YoY, led by better execution in development contracts

? EBITDA margin contracted 1394 bps YoY to 31.1% on change in contract mix; EBITDA came at | 21.3 crore, up 26.8% YoY

? PAT increased 39.1% YoY to | 14.2 crore

? YTDFY23 order inflow was at ~| 250 crore; order backlog at | 664 crore

What should investors do: DPIL is well placed to deliver revenue and PAT CAGR of 28.2% and 24.3%, respectively, over FY22-24E. Increase in profitability with strong asset turnover will result in healthy return ratios over FY23-24E.

* We remain long term positive and retain our BUY rating on the stock

Target Price & Valuation: We value Data Patterns at | 900 i.e. 32x on FY24E EPS.

Key triggers for future price performance:

? Strong order inflows with healthy pipeline of orders worth | 2,000-3,000 crore in the next two to three years provides strong visibility

? Defence electronics provides huge opportunity of ~| 1.5 lakh crore in next four to five years led by armed forces’ requirement of advanced systems

? Fire control system for Brahmos missile, Avionics for LCA, RWR for Fighter Aircraft, ELINT for Airborne and Ground Platform and radar subsystems are key orders in pipeline in FY23 for DPIL

? Large part of electronic components (used in Indian defence platforms) are supplied by foreign OEMs. As indigenisation efforts continue, future procurement will see a large portion of defence electronics sourced locally

Alternate Stock Idea: Besides DPIL, we like Bharat Electronics in the defence electronics space.

? Strong growth in profitability aided by sustained margins. Strong balance sheet, double digit returns ratios

? BUY with a target price of | 315/share

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