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In-line results; growth guidance maintained

Data Patterns reported 9% YoY growth in revenue (in-line with JMFe), while EBITDA decline was restricted to just -1.4% (12% ahead of JMFe), as gross margins surprised positively on a favourable mix. PAT was 5% higher than estimate at INR616mn, -7% YoY. Management maintained its revenue growth guidance 25-30% YoY with EBITDA margins of 40%+, despite increase in share of development contracts in the order book. We believe rising share of electronics in defence, step up to systems integration contracts and higher share of single vendor contracts will aid the company to achieve sales and EPS CAGR of 23% CAGR respectively, over FY22-24E. We maintain BUY rating with revised TP of INR830 (30x FY24E EPS), as we build in a pickup in execution of large orders in FY24.

Decent order execution: Net sales grew by 9% to INR1.7bn, in-line with JMFe. Revenue growth was robust in development contracts that grew by 187%, but revenue from production and service contracts declined by 19% and 46% YoY respectively. For FY22, healthy growth was witnessed across segments, as production/development/service segments posted growth of 24%/117%/21% YoY respectively. Major client contribution during FY22 was from DRDO (25% vs 37% in FY21), ECIL (19% vs 15% in FY21) and Brahmos (13% vs 10% in FY21). In terms of product wise revenue share, EW declined (26% vs 41% in FY21), Radars grew (23% vs 16% in FY21), ATE grew (15% vs 12% in FY21), while exports declined (12% vs 15% in FY21).

Supply chain issues impacted margins: EBTIDA was down by 1.4% YoY to INR875mn, but reported a 12% beat on JMFe, as margins contracted by 520bps YoY to 51.3%, largely due to high base effect. In FY22, EBITDA margin witnessed 420bps expansion to 45.4% vs 41.2% in FY21, as revenue contribution from production contracts remained high. Management guided for EBITDA margins of 40%+ in FY23, despite increased share of development orders in order book. Given a robust margin profile, the company has headroom to quote aggressively in certain larger value orders, which can open up new opportunities for the company and scale up revenue to INR10bn faster

Robust growth in order inflows and backlog provides revenue visibility: Order inflows witnessed strong uptick of 111% YoY to INR2.9bn (+71% QoQ), led by large orders like INR335mn order from DRDO for Radar, INR299mn from DRDO for communication, INR274mn from DRDO in EW and INR194mn from HAL in avionics. Management highlighted that company could receive orders totalling INR20-30bn in next 2-3 years, given cancellation of several govt-to-govt (G2G) contracts in order to promote Indian vendors, 10% increase defence capex allocation and incremental ban on imported equipment. Order book stood INR4.7bn (1.5x TTM sales), -4% YoY.

Maintain BUY with revised TP of INR 830: We slightly increase our revenue estimates to factor in increased inflows in FY23/24, due to favourable macro environment, but continue to maintain our margins estimates in 41-42% range. Maintain BUY with revised TP of INR 830 (30x FY24E EPS). Key risks: Budgetary cuts or delays in project awards

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