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Strong execution continues…

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.

Q2FY23 Results: Revenues were better than estimates while margins came lower.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

Revenues were at | 88.2 crore; up 48.8% YoY & 28.9% QoQ, led by better execution in both development & production contracts

EBITDA margin contracted 131 bps YoY to 34.2% on a change in contract mix; EBITDA came in at | 30.2 crore, up 43.3% YoY

PAT increased 63.2% YoY to | 21.1 crore

H1FY23 order inflows at | 517 crore; order book at | 1012 crore as on date

What should investors do? DPIL is well placed to deliver revenue, PAT CAGR of 28.0%, 29.0%, respectively, over FY22-25E. Increase in profitability with strong asset turnover is expected to 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 | 1555 i.e. 40x on FY25E 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 | 135/share

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