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Data Patterns Ltd (DPL) is among the few vertically integrated defense and aerospace electronics solutions provider catering to the indigenously developed defense products industry.

Diversified order book providing healthy revenue visibility: DPL has developed end-to-end capabilities, to cater to the entire spectrum of defence and aerospace platforms including processors, power, radio frequencies and microwave, embedded software and firmware and mechanical engineering. It partners with customers through the life cycle of a product, from conception till deployment and thereafter, building complete systems includingreusable building blocks,sub-systems, etc. As of 2QFY22, its order book stood at INR5.8bn (2.6x OB/Sales), having grown at 40% CAGR since FY18, thus indicating a scalable business model.

Industry tailwinds driving growth: Defense products are witnessing shifting procurement trends towards private sector under various government programs such as Aatma Nirbhar Bharat, Make in India, DAP 2020 and Defense Production and Exports Policy. Given DPL’s strong relationship, in-house design capabilities and integrated platform, it is well-positioned to capture the large addressable market – expected to grow at 9% p.a. to INR350bn by 2030

Healthy Financials: DPL’s Revenue/EBITDA/PAT has grown at a 31%/90%/169% CAGR over FY19-21, while its EBITDA margins expanded from 19.5% in FY19 to 41.1% in FY21. The growth was supported by robust order book which grew at 40% CAGR over FY18-1HFY22 and provides strong revenue visibility. It generates strong cash flows and will become debt-free post IPO. Its return ratios are healthy at ~13%.

Issue Size: The INR5.9bn IPO consists fresh issue of INR2.4bn and OFS of INR3.5bn (from promoters and other investors), which would result in promoter’s stake reducing from 58.6% pre-IPO to 45.6% post-IPO. The funds raised will be utilized for capex expenditure, debt repayment and funding of working capital requirement.

Valuation & View: We like DPL given its vertically integrated business model, well-diversified portfolio, robust order book and strong client relationship along with consistent financials. The issue is valued at 55x FY21 P/E (on a post issue basis), v/s. 167x for MTAR and 138x for Paras Defense. We believe it could benefit from the government impetus on the defense/ aerospace expenditure. Hence we recommend Subscribe.

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