Buy Apollo Micro Systems Ltd For Target Rs. 158.0 By Choice Broking Ltd
Q2FY25 Performance Highlights: Revenue for the quarter stands at Rs 1,607mn, jumped by 84.4% YoY (our est. Rs 1,090mn) vs Rs 872mn last year same period. Gross profit increased by 69% YoY to Rs 403mn. Gross margins contracted by 224bps YoY/ 748bps QoQ to 25.1% vs CEBPL est. 28.0%, margins decreased because of supply chain issues. EBITDA increased by 79% YoY to Rs 329mn but margins squeezed by 60bps YoY to 20.5% vs (our est. 20.7%). PAT grew significantly by 139% YoY to Rs 157mn, due to healthy top-line execution. Despite global uncertainty and supply chain instability AMS has delivered a decent set of performance during Q2, we expect the company will manage to achieve 40-50% revenue growth in FY25 as well.
* New plant, unit-II is expected to commission in next 2-3 months and unit-III bigger plant is expected to start operation in 9-10 months.
* Recent order won under Make-II category for Anti drone swarm system, the company has got the opportunity to participate in the program which is expected to complete in next 15-18 months, where AMS will provide RADAR/ Electroptic System/RF detector with countermeasures (rocket). The present TAM is in upwards of Rs.8000cr. AMS already have 60% of technology with them and based on their capability management expects to meet the balance technology internally. AMS also participated in the PINKA and ASTRA missile program where it is getting traction for export and domestic market respectively. AMS provides 3-4 components to the program.
* Apollo Micro Systems (AMS) was recently shortlisted by the Defense Research and Development Organization’s (DRDO) Armament Research and Development Establishment (ARDE) for the Technology Transfer (ToT) of the PRACHAND anti-tank munition hardware. The PRACHAND system, known for its capability to deliver full-width attacks on armored targets, will be manufactured and supplied by AMS, strengthening India’s defense self-reliance initiatives. AMS has also been securing additional major contracts, including from Reliable Technosystems India for electronic modules, Economic Explosives Ltd, and with Bharat Dynamics Limited for torpedo systems. This extensive portfolio underlines AMS’s expanding role in India’s defense sector, leveraging its expertise in electronics and mechanical systems for strategic defense applications.
* 7X+ capacity expansion on the card: The company is increasing its facility size from the current 55,000 square feet to 3.9lakh square feet over the next 12-18 months, with a capex of Rs. 150 crores. This investment will be allocated to machinery and testing equipment. The management intends to fund this capex with a 70:30 ratio of debt to equity. Unit-2, spanning 40,000 square feet, is set to be commissioned by this year. Unit-3, which spans 350,000 square feet, will be commissioned in FY26. The management anticipates that 3-4 programs, for which they have received product development approval, will undergo trials in the upcoming season, with the torpedo program having AMS supplying the seeker and accounting for roughly 50% of the total content value.
* Heading towards platform level development: AMS is now operating as a solution provider and collaborates with Tier 1 players, DRDO, and other DPSUs from the development stage. Currently, the company is investing in its R&D for system-level development and intends to move into platform-level R&D. Management also has a positive outlook on the defence opportunity as the program upgrade cycle is getting shorter, reducing from 10 years to 3-4 years.
* View and Valuation: We have a bullish view on the company led by GOI push for the "Make in India" initiative, will witness a high-growth cycle over the next 5-6 years. In missile technology, India has very low dependency on foreign parts; hence, we expect companies like AMS to benefit from the GoI's local manufacturing initiatives. AMS, which largely provides solutions in the areas of weapons and EW, is poised to grow at a healthy rate in the coming years. We recommend to buy AMS supported by 1) its participation in most of the indigenous weapon programs, 2) commencement of production of these programs following successful trials, 3) capacity expansion to meet the rising demand from defence, 4) shift in the business model from a solution provider to a development-level solution provider, and 5) diversification in defence product (Anti drone swarm system). We expect AMS's Revenue/EBIDTA/PAT to grow at a CAGR of 40%/41%/51% over FY24-27E. We assign a multiple of 45x on FY27E EPS to arrive at a TP of Rs.158, with a OUTPERFORM rating.
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