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Strong quarter; to continue focus on NWC moderation

Data Patterns reported inline numbers, as net sales grew 23% YoY, EBITDA grew 35% YoY with EBITDA margin at 37.6% vs. 34.2% (340bps YoY, JMFe: 32.2%). PAT was up 61% YoY at INR 338mn (in line). NWC at 353 days in Sept-23 remained elevated but moderated from 434 days in Sept-22 (365 days in Mar-23). OCF for 1HFY24 was (+) INR 210mn vis-à-vis (-) INR 721mn in 1HFY23. Order book grew by 20% YoY to INR10.0bn (2x TTM sales) with order inflows of INR1.5bn (1HFY24: INR 2.7bn). The company expects to maintain +25% revenue CAGR for the next 2-3 years with 35-40% EBITDA margin in FY24 and intends to attain 20%+ return ratios. Management highlighted that they intend to use the proceeds of QIP of INR5bn for developing complete products for the defence segment in the areas of radars, EW and communication systems. These products will help in capitalising large opportunities in future especially with the GOI’s focus on indigenising design and development of defence products. We expect sales and EPS CAGR of 32% and 37% respectively over FY23-26E. Maintain BUY with TP of INR2,720 (55x Sept’25E EPS).

* Revenue growth led by robust growth in development contracts: Net sales grew by 23% YoY to INR1.1bn, largely led by robust growth in development contracts that grew to INR639mn (+190% YoY) while revenue from production contract declined to INR401mn (-37% YoY). Revenue from service contracts grew by 64% YoY to INR43mn. Revenue composition during 2QFY24: DRDO (57%), Exports (1%), MOD (27%), DoS (7%), Brahmos (1%), and HAL (5%).

* Favourable revenue mix supports margins: EBTIDA was up 35% YoY to INR408mn, mainly due to better gross margins (+410bps YoY to 69%) and lower other expenses (- 130bps vs last year), however employee cost remain high at 23.7% of sales (+200bps YoY). Overall, EBITDA margins stood at 37.6% (+340bps YoY) in 2QFY24. Company expect to maintain 35-40% EBITDA margin in FY24 with healthy increase in order book for the production contracts (INR3.7bn).

* Order book strength sustained; to target continued reduction in NWC levels: Order book grew by 20% YoY to INR10.0bn (2x TTM sales) with order inflows of INR1.5bn in 2QFY24 (1HFY24: INR 2.7bn; FY23: INR 9bn). Major orders received in 2QFY24 were a) Radar (export, Development) for INR389mn, b) radar (BEL, production) for INR321mn, and c) Avionics (HAL, production) for INR447mn. The company expects healthy order inflows of +INR 5bn in FY24 (FY23 included a large order from DRDO leading to high base). Data Patterns also targets to lower the NWC intensity to below 300 days in the next 1-2 years.

* Maintain BUY with TP of INR 2,720: Data Patterns’ order backlog stood at INR 10.0bn in Sept-23 (2x TTM revenue) and is pursuing repeat order win prospects of INR 20-30bn. We expect revenue/EPS CAGR of 32%/37% over FY23-26E led by robust growth prospects and sustained margins. Data Patterns’ development led business model and robust growth prospects support elevated valuations of 46x/34x FY25E/26E EPS. Maintain BUY with unchanged TP of INR2720 valuing at 55x Sept’25E EPS. Key risk: Weak order intake.

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SEBI Registration Number is INM000010361