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Weak performance due to revenue deferment

Earnings below estimates

* Data Patterns (DATAPATT) witnessed a weak quarter, with revenue declining 16% YoY, largely led by the deferment of order delivery (~INR700m). The service/production revenue declined ~33%/28% YoY while development revenue grew 19% YoY. However, EBITDA margins expanded 310bp YoY, led by a favorable business mix (development revenue mix increase 11pp YoY).

* Despite a weak 9MFY25 (down 8% YoY), the company guides to achieve its full-year revenue growth/EBITDA margin guidance of ~20-25%/35-40%. This indicates a major ramp-up in 4QFY25, implying over 70% YoY revenue growth, while margins may experience a significant dip in 4Q to maintain its FY25 guidance.

* Factoring in the weak 3Q performance, we cut our FY25/FY26 EPS estimates by 7%/5% while largely maintaining our FY27 EPS estimate. We reiterate our Neutral rating with a TP of INR2,180 (premised on 35x FY27E EPS).

Higher development revenue mix YoY aids margin expansion

* Consolidated revenue declined 16% YoY to INR1.2b (est. INR1.9b) in 3QFY25. Service/development/production revenue stood at INR47m/INR433m/INR691m, down 33%/up 19%/down28% YoY, respectively.

* In terms of products, Radar/ATE accounted for the largest revenue mix at ~62.3%/17.9%, respectively. In terms of customers, exports played a significant role this quarter, accounting for ~76.8% of the mix vs only 0.9% in 3QFY24.

* Gross margins expanded 21.6pp YoY to 80.3%, led by a favorable business mix. Employee/other expenses grew 6.1pp/3.3pp YoY to 24.9%/9.2% in 3QFY25.

* Accordingly, EBITDA margins expanded 310bp YoY to 46.2% (est. 42.3%). EBITDA declined 10% YoY to INR540m (est. INR815m). Adjusted PAT declined 12% YoY to INR447m (est. INR616m).

* The order book stood at ~INR10.95b as of Dec’24 vs. INR9.7b/INR9.6b in Sep’24/Dec’23. Development/Production accounts for 47% each, while the Service order book constitutes ~6%.

* In 9MFY25, revenue/EBITDA/Adj. PAT declined 8%/2%/3% at INR3.1b/INR1.2b/INR1b.

Highlights from the management commentary

* Guidance: DATAPATT maintains its guidance of ~20-25% revenue growth in FY25, with EBITDA margins of ~35-40%. The company also reaffirms its near-term growth outlook, targeting a 20-25% CAGR.

* Order Intake: The international order book stands at ~INR1b, with significant new production orders in EW, Radar, and Avionics. Moving forward, order book growth is expected to be driven by repeat contracts and new orders, offering the potential for faster conversions

* Inventory days increased due to two large radar orders, which tied up ~60-65% of the company's inventory. The company is expected to deliver one project by Mar’25-end and the other by 1HFY26, leading to a significant decline in inventory.

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