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Favorable business mix drives operating performance

* Data Patterns (DATAPATT) reported a healthy revenue growth of 23% YoY in 2QFY24, fueled by a robust traction within Radars (up 95% YoY) and Avionics (up 3.6x YoY). DATAPATT recorded strong operating performance (EBITDA margin up 340bp YoY), primarily due to an improved gross margin (up 410bp YoY) aided by the favorable business mix.

* We retain our FY24/FY25/FY26 EPS estimates. Reiterate Neutral with a TP of INR2,210 (premised on 37x FY26E EPS).

Radars and Avionics power revenue growth

* Consolidated revenue grew 23% YoY to INR1,083m (up 21% QoQ) aided by robust growth within Radars (up 95% YoY) and Avionics (up 3.6x YoY).

* EBITDA stood at INR408m in 2QFY24 (up 35%/46% YoY/QoQ). EBITDA margin expanded 340bp YoY to 37.6%, led by ~410bp YoY expansion in gross margin because of the favorable business mix.

* Adjusted PAT stood at INR338m in 2QFY24 (up 61%/31% YoY/QoQ).

* The order book increased to INR10b as of Sep’23 vs. INR9.7b/INR9.2b in Jun’23/Mar’23, aided by strong inflow of production contracts (~64% of total orders received) from key customers such as BEL, HAL and ADA.

* For 1HFY24, its revenue/EBITDA/Adj. PAT grew 26%/33%/69% YoY to INR2b/INR686m/INR596m.

Highlights from the management commentary

* Guidance: Management maintained its revenue guidance at ~25% CAGR over the next two years. It expects gross/EBITDA margins for FY24 to be slightly better than FY23. Working capital days are expected to decline gradually over a couple of years.

* Orders inflow for 2QFY24 stood at ~INR1.4b (production/development /service contacts accounted for ~64%/34%/2% of the inflows). DATAPATT is maintaining its order inflow guidance of ~INR4.5-5.0b for FY24.

* Industry tailwinds: The government has recently given approvals for defense acquisitions/procurements amounting to ~INR78b. Further, DATAPATT has started participating in large-value tenders under the Make I and Make II categories with the Ministry of Defense, which will improve the total addressable market and its revenue potential.

Valuation and view

* DATAPATT, a prominent player in the aerospace and defense electronics sector in India, is set to capture a larger share of pie (TAM of ~USD2b as of CY20; registering a 9% CAGR) on the back of its vast experience, strong core competencies, and robust executional capabilities.

* We estimate a 33%/37%/40% CAGR in revenue/EBITDA/Adjusted PAT over FY23-FY26, driven by robust order book growth (at ~39% CAGR over FY19-23) and improved margins.

* We retain our FY24/FY25/FY26 EPS estimates. We reiterate our Neutral rating with a TP of INR2,210 (premised on37x FY26E EPS), owing to its higher working capital cycle and rich valuations.

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