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Net revenue came at Rs.872mn (+54.9% YoY/+51.1% QoQ) led by execution of various program under the localization initiative mostly related to missiles. Gross profit increased by 62.3% YoY, led by controlled raw material prices and EBITDA grew by 85.5% YoY to Rs.186mn with a margin of 21.3% (+349bps YoY/+101bps QoQ) led by execution of high margins program such as TAL, VARUNASTRA, EHWT. Higher RM cost was partially offset by Oplev and other cost control measure. PAT grew by 300.6% YoY to Rs.66mn due to flat depreciation and low tax rate during the quarter. Despite global uncertainty and supply chain instability AMS has delivered decent set of performance during Q2, we expect company will manage to achieve the growth guidance in FY24.

Missiles dedicated product portfolio: AMS has participated in 55-60 programs, catering to Missiles, Naval Torpedoes and Underwater Mines. With strong order execution visibility and capacity expansion, management expects to increase revenue to grow by 35-40% over FY24-25. The company's product portfolio serves the Line Replaceable Units (LRUs) of defense systems in the fields of Missiles, Torpedoes, Submarines, Bombs, Artillery Systems, ATGMs, and Radar. Some of the programs include AGNI, PINAKA, AKASH-NG, VLSRSAM, VARUNASTRA, TAL, NIRBHAY, ATAGS, MIGM, and more. AMS has actively participated in most of the Indigenous missile programs. One such program is MIGM (Underwater Mine), which is an import-banned product, and the Ministry of Defense's requirement must be fulfilled through local vendors. AMS is involved in all indigenous programs.

5X+ capacity expansion to carter future demand: The company is looking to increase its facility size from the current 55,000 square feet to 3.3 lakh square feet over the next 12 months, with a capex of Rs.150 crore. 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 50,000 square feet, is set to be commissioned by DecemberJanuary. Unit-3, which spans 240,000 square feet, will be commissioned in H1FY25. 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.

View and valuation: We are confident about the growth story of the Apollo Micro Systems, due to its position (involvement in various strategic missiles from MoD and BDL) and faces very less competition. We have a positive outlook on AMSL, supported by, 1) Sole supplier of underwater mines, 2) Favourable Government policies on self reliance on defence sector, 3) Rising defence spending across all segment (Naval, Army, Air Force), 4) Massive upcoming big ticket projects, 5) The company’s healthy order pipeline, would support the the growth story of the company. We expect AMS Revenue /EBIDTA/PAT to grow at 41/44/74% over FY23-26. We value the stock based on 50x of FY26E EPS (with PEG ratio 0.7x during same period) to arrive at the TP of 163 with “OUTPERFORM” rating.

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