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Order execution to pick-up in second half…

Astra Microwave Products Ltd. (AMPL) is a leading designer and manufacturer of a wide array of radio frequency systems, microwave chips, and microwave-based components and subsystems for defence, telecom, and space.

• In Q2FY24, revenue grew by 11%, led by robust order execution. But EBITDA saw a modest increase of 3% YoY, due to higher employee costs and other expenses.

• AMPL witnessed a robust order inflow of Rs.405cr in Q2, and the current order backlog is Rs.1,867cr (2.3x FY23 sales), painting a healthy earning picture for the next 1.5 years.

• Management foresees a resilient long-term order pipeline, projecting cumulative opportunities of Rs.8,000cr from FY24E-28E within AMPL's Rs.39,000cr total addressable market until 2030.

• Anticipating a shift in order execution mix towards domestic orders (70% mix) in the next 2-3 years, we anticipate EBITDA margin in the range of ~21%.

• Buoyed by a robust order pipeline and favourable margin profile, we value AMPL at a P/E of 30x (26x earlier) on FY25E. However, due to premium valuation concerns, we have a Reduce rating with a target price of Rs.500.

Order pipeline robust...domestic execution to pick-up

The management's guidance remains consistent, projecting a Rs. 8,000 crore order inflow for FY24E-28E, with a total addressable market of Rs. 39,000cr. The current order backlog is at Rs.1,890cr, which is 2.3x FY23 sales and provides visibility for the next 1.5 years. The order inflow for Q2FY24 was Rs.405cr. Order execution mix was 53% domestic and remaining exports. Going ahead, in the longer term, with an execution mix of 70:30 between domestic, exports, & orders for the next 2-3 years.

EBITDA margin improves...

EBITDA grew only by a modest 2.7% YoY on account of higher employee costs and higher other expenses, which grew by 27% and 28.4% YoY, respectively. EBITDA margins were dropped by 170bps YoY to 22%. However, supported by lower interest costs, higher other income, and share of profit from JV/associates, net profit grew by 39% YoY. With an execution mix of 70:30 between domestic, exports, & orders for the next 2-3 years, we expect the EBITDA margin to be in the range of 21% versus 14% (the average of the last 5 years). We marginally upgrades our EPS estimates by 9.6% & 7.5%, respectively, on account of the likely improvement in share of profits from JV/ associates. We estimate profitability to grow by 44% CAGR over FY23-FY25E.

Valuations

Enhanced by the government's self-reliance drive and ongoing defence modernization, the sector's long-term earnings outlook has strengthened. A notable upswing in the order inflow pipeline, driven by a focus on defence electronics, is evident. Anticipated domestic order execution acceleration bodes well for margin expansion and earnings. Yet, heightened valuation expansion is a concern. We value AMPL at P/E 30x FY25E, we downgrade to "Reduce" with a target price of Rs.500.

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