by Welcome back to Traders Ideology, In this article, we will do a fundamental analysis of Data Patterns. If you have been reading my articles you would know that I strongly believe that technology is one sector that will generate the next set of multibagger stocks.
We recently had the IPO of Paras Defence that almost tripled the wealth of its investors on the listing day itself. Its IPO price one goes up is 175 and was listed at rupees 469. It was mainly due to the bright growth prospects in the defense sector, and relatively smaller market cap, and smaller IPO size. We again have a similar IPO in the defense and space sector with a smaller IPO size. It is the IPO of Data Patterns.
In this article, we will do a fundamental analysis of Data Patterns, first, we will look at the business of the company, its promoters, key strength, competitors, future growth, and financials. Then we will look at the valuation of the company.
Disclaimer: This article is only for educational purposes. I do not recommend buying or sell so please consult your advisor and do your own research before investing.
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Fundamental Analysis of Data Patterns (India) Limited
Fundamental Analysis of Data Patterns (India) Limited are as follows:
Company Overview
Data Patterns is a defense and aerospace electronics solution provider. This company was incorporated in 1998 in Bangalore, so it is a 20 plus-year-old company.
Data Patterns has high design capabilities across the spectrum of strategic defense and aerospace electronics solutions. Its core competency includes Electronic hardware design and development, Software design and development, Firmware design and development, Mechanical design and development, Product prototype design and development, Functional testing and validation, Environmental testing and verification, and Engineering services opportunities.
Data patterns products and solutions are completely in-house right from design to development and testing. Now let us look at some of the products of Data Patterns and their application. Although their products are very complex for a normal person to understand, I have tried to simplify them. Its product category is as follows:
1. Radars
- Its first product category is radars, it includes different types of radars, like surveillance radar that can detect moving targets, then weather radars, wind radars, BrahMos Missile seeker that searches for the target and guide the missile to its target, and many other adults.
2. Underwater Electronic Communication System
- Its second product category is the underwater electronic communication system.
- The underwater electronics communication system has various products used for data acquisition requirements of ocean resources like air and seawater temperature, salinity, wind speed, and its direction, wave intensity, etc.
- Then, its products have a usage in passive surveillance and intelligence gathering.
3. Avionics display
- Its third product category is avionics display.
- These avionic displays are basically used in the cockpits of planes and helicopters.
- For example, the entire glass cockpit of a light utility helicopter is produced by the data pattern along with the accompanying data interface unit.
4. Automated test equipment
- Its fourth category is automated test equipment. One of the company’s core businesses has been the development of automated test equipment for critical aerospace requirements.
- The Indian government Space Research Organization requires various types of automated test equipment for the development of its test benches for Polar Satellite Launch Vehicle that is PSLV and Geo Stationary Launch Vehicle that is GSLV.
- All the electronics systems on the PSLV and GSLV as well as some satellite subsystems are tested by the Indian Space Research Organization using such ATE that is automated test equipment.
- Their products have usage across platforms and programs, including Tejas light combat aircraft, light utility helicopter, BrahMos missile program, land, and air-based missile launch system, tracking radar, weather radar, Nanosatellite for ISRO, DRDO radar, and electronic warfare system, etc.
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Promoters
- If you look at the promoters of Data Patterns, it was incorporated by Srinivasagopalan Rangarajan and Rekha Murthy Rangarajan.
- Srinivasagopalan Rangarajan is the Chairman and MD of the company and he holds a master’s degree in Industrial Management from IIT Madras.
- The company’s senior management has over 20 years of average experience. So, the overall leadership of the company is looking very strong.
Financials
- On above chart, you can see that all the figures are in crores. We will compare FY20 with FY21.
- If we see Total Assets, we have seen an increase from 295.36 to 328.37 crores.
- In Total Revenue, we have seen an increase from 160.19 to 226.55 crores.
- In Profit After Tax, we have seen a double increase from 21.05 to 55.57 crores.
- If we see the important ratios, then Net profit margin is 24.53%.
- Operating profit margin is 43.70%. Earning per share is 11.89.
- P/E is 49.20. Industry PE is 66.56.
- Debt to equity is 0.64. Current ratio is 2.812 year-sales.
- CAGR is 30.75%. 2 year-profit CAGR is 168.64%.
Revenue
If you look at the revenue, company revenue has grown from 131 crores in FY 19 to 156 crore and then 224 crores in FY 21 h1 revenue for FY 22 stood at 97 crores, its net profit has grown from 7 crores in FY 19 to 21 crore and then 55 crores in FY 21. Its h1 FY 22 profit stood at 23 crores. So, growth has been good.
ROE & ROCE
Both ROE and ROCE have grown in the last 3 years where ROE has increased from 5.8% in FY 19 to 26.79% in FY 21 and ROCE has grown from 12.45% in FY 19 to 34.69% in FY 21. So, profitability is also high overall financials are looking good.
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Key Strength & Competitors
- One of the key strengths of the company is its complete focus on in-house development right from design to manufacturing, which gives them the cost advantage.
- The company has developed several reusable building blocks that have resulted in better margins and spreading the development cost over multiple programs.
- The second, strength is the strong experience of more than 20 plus years in the industry, where data pattern has developed a good relationship with the Indian Defense and Space sector, PSUs, government ministries, and departments.
- As far as competition is concerned Data Patterns as competition from various listed as well as non-listed companies like L&T, Bharat Electronics Limited, Mahindra defense, Alpha design, ASTRA microwave, MTR technologies, and so on.
Future Growth Prospects
- If we look at the future growth Indian defense industry is evolving into a self-sustaining industry with a focus on indigenous manufacture with themes like Make in India and AATMA NIRBHAR BHARAT.
- I think that this AATMA NIRBHAR BHARAT theme would create a huge opportunity for indigenous companies like Data Patterns. Currently, there is a lot of dependency on foreign countries in the defense and space sector, and focusing on AATMA NIRBHAR BHARAT would open up huge opportunities in the future. Company has a very strong order book of 581 Crore as on September 21.
- This order book has increased at a CAGR of 40% since 2018. Just to give you an idea, company revenue in FY 21, was 224 crore. The current order book is almost 2.5 times the FY 21 revenue and it is growing quickly.
- Data Patterns intend to continue to expand its capability and product portfolio to enhance their offering in the defense and aerospace sector.
- They also intend to bid for higher-value projects that require significant usage of complex technologies.
- For example, they have developed and deploy their first nanosatellite in 2017. Based on the learning they have received two more contracts to design and build nanosatellites companies also planning to upgrade and expand their manufacturing facility in Chennai.
- The company also intends to expand its market outside India. Hence, all the future is looking very bright.
Strengths and Limitations
Strengths and Limitations are as follows:
Strengths
- Now let’s talk about the investment pros.
- The company has been operating in the domestic defense and aerospace electronics space since 1985,Leading to subsystem development and manufacturing in several critical defense programs Like the launch control system for the ground-based BrahMos missile and “Take Me Home” for the Tejas aircraft.
- Go” displays. Being a domestic company, I have also got priority in strategic projects and orders versus foreign bidders.
- The company achieved a PAT margin of 24.5% in FY21 and an ROE of 26.8% in FY21 which was the highest in the industry.
- The inherent competitive advantage of the company is evident over its domestic rivals MTAR Technologies, Astra Microwave, Paras Defence.
- The Defense Electronics segment in India is expected to grow at a CAGR of 15.71% to become a $44 billion market size by 2030.
- Due to the initiative of self-reliant India in the defense sector of the Government of India.
- It can be assumed that the majority of this opportunity should go to its domestic defense electronics manufacturers.
- Data Patterns has already created Defense Optics, Military Radar, Airborne Electronic Warfare, and Communication Intelligence ReceiversFor the Indian Defense Sector to capture the market which has benefited from these product segments.
Limitations
- Now let’s see the Investment cons.
- The company’s 15% of sales came from exports in FY21.In FY21, competition in the international defense solutions space is high.
- For these, Jahan is a bidder for contracts for companies from advanced economies such as the USA, China, and Russia.
- These international competitors have many inherent advantages over data patterns such as size, scale, and technological advances.
- The company’s biggest client is the Government of India, due to which the company has a lot of contractual protection.
- It does not have to negotiate control when making contracts with the government.
- Technical expertise and innovation are of great importance in the data patterns industry segment.
- The sector is always prone to technical disruptions, especially in the software-related segment.
Valuation
- If you look at its valuation, at annualized learning for FY 22 had a higher price band, it is launching its IPO at a PE ratio of 65.4.
- Again, generally looking the valuation is on the higher side, but it is due to 2 factors.
- The first is due to the current market euphoria where the majority of good companies are available at a higher valuation.
- And the second reason is the bright growth prospect of Indian companies in the defense sector.
Conclusion
- Overall if we conclude, Data Patterns is in the business of electronic solutions for the defense and space sector. It is a 20 plus-year-old company with very experienced management.
- The company is vertically integrated with the in-house development of electronic products and solutions right from design to manufacturing.
- Financially the company is looking very strong. Hence on fundamentals, I would rate it 9 out of 10.
- As far as valuation is concerned, the annualize PE is 65.4. And there is a bright good prospect in the Indian Defense and Space sector due to the strong focus on Make in India and AATMANIRBHAR BHARAT.
- It would significantly benefit companies like Data patterns. Hence, keeping the high earning potential in mind on valuation. I would rate Data Patterns for 9 out of 10. Overall, it is worth, for long-term wealth creation.
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