COMPOUNDER CONTEST

by Team SRS Capital (Indian School of Business)

Saral Sanjay Baheti | Rahul Jhanwar | Soham Bansal
 The Growth of Defense Electronics Market in India
Make in India along with Atamnirbhar philosophy will lead to rapid growth of Indian companies in the sector

• Indian National Security Policy is continuously evolving to establish India as a major military power and
prepare the armed forces for war on two and half fronts. Thus, India has seen a substantial increase in its
total expenditure towards Defense over the past decade.
• India’s budgeted total defense expenditure for the year 2022-23 is INR 5.25 lakh crores (12% of its total
budget outlay) which translates to approximately $75 billion. The same was $40 billion in 2010. Budgeted
total defense expenditure is expected to reach around $140 billion by 2030.
• With the increase in the total defense expenditure, there has been a substantial increase in the capital
outlay on defense and grants given for research and development.
• India is expected to spend INR 9.88 lakh crores on capital procurement for defense over the next 5 years.
• With a volatile geopolitical scenario, and increased focus on the borders with China, the Government of
India is increasing focus on indigenous weapon systems.
• Make in India and Atamnirbhar Bharat are government initiatives to promote the domestic defense
industry and to create a domestic supply chain for the needs of its armed forces.
• Along these lines, the government brought about negative lists of equipment barred from importing.
These lists contain products like Radars and Electronic Warfare systems produced by Data Patterns. The list
is poised to grow and create more business opportunities for Indian firms.
• Exports of Indian defense equipment is on the rise. In 2021, exports were 8,434 crores as compared to
2,059 crores in 2016. Matured platforms in use by Indian Defense forces are increasingly being exported to
other developing countries.
• The dominant growth levers defense industry in India are the following:
∙ Indigenization ∙ Increasing role of Private Players ∙ Exports
• Space industry is also witnessing similar liberal policy interventions favouring Indian private firms for self
reliance, commercialization.
• With the stability of central government, the policies and general direction will remain predictable in coming
future and focus will keep enhancing on indigenization, privatization & FDI. Both space and defence Defense Electronics Market Segment wise
industries in India are enjoying tailwinds.
 Company Overview
Data Patterns was incorporated in 1998 as “Indus Teqsite Private Limited” in Bangalore. It is a vertically integrated Defense and Aerospace electronics solutions provider catering to the
indigenously developed defense products industry. The company has in-house design and development capabilities with major products being radars, electronic warfare suits, avionics
displays and small and micro satellites. The company came out with a public issue in 2021 and raised 588 crores. It is headquartered in Chennai.

Salient Features of Business The Management

Leading Defense Oriented company Data Patterns is a family owned business with founders
Data Patterns caters to defense and aerospace platforms like space, air, land and sea. It has design capabilities across the actively involved in management. Promoters (Rangarajan
entire spectrum of strategic aerospace and defense electronics solutions. Family) own 45.62% of the company, down from 57.08%
before the IPO. There are no major corporate governance
Manufacturing Facilities issues as the management has maintained a clean profile
Company's manufacturing facility span 100,000 sq. ft factory built on 5.75 acres of land in Chennai. It has facilities for design, before and after the IPO. There are no pledged shares with
manufacturing, qualification, and life cycle support of high-reliability electronic systems. The company has also acquired an Data Patterns, the company itself, being debt free.
additional 2.81 acres of adjacent land for further expansion.
S. Rangarajan, is the Chairman
Ongoing Projects and Managing Director of Data
The company is currently engaged in the supply of critical products to several prestigious defense projects in India, including Patterns. He has been associated
the Light Combat Aircraft (LCA), the HAL Dhruv, Light Utility Helicopter (LUH) and the BrahMos missile programme, precision with the Company since its
approach radars and various communications intelligence (COMINT) and electronic intelligence (ELINT) systems incorporation. He has over three
decades of experience in
Dependence on Govt Contracts business development, corporate
The company’s business is dependent on projects and programmes undertaken by GoI and associated entities such as defense affairs, finance and marketing.
public sector undertakings and government organizations involved in space research. Data Patterns derives a significant
portion (~45-50%) of its total sales from contracts with GoI entities.
Vijay Ananth, is the Chief
Order Book Operating Officer and Chief
The company has an order book of 1000+ crore as of August 2022. Information Security Officer at
Data Patterns. He has more than
IPO Details two decades of experience in
software engineering and product
The company raised 588 cr. through IPO of which 240 cr. was fresh issue and remaining 348 cr. was Offer for sale. The 240 management.
crores were used for capex and to meet the working capital requirements.
 Financials
With robust revenue growth to the north of 50% CAGR and order book of Rs. 1000 cr., the company is poised to generate profits

Revenues Order Book

Sale of Products Sale of Services Other Income

1%
8%
1%
12%
1%
8% 91%
87%
15%
91%
37%
85% 62%

FY2018 FY2019 FY2020 FY2021 FY2022

Expenses The company currently has orders of approx. INR 660 cr. in hand. Order for which negotiations have been completed
amount to approx. INR 340 cr. This makes it a total order book of more than INR 1000. An order book which has been
the largest in company’s history, coupled with growth factors in the industry, such as push for indigenization of
Cost of Material Consumed Emloyee Benefit Expenses
weapons will ensure bright business prospects for the company.
Other Expenses Change in Inventories

12% FY2018 FY2019 FY2020 FY2021 FY2022 FY2023 FY2024 Data Patterns has shown consistent
Total Revenue 56.88 60.72 158.03 226.55 314.81 398.44 518.41 growth with rising margins on the back
6% 36% YoY 7% 160% 43% 39% 25.61% 30.11% of a strong order book. The order
11%
inflows of the company are high value
39% Expenses 45.56 52.21 63.85 124.52 175.33 226.11 283.57
4% items which require constant servicing
11%
5% 8% YoY 15% 22% 95% 41% 28.91% 25.41% and maintenance. We project a dip in
12% 37% 52% margins due to low value items being
45% 51% EBITDA 11.32 8.51 94.18 102.03 139.48 172.33 234.846
52%
55% YoY -25% 1006% 8% 37% 23.52% 36.27% billed until delivery of HAL Tejas MK 1A
36% 44%
-3%
ROCE 13% 21% 39% 34% 32% 37% begins. The top line reflects the growth
FY2018 FY2019 -1% FY2020 FY2021 FY2022 in the order book.
ROE 6% 14% 27% 16% 18% 21%
 Investment Thesis
A company to keep on your 'radar'...!

Market Opportunity Business Strategy Risks

As of today, India has 41 Ordnance Factories and 8 Defense PSUs Local Expansion: The company has used the IPO proceeds to Dependency on Government:
which produce approximately 40% of India’s defense capital expand its plant and has now doubled its capacity. This The contracts received by the
outlay (∼ 1.5 lakh crore). The rest is imported. With the higher additional capacity allows the company to manufacture company are largely due to
push for indigenization, we can expect to see higher share of larger and better radars. At present the company’s revenue indigenization push by the
orders bagged by private sector in the total capital expenditure. run rate is 300 crores and with this additional capacity, 500 government. The same orders
Government of India has ordered 83 HAL Tejas Mark 1A following is manageable would evaporate if the
up on the Tejas Mark 1 order for a cost of 48000 crores. Data government imports the
Patterns has previously supplied Radar and Electronic Warfare Product expansion: Data Patterns is entering into demanded products.
suits for the aircraft and is expecting to bag orders upwards of agreements with the Ministry of Defense to produce newer
1,000 crores (Equal to its present order book and 3 times its AWAC radars which have not been produced by the Limited Customers: There are
annual run rate) from this aircraft order itself. company historically. The company is expanding horizontally. limited set of fixed customers for
HAL is producing multiple aircraft along with Tejas, and Data the company. They are DRDO,
Patterns is its preferred partner. HAL is producing HAL Tejas MK2, Exports: The company is counting on the gradual rise in HAL, BEL and Brahmos
HAL AMCA and TEDBF with the combined orders for these India’s arm exports to friendly countries. For example, the Aerospace. However, the
aircrafts costing more than 1 lakh crores. These aircrafts will be recent Brahmos order by Philippines directly aids the company is now expanding to
higher in number than HAL Tejas Mark 1 and will also be more company’s topline. The company also supplied 100 radars to beyond the country’s borders.
technologically sophisticated requiring more inputs from Data a UK based multinational.
Patterns. High Working Capital
The growth of business is sticky. Once the contract is completed, Partnership: Data Patterns is in talks with various UK based Requirements: The company has
usually, the same firm receives the maintenance and servicing companies for co-development of radars. This will enable significant working capital
contract. Data Patterns has seen a gradual rise in service technological transfer to the company. requirements. The payments
contracts (∼10% of revenue). from PSUs are sometime delayed
Apart from HAL, Data Patterns is also the preferred partner for Single Vendor Contracts: The company being a niche player and are mostly in the fourth
DRDO for joint development of Airborne Early Warning and in the industry and the only major player for radars and quarter of the year. However,
Control System radars. Data Patterns works with another Defense avionics has received multiple single vendor contracts from development goes along all year
PSU, Bharat Electronics Ltd. PSUs. long.
 Competitive Analysis
Data Patterns is best placed to be major benefactor of macro conditions and growth levers in defence electronics industry in India

Company

COTS, Avionics, COMS, Satellites, EW, Radars, Avionics, COMS, EW, Naval System, Land & EW, COMS, Opto-Electronics, Radar Systems,
Products Catalogue
Missile Systems Armored Vehicles, Space Optical Solutions Simulators

Established 1998 ~1982 2004

Founders S. Rangarajan Sharad Shah Col. H S Shankar
Primary Location Chennai Navi Mumbai Bengaluru
Workforce 818 400+ 825
Revenue (FY22) INR 314 Cr INR 180 Cr INR 401.03 Cr
Trailing PE 35 101 Unlisted
Market Cap (Aug-22) INR 4328 Cr INR 2533 Cr. Unlisted
Major Clients HAL, DRDO, ISRO, BEL, Brahmos ISRO, DRDO, BEL, Cochin Shipyard, HAL ISRO

Light Combat Aircraft Tejas

Cubesats Pechora Missile Upgradation Program
HAL Dhruv Helicopter
Major Projects Space Antennas Air defense fire control radar
Light Utility Vehicle
EMP Shielding
Brahmos Missile Program

• Vertically integrated defense and aerospace • Company business model is based on

electronics solution which has innovation
Analysis driven business model.
• Company is already a preferred partner of
Govt organizations and PSUs.
• Company has edge in few segments with
manufacturing and integration.
their R&D capabilities.
• Too much diversified portfolio lacking focus
• Business strategy is to achieve technologies
on any one sector for them to be leaders.
through JVs and foreign partners.
• Client diversification is beneficial for firm.
 Valuation
A Strong Opportunity to generate an IRR of 27% over a 10 year investment period

2022 2032

1 Market Capitalization 3,300 crores 2,746 crores No. of indigenous fighter aircrafts 40 300+
with Indian Air Force
2 FY 2022 PAT 94 crores 27 crores
No. of AWACS in Indian Air Force 3 12+
3 Trailing PE 35 101
No. of indigenous Helicopters 110 300+
4 FY 2022 Revenue 314 crores 180 crores
Brahmos Missile Batteries 28 50+
5 5 year revenue CAGR 44% Average = 78 30%

Revenue Target FY 2032E Average PAT Margin Net Profit FY 2032E

INR 2,272 Cr X 20% = INR 450 Cr

IRR
Based on the conservative Data Patterns has maintained an PAT Margins
estimate of Revenue growth in line in excess of 20% over the past 2 years. With
with overall defence budget aircraft orders kicking in and no additional
growth ~ 10%. debt taken, these margins are the new
26.67% normal.

Net Profit FY 2032E Expected PE Multiple Market Cap FY 2032E

INR 450 Cr X 78 = INR 35100 Cr