JM Financial initiates coverage on Data Patterns with buy rating; says company is a 'defence unicorn in making'—5 reasons why

Data Patterns, which made a strong debut on the stock exchanges last year in December, is a 'defence unicorn in making,' says JM Financial while initiating coverage on the stock. Shares of this vertically integrated defence and aerospace electronics solutions provider were listed on the exchanges at 48% premium as they debuted at Rs 864 a share on the BSE against its issue price of Rs 585.  The debut price is also Data Patterns 52-week high.  

As per JM Financial, Data Patterns has the potential to hit a target price of Rs 800 in one year. This turns out to be an upside of 19% on March 21 closing price of Rs 678 per share on the BSE. Since its stellar debut on the bourses, the stock has corrected significantly and is available at more than 25% discount on Monday's closing price of Rs 678 per share.

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Despite recent corrections in stock prices, JM Financial is of the view that with expansion in company's manufacturing base and recent fund infusion of Rs 3bn, the company has the potential to deliver healthy growth in FY24E. "We initiate coverage on Data Patterns with a 'buy' rating and target price of Rs 800 (30x FY24E EPS), implying 19% upside," said the brokerage.  

Budgetary cuts or delays by the government and technology disruption, however, can hurt stock's prospects, it underlines.  

Here is 5 reasons why JM Financial thinks that Data Patterns is a defence unicorn in making:  

1 Strong order book
Data Patterns reported strong order book growth of 41% CAGR over FY18-21, led by progress of large orders from development to production phase, particularly in EW and radars space. Order book at end Dec’21 stood at Rs 5.8 bn (1.9x TTM sales), led by a healthy mix of orders from MoD, BrahMos, DRDO, ISRO, HAL etc.

The brokerage expects the company to maintain moat around its business as more than 50% of forecasted revenue consists of single vendor contracts, resulting in better revenue as well as margin visibility.

2 Defence indigenization beneficiary
As per JM financials, Data Patterns is well placed to benefit from decadal growth opportunity in defence electronics, thrust on local procurement/indigenization through policy changes and rising usage of electronics in defence  

3 Strong earnings growth
Improving balance sheet and strong earnings CAGR of 31% over FY21-24E is likely to drive RoICs to 30% vs average of 12% in last 5 years.

4 Manufacturing facilities and R&D capabilities
Data Patterns is in the process of doubling its floor area and manufacturing capacity, as per JM Financials. Also, the capability of handling large and heavy equipment, integration of large radars and mobile electronic warfare systems and satellite integration facility will be enhanced. It intends to augment R&D capabilities for various verticals through procurement of additional software, testing equipment or other related hardware. It plans to spend Rs 600mn out of IPO proceeds for the purposes.

5 Focus on export business
Exports stood at 14% of overall revenue in FY21.Data Patterns intends to widen its reach to other high-end global markets similar to India, where its core competency is in complete sync with requirements for various sectors, such as industrial automation, telecom, automobile (electronic subsystems), medical (electronic subsystems) and nuclear. To leverage revenues from these markets, the company will either utilise engineering services model or product development model.  

Company details 
Established in 1985, Data Patterns is among the few vertically integrated defence and aerospace electronics solutions provider having design capabilities across the entire spectrum (air, land and sea). Its capabilities span across avionics, missile systems, radars, electronic warfare, satellites and communications.