New Orders And International Expansion Will Drive Future Success

Key Takeaways

• Expanding international presence with a strong order book supports revenue growth from exports and boosts medium-term contract pipelines.
  
• Indian defense sector opportunities align with government budget increases, potentially enhancing growth and order acquisition.
  
• Revenue growth is threatened by customer deferments and defense contract delays, alongside risks from extended project cycles, inventory strain, and competitive export markets.

Catalysts

Provides defense and aerospace electronics solutions in India.

• Data Patterns expects to achieve a 20% to 25% revenue growth by FY '25, driven by a ramp-up in execution and maintaining strong EBITDA margins at 35% to 40%. (Revenue, EBITDA margins)
  
• The company is intensifying efforts to expand its presence in international markets with a robust order book worth ₹106 crores, indicating potential revenue growth from exports. (Revenue, Gross margins)
  
• With a target of ₹20 billion to ₹30 billion in new orders over the next 18 months, a significant pipeline of new contracts is expected to boost order inflows. (Order book, Revenue)
  
• Investments in research and development are expected to create new products that cater to emerging industry needs, which can increase revenue and gross margins in the medium and long term. (Product development, Revenue, Gross margins)
  
• The Indian government's increased defense budget and focus on indigenous weapon and equipment modernization provide opportunities for growth in the defense sector, which Data Patterns can leverage to secure new orders. (Revenue growth, Order book)

Data Patterns (India) Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Data Patterns (India)'s revenue will grow by 25.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 31.3% today to 31.5% in 3 years time.
• Analysts expect earnings to reach ₹4.4 billion (and earnings per share of ₹78.8) by about July 2028, up from ₹2.2 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 59.1x on those 2028 earnings, down from 70.1x today. This future PE is lower than the current PE for the IN Aerospace & Defense industry at 70.9x.
• Analysts expect the number of shares outstanding to grow by 0.05% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.66%, as per the Simply Wall St company report.

Data Patterns (India) Future Earnings Per Share Growth

Risks

• Delivery deferments from customers could impact revenue recognition in the short term, potentially affecting the company's ability to meet revenue growth projections for FY '25.
  
• The slowdown in domestic defense contracts due to bureaucratic delays and defense sector procurement challenges could constrain revenue growth, which is heavily reliant on the order inflow from government contracts.
  
• Execution risks related to large capital equipment projects, with extended order cycles and lower margin contracts, might pressure net margins and profitability if not managed effectively.
  
• Elevated inventory levels and an extended cash conversion cycle could strain working capital and liquidity, particularly if delays continue and deferment persists, affecting net margins in the intermediate term.
  
• Export market expansion, while promising, carries the risk of lower margins due to competitive pricing dynamics and the potential difficulty in establishing a foothold in international markets, which could impact overall earnings if exports don’t grow as anticipated.

Valuation

• The analysts have a consensus price target of ₹3171.0 for Data Patterns (India) based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹3700.0, and the most bearish reporting a price target of just ₹2700.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹14.0 billion, earnings will come to ₹4.4 billion, and it would be trading on a PE ratio of 59.1x, assuming you use a discount rate of 13.7%.
• Given the current share price of ₹2777.8, the analyst price target of ₹3171.0 is 12.4% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.