Defense Indigenization Will Create New Opportunities In Radar And Electronic Warfare

Key Takeaways

• Strategic focus on defense indigenization and new technology trends positions Astra Microwave for significant revenue growth in domestic and international markets.
  
• Expansion in high-margin radar and electronic warfare domains enhances value chain positioning and could improve net margins.
  
• Heavy reliance on domestic defense orders and limited market segments poses revenue risks, especially with rising finance costs and project execution challenges.

Catalysts

Designs, develops, manufactures, and sells sub-systems for radio frequency and microwave systems used in defense, space, meteorology, civil, and telecommunication applications in India.

• The company is strategically positioned to leverage the push towards defense indigenization, which is expected to boost its earnings as domestic defense orders increase. This could significantly impact future revenue growth.
  
• Astra Microwave is expanding in the radar and electronic warfare (EW) domains, which are expected to carry decent margins and help move up the value chain. This could lead to improved net margins due to higher-margin business segments.
  
• The successful participation and expected orders in anti-drone radar and other strategic projects position Astra Microwave to capitalize on new defense technology trends, potentially impacting both revenue and net margins.
  
• The company is anticipating a 15% to 20% top-line growth for the coming year due to a robust order pipeline. This expected revenue increase can enhance earnings and overall financial performance.
  
• Potential growth in the export market, particularly through build-to-spec contracts, could increase international market share and diversify revenue streams, positively affecting both revenue and net earnings.

Astra Microwave Products Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Astra Microwave Products's revenue will grow by 22.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 13.5% today to 14.1% in 3 years time.
• Analysts expect earnings to reach ₹2.6 billion (and earnings per share of ₹29.22) by about February 2028, up from ₹1.3 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 50.4x on those 2028 earnings, down from 51.8x today. This future PE is greater than the current PE for the IN Communications industry at 43.5x.
• Analysts expect the number of shares outstanding to decline by 0.07% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.21%, as per the Simply Wall St company report.

Astra Microwave Products Future Earnings Per Share Growth

Risks

• Astra Microwave Products faces high interest costs due to increased working capital borrowings, which could impact net margins if not managed efficiently.
  
• The company relies heavily on domestic defense orders, accounting for 85% of revenue, suggesting potential risk if domestic demand or government defense spending decreases, which could impact future revenues.
  
• There are challenges related to the execution of major projects, such as the delay in procurement of the Uttam AESA radar, that could affect order inflows and the revenue forecast.
  
• The rise in actual finance costs due to increased borrowings, despite adjustments according to accounting standards, might affect net earnings negatively if the trend continues.
  
• Dependence on a few market segments, like radar and EW, and high domestic concentration could expose Astra Microwave to sector-specific downturns, thus impacting overall earnings stability.

Valuation

• The analysts have a consensus price target of ₹953.75 for Astra Microwave Products based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹18.3 billion, earnings will come to ₹2.6 billion, and it would be trading on a PE ratio of 50.4x, assuming you use a discount rate of 13.2%.
  
• Given the current share price of ₹732.8, the analyst price target of ₹953.75 is 23.2% 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.