Company Name – Data Patterns (India) Ltd (Data Patterns) Current Share Price – INR 1,204 (February 27, 2023) Market Cap – INR 6,244 cr |
1. What is interesting about the stock?
Cash is King.
The idiom "cash is king" means that cash or liquid assets (such as money in a checking or savings account) is highly valuable and can be more important than other types of assets.
The phrase is often used in business and financial contexts, where having cash readily available can provide a competitive advantage. For example, a business with a strong cash position or cash flow position can take advantage of opportunities that arise, such as acquiring a competitor or investing in new technology. Additionally, having cash available can help businesses weather unexpected downturns or emergencies.
A high-growth business with a high working capital typically requires a large amount of cash to finance its growth. This is because the company may need to invest heavily in inventory, accounts receivable, and other current assets to meet the increasing demand for its products or services. This business will be continuously looking for external funding.
But, why are we talking about “cash is king” and high-growth businesses with high working capital? Because one such business is Data Patterns.
Data Patterns (India) Limited is a technology-driven company based in Chennai, India. The Company was founded in 1985 and has since grown to become a leading provider of electronic systems and solutions in India.
Data Patterns provides a wide range of services, including the design, development, and manufacturing of advanced electronic systems and solutions for aerospace, defense, and industrial applications. Their offerings include embedded systems, avionics, electronic warfare systems, communication systems, and more.
The product portfolio includes Radars, Underwater electronics/communications/other systems, Electronic warfare suite, BrahMos program, Avionics, small satellites, ATE for defense and aerospace systems, and Commercial off-the-shelf (COTS).
The Company is currently engaged in the supply of critical products to several prestigious defense projects in India, including the Light Combat Aircraft (LCA), the HAL Dhruv, Light Utility Helicopter (LUH) and the BrahMos missile program, precision approach radars, and various communications intelligence (COMINT) and electronic intelligence (ELINT) systems.
The company has a state-of-the-art manufacturing facility in Chennai, which is equipped with advanced technologies and modern equipment to ensure high-quality products and solutions. They also have a dedicated R&D team that works on developing new technologies and solutions to meet the evolving needs of their customers.
Data Patterns has established partnerships with leading global companies in the defense and aerospace industries. They have a strong customer base in India as well as in international markets such as the United States, Europe, and Asia. Some of their key customers are Bharat Electronics Ltd (BEL), Hindustan Aeronautics Limited (HAL), the Indian Space Research Organization (ISRO), and Defense Research and Development Organization (DRDO).
The Company has an order book of INR 888 cr (~2x TTM revenue).
India’s increased focus on domestic defense manufacturing is a strong tailwind for the Company. However, Data Patterns is predominantly dependent on the government and PSU for its revenue which increases the receivable days, and also Company needs to maintain a large inventory given the nature of the business. This puts pressure on the operating cash flow with working capital close to 300 days in FY22.
Why invest in Data Patterns?
Strong Technical Expertise: Data Patterns has a highly skilled team of engineers and technical experts who are well-versed in designing and developing advanced electronic systems and solutions. The company's technical expertise is backed by its state-of-the-art manufacturing facility and its focus on R&D, which enables it to deliver innovative and reliable solutions to its customers.
Diverse Customer Base: Data Patterns has a diverse customer base that spans multiple industries, including defense, aerospace, and industrial applications. This diversity helps the company to mitigate risks and maintain a stable revenue stream.
Strong Partnerships: The company has established partnerships with leading global companies in the defense and aerospace industries. These partnerships provide Data Patterns with access to new technologies, markets, and customers.
Sustainable Practices: Data Patterns is committed to sustainable practices and has implemented various initiatives to reduce its environmental impact. The company has also received certifications for its environmental management systems.
Management experience: Company’s management is experienced and has a track record of success in the industry. The company has a seasoned management team with decades of experience in the electronic systems and solutions industry. The Chairman and Managing Director of the company, Mr. R. Srinivasan, has been with Data Patterns for over three decades and has played a key role in the company's growth and success. He has extensive experience in the design, development, and manufacturing of electronic systems and solutions.
2. Key Historical Financials
Company revenue and PAT have grown at a CAGR of 44% and 163% respectively in the last 5 years
Data Patterns grew ~40% in FY22 on a YoY basis and is expected to exceed that growth in FY23 with bumper 155% growth in Q3FY23
EBITDA margin has increased from 28% in FY21 to 45% since FY22 and is at 42% in Q3FY23
PAT growth has been augmented further by de-leveraging in FY22
Working capital has come down since FY22 from 367 days to 290 days in FY23. But, the working capital is still quite high leading to very poor cash flow conversion (CFO/EBITDA)
Company raised INR 240 cr as a fresh issue in the IPO in December 2021. Cash balance as of March 2022 and September 2022 was ~INR 180 cr and ~INR 70 cr respectively implying that the Company used ~INR 60 cr in Q4FY22 and ~INR 110 cr in H1FY23. Data Patterns may run out of IPO money by the end of FY23 and may need either fresh equity issuance or raise debt to fund the growth
ROCE and ROE were strong in FY22 at 33% and 24% respectively
3. What is my view on company valuation?
Data Patterns IPO was subscribed ~120x and the shares were listed at ~50% premium to the issue price of INR 585. The share price has further appreciated post-listing peaking at INR 1,450 in early Feb 2023 and the current price is at INR 1,204 (~2x of the IPO issue price).
Company trades at P/E (TTM) multiple of 48x vs Bharat Electronics P/E (TTM) multiple of 25x (5-year median P/E ratio being 15x). High Working capital in a strong growth Company like Data Patterns is a big challenge. The Company is already looking to raise INR 500 cr, duly approved by the board and shareholders, as further equity issuance just around 1 year after the IPO. In this context, the valuation is extremely expensive and long-term investors could evaluate investing after a significant fall in the valuations.
4. What are the risks to the investment analysis?
Risks to the analysis are:
Management is looking to reduce the working capital. A sharp fall in working capital could significantly improve the operating cash flow
Susceptibility to changes in sourcing policies of key customers as the business is mostly project driven
About the Author
I have over 17 years of experience in venture capital, private equity, and investment banking across various sectors in India and the Middle East. I was last working with Majid Al Futtaim Holding (MAF), a leading conglomerate in the Middle East, to look after investments, M&A, and venture capital. I have prior experience in India with Tata Capital (Private Equity), Merrill Lynch (Investment Banking or IB), and Ambit Corporate Finance (IB). I bring the long-term ownership mindset to the analysis.
I graduated from the MBA program of the Indian Institute of Management Lucknow (2005) after completing the Bachelor of Technology program at the Indian Institute of Technology, Kharagpur (2002).
I am an Insignificant Investor in the public market and co-founder of SocInvest.
Disclosure
I have no stock, option, or similar derivative position in any of the companies mentioned in the last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.
I am not a SEBI registered advisor. This article is purely for educational purposes and is not to be construed as investment advice. Please consult your financial advisor before acting on it.
I have used publicly available information while writing this article.