Data Patterns

IPO Size: Rs. 588 cr

• 60% is offer for sale (OFS) mainly by promoters, to trim 59% holding to 46%
• Rs. 240 cr is fresh issue for (i) Rs. 61 cr debt repayment, (ii)Rs. 95 cr working capital, (iii) Rs. 60 cr capex

Rs. 60 cr pre-IPO placement, undertaken at Rs. 577 per share, last month, to 3 funds.

Price band: Rs. 555-585 per share

Mcap: Rs. 3,035 cr, implying 19 % dilution

IPO Date: Tue 14^th Dec to Thu 16^th Dec 2021, Listing Fri 24^th Dec 2021

Grey Market Premium (GMP): We are strongly against ‘grey market premium’ as it is an unofficial figure, against SEBI guidelines.

Company Overview:

Company supplies defence and aerospace electronics like radars, avionics displays, nano satellite etc. to Indian Government, with current order book of Rs. 581 cr representing 2.5x FY21 revenue of Rs. 224 cr. While order wins are lumpy, development contracts generally convert to production contracts, followed by service contracts and repeat production orders. While 2/3^rd of current order book is production contracts, development contracts rose from Rs. 30 cr, as of 31.3.21 to Rs.123 cr, as of 30.9.21, implying healthy outlook for new order wins.

Strengths:

1. High Growth: Revenue grew at 31% CAGR between FY19-21, and stood at Rs. 96 cr in H1FY22. Company is doubling capacity from fresh issue proceeds of Rs. 60 cr, to support growing order book.
2. High Margins: Focus on repeat orders for production contracts, which yield higher margins, as development costs are written-off during development contract itself, lead to high gross margins of 65-70%. Resultant operating leverage translated into 40% EBITDA margin and 24% PAT margin in FY21 and H1FY22. 
3. Valuation Discount to Peers: Trailing twelve month (TTM) EPS of Rs.18, leads to a PE multiple of 33x, which may appear to be high for small scale of operations and expected decline in RoE to 18-19% going forward, from FY21’s 27%. However, recently-listed private sector defence peers like Paras and MTAR Tech are ruling at PE multiples of 66x and 120x respectively, making Data Pattern’s pricing attractive.

Concerns:

1. Working Capital Intensive Business: Of Rs. 270 cr capital employed, Rs. 220 cr is locked in debtors and inventory. Even pre-covid, debtors and inventory outstanding were 9 months and 5-6 month of sales respectively, highlighting need for higher working capital to sustain growth.
2. Company’s net fixed assets of Rs. 35 cr are very low vis-à-vis private peers Paras (Rs. 155 cr), MTAR Tech (Rs. 175 cr). This is probably the reason for promoter pledge of 1.25 cr equity shares (26% of pre-issue capital) for securing loans from SBI (Rs. 31 cr fund based, Rs. 72 cr non-fund based facility). Company’s credit rating of BBB is also poor, although fresh issue proceeds will make it debt-free.
3. Unusual and Strange Risk Factor in the IPO prospectus, not seen in 200+ RHPs analyzed by us:

There may be significant independent press coverage about our Company and this Offer, and we caution you not to place reliance on any information contained in press articles, including, in particular, any financial projections, valuations or other forward-looking information, and any statements that are inconsistent with the information contained in this Red Herring Prospectus.

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