Up 21% from IPO price, ICICI Direct initiates coverage of Data Patterns stock, sees another 25% upside

After having been listed at a sharp premium over the IPO price, shares of Data Patterns (India) have now scaled lower from their highs amid various headwinds on Dalal Street. However, the stock still trades at close to a 20% premium to the issue price and analysts at ICICI Direct believe they could go higher. Initiating the coverage of Data patterns, ICICI Direct has pinned a ‘Buy’ tag on the stock with a target price of Rs 886, which is nearly 25% above the current trading price of Rs 711 apiece. Shares of Data Patterns were listed on NSE and BSE in December last year.

Defence electronics space provides huge opportunity

Data Patterns is a vertically integrated defence and aerospace electronics solutions provider catering to the indigenously developed defence products industry. Analysts believe that the Defence electronics space, where Data Patterns operates, provides a huge opportunity. “With defence public sector units (DPSUs) focusing on specialisation, integration and subcomponent manufacture being outsourced to the private industry, there are consequent expanded opportunities for the private sector,” the note said. 

In the previous Union Budget, the government earmarked Rs 84,598 crore, 68% of the military’s capital acquisition budget, for purchasing locally produced weapons and systems to boost self-reliance in the defence sector. ICICI Direct said that at present, defence electronics make up only 25-35% of the cost of platforms used by the Indian armed forces, which is expected to increase in future. “Data Pattern has established itself as a vertically integrated defence and aerospace electronics solutions provider to indigenously developed defence products industry,” ICICI Direct added.

Healthy order book

Data Patterns has a healthy order book standing at Rs 577 crore as of December 2021 end, of which 68% were production contracts while 22% and 10% of contracts were development and services contracts, respectively. The company is currently engaged in the supply of products to several prestigious defence projects in India, including the LCA, the HAL Dhruv, LUH and the BrahMos missile programme, according to the brokerage firm.

The company’s management has further guided that it is on track to get orders worth nearly Rs 500 crore in FY23. “The company expects a pipeline of over Rs 2,000 crore contracts, which are likely to be placed over the next two to three years,” ICICI Direct said. 

Firm to remain net cash

Data Patterns IPO was a mix of a fresh issue and an offer for sale. The company has utilised the IPO proceeds to repay its debt fully, funding capex at the Chennai facility and funding working capital requirements. “We expect the company to remain a net cash company now for the period FY22-24E led by an increase in profitability,” analysts said. ICICI Direct values the company at Rs 886 per share, on 32x P/E on FY24E EPS basis.