Data Patterns (India)
Data Patterns (India) is coming out with a 100% book building; initial public offering (IPO) of 1,02,76,874 shares of Rs 2 each in a price band Rs 555-585 per equity share.
Not more than 50% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not less than 15% of the issue will be available for the non-institutional bidders and the remaining 35% for the retail investors.
The issue will open for subscription on December 14, 2021 and will close on December 16, 2021.
The shares will be listed on BSE as well as NSE.
The face value of the share is Rs 2 and is priced 277.50 times of its face value on the lower side and 292.50 times on the higher side.
Book running lead manager to the issue are JM Financial and IIFL Securities.
Compliance Officer for the issue is Manvi Bhasin.
Profile of the company
The company is among the few vertically integrated defence and aerospace electronics solutions provider catering to the indigenously developed defence products industry. It has proven in-house design and development capabilities and experience of more than three decades (including through its erstwhile subsidiary) in the defence and aerospace electronics space. Its offerings cater to the entire spectrum of defence and aerospace platforms - space, air, land and sea. The company has design capabilities across the entire spectrum of strategic defence and aerospace electronics solutions including processors, power, radio frequencies (RF) and microwave, embedded software and firmware and mechanical engineering. Its core competencies include electronic hardware design and development, software design and development, firmware design and development, mechanical design and development, product prototype design and development, functional testing and validation, environment testing and verification and engineering services opportunities.
The company’s capabilities across the spectrum of defence and aerospace electronics solutions from design to delivery allows it significant competitive advantage in terms of overall development time and cost and also allows it to offer competitive pricing when bidding for defence and aerospace projects. Platform specific products and products certified for ongoing programmes allow it to be the preferred OEM supplier for such qualified product requirements, driving growth and revenue visibility over many years. It has end-to-end capabilities to build and deliver complete systems, with its design and manufacturing capabilities being completely in-house. Its electronic solutions are developed by specialist teams working on areas including complex 20+ layer printed circuit board (PCB) designs, field-programmable gate arrays (PGA) based firmware algorithms, all layers of software including operating system porting, device drivers, networking layers, application software, graphical user interface, cartography, signal processing, streaming protocols and waveform engineering. Its capabilities across the spectrum of aerospace and defence electronics solutions from design to delivery allows it significant competitive benefits in terms of overall development time and cost and also allows it to offer competitive pricing when bidding for aerospace and defence projects.
Proceed is being used for:
Prepayment or repayment of all, or a portion, of certain outstanding borrowings availed by the company.
Funding working capital requirements of the company.
Upgrading and expanding its existing facilities at Chennai.
General corporate purposes.
Industry overview
The defence and space industry are strategic sectors and are resilient to economic impacts. They are largely affected by geopolitical situation, political stance and national strategic plans. The Indian Defence industry is at an inflexion point, with the increased private sector participation being the way forward. India’s defence industry has come a long way since it embarked on a mission of self-sufficiency in the 1950s. The initial model was designed with enhancing the production of low technology weapons in mind, with production and manufacture being led by DPSUs. The Indian defence exports are likely to grow at a fast rate due easing of export restrictions and policy changes. This is also being compounded by rising prowess of the Indian defence suppliers. The Indian defence exports are now dominated by the private sector as compared to defence public sector units and are expected to drive revenue opportunities Companies in niche products such as Data Patterns are well positioned to capture the growth in exports.
India continues to be the among the top 5 importers of armed equipment in the period 2016-2020 as per SIPRI report; “Trends in International Arms Transfer” released in 2021. However, it is heartening to note that its share of the global arm imports dropped from 14% in 2011-2015 to 9% in 2016-2020, a drop of 33%. This is a clear indicator of the fruition of efforts to promote the capability and sourcing from domestic defence industry. The government’s latest policies seek to build greater self-reliance in Indian defence R&D and manufacturing through a combination of the Aatmanirbhrar Bharat mission, DAP 2020, Offsets and the upcoming Defence Production and Exports Policy. The Indian government’s approach to promoting more indigenous industry inclusion has been becoming more calibrated in the last few years. The drivers used are indicated in Figure 21. Whilst the onus has been on increasing prioritisation for Indian company led procurement mechanisms, several other policies have also been initiated to simplify entry into the defence sector and devolving more freedoms in avenues such as export selection to Indian companies.
Pros and strengths
Indigenous integrated and strategic defence and aerospace electronics solutions provider: Since inception, the company has focussed on designing and building its own products. The company has extended its product focus across the manufacturing value chain from industrial and test automation to automated test equipment for space systems to developing products and sub-systems for defence and aerospace systems through DRDO. The company is focussed on developing complete systems and sub-system solutions in domains such as radars, electronic warfare, communication systems, RF and microwave, Military COTS (such as VME and VPX processor boards, digital receivers, Input/Output modules of many functions and form factors), avionics, missile and torpedo electronics, fire and launch control systems, space based systems and automatic test equipment. DRDO is its valuable customer and have supplied several electronics based systems / sub-systems to DRDO for various applications. The private sector in several countries, including those in the United States and the United Kingdom, grew in stages with private companies starting out as suppliers to government majors and military research facilities. Over time component manufacturers evolved into integrators and later into solution providers. With defence primes developing independent platform building capability, this division of labour within the industry has become more streamlined and specialised, resulting in greater industry revenues and profit.
Sound order book across product categories: As on September 30, 2021, the company had an order book of Rs 581.30 crore, with orders from several marquee customers in the Indian defence ecosystem, including the Indian government defence ministry, BrahMos, DRDO, the Indian government space organisation, HAL, BEL and a DPSU involved in the missile space. 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. In each of the above projects, the company’s products form critical components, such as the launch systems for the ground based BrahMos missile launcher, flight and safety critical “take me home” displays for the Tejas. As products and systems bought by Indian defence services need to have a life time of minimum 20 years, its systems are designed to meet such operational requirements with a clear policy on obsolescence management. The company therefore has several customers with a history of reliable product service over many years. The company have also designed and supplied the Launch Countdown System to the Indian government space organization.
Modern certified manufacturing facility of international standards: The company’s in-house design and development capabilities are complemented by 100,000 square feet manufacturing facility located on 5.75 acres of land at the SIPCOT Information Technology Park, Siruseri, Chennai, which has facilities for design, manufacturing, qualification and life cycle support of high reliability electronic systems used in defense and aerospace applications. Its facility allows the company to be self-sufficient in its requirement of high quality and high complexity production while ensuring functional testing for all its products using internally developed automatic testing equipment. Environmental test facilities are also available for the requirements of JSS55555, MIL-STD-461 and MIL-STD-810 including for Highly Accelerated Life Test / Highly accelerated stress screening. The company is certified for or follow various standards across product life cycles, including for aerospace systems under AS9100D by TUV-SUD, IPC Standards for PCB design, DO178B for software for airborne systems, Software life cycle processes and environment standards MIL-STD-810, JSS-55555 and EMI-EMC standard MIL-STD-461.
Innovation focussed business model: The company has in the past initiated development of several projects, such as military grade processor modules, cockpit displays, actuator controllers for missiles and torpedoes, flight control computers, digital receivers and Up/Down converters for radars, with an aim to utilise these components in subsequent projects. Subsequently, it has been able to utilise these pre-developed building blocks and sub-systems in the development of complete systems, thereby allowing for higher value addition while distributing development costs. Further, an ability to partner with its customers through the life cycle of a product, from conception till deployment and thereafter, allows it to be logical partner to its customers as a product moves from development to deployment. It designs and develops a number of building blocks similar in specifications to imported modules to allow it to compete in local tenders of DRDO for military commercial-off-the-shelf (COTS) products.
Risks and concerns
Business largely dependent on contracts from GoI and associated entities: The company is among the few vertically integrated defence and aerospace electronics solutions provider catering to the indigenously developed defence products industry. The company offer products catering to the entire spectrum of defence and aerospace platforms such as space, air, land and sea. Consequently, its business is dependent on projects and programmes undertaken by GoI and associated entities, such as defence public sector undertakings and government organizations involved in space research (collectively, the ‘GoI Entities’). The company derived Rs 10.78 crore, Rs 23.43 crore, Rs 117.76 crore, Rs 57.30 crore and Rs 63.04 crore amounting to 11.18%, 52.68%, 52.58%, 36.71%, and 48.10% of its total sales during the six months ended September 30, 2021, the six months ended September 30, 2020, Fiscals 2021, 2020 and 2019 respectively, from sales made to the GoI Entities. Any decline or reprioritisation of the Indian defence or space budget, reduction in orders, termination of existing contracts, delay of existing or anticipated contracts or programmes or any adverse change in the GoI Entities’ defence or space requirements and geo-political circumstances, may have a material adverse impact on its business and profitability.
Significant working capital requirements: The company requires significant working capital including in connection with its manufacturing operations, financing its inventory, purchase of raw materials and its development of new products which may be adversely affected by changes in terms of credit and payment. The company is required to maintain a high level of working capital because its business activities are characterised by long product development periods and production cycles. Even where milestone payments are allowed, these have to be backed by bank guarantees. Delays in payment under on-going contracts or reduction of advance payments due to lower order intake or inventory and work in progress increases and/or accelerated payments to suppliers, could adversely affect its working capital, lower its cash flows and materially increase the amount of working capital to be funded through external debt financings. The actual amount and timing of its future capital requirements may differ from estimates as a result of, among other factors, unforeseen delays or cost overruns, unanticipated expenses, regulatory changes, economic conditions, engineering design changes, technological changes and additional market developments. If the company decide to raise additional funds through the incurrence of debt, its interest and debt repayment obligations will increase, and could have a significant effect on its profitability and cash flows and the company may be subject to additional covenants, which could limit its ability to access cash flows from operations.
Operations rely heavily on effectiveness of products: The company’s operations rely heavily on the effectiveness of its products. To remain competitive, it must continue to stay abreast of the constantly evolving trends and to enhance and improve the responsiveness, functionality and features of its products, including cost to their end customers and compete, it must continue to invest resources in design and development to enhance its information technology and improve its existing services. The industry in which it operates is characterized by rapid technological evolution and changes in customer requirements, which could render its existing technologies and systems obsolete. There is a need to keep in pace with state-of-the-art technologies in defence sector in developed countries. The company’s success will depend, in part, on its ability to identify, develop, acquire or license leading technologies useful in its business, and respond to technological advances and emerging industry standards and practices in a cost-effective and timely way. There can be no assurance that it will be able to use new technologies effectively or adapt technologies and systems to meet customer requirements or emerging industry standards. There can be no assurance that it will be able to successfully implement its future strategy to continue to innovate.
Operates in competitive business environment: The company’s ability to meet the qualification criteria in its various business areas is critical to being considered for any project. The company competes on the basis of its ability to fulfil its contractual obligations including the quality of products and the timely delivery of the products. Additionally, while these are important considerations, price is a major factor in most tender / bid awards and its business is subject to intense price competition. Its competitors may have substantially greater financial, management, research and marketing resources than the company have as a result of which they may be able to utilise their resources and economies of scale to develop improved products, divert sales away from the company by winning broader contracts or hire its employees by offering more lucrative compensation packages. Its competitors may be able to provide its customers, including the GoI Entities, with different or greater capabilities or benefits than the company can provide in areas such as technology, technical qualifications, post contract performance, price and availability of key professional personnel. In addition, larger diversified competitors serving as primary suppliers may be able to supply underlying products and services from affiliated entities or new joint ventures with private Indian companies, which would prevent it from competing for sub -contracting or licencing opportunities on these contracts.
Outlook
Data Patterns is a defense and aerospace electronics solutions provider catering to the indigenously developed defense products industry. The company offers products to the entire spectrum of defense and aerospace platforms - space, air, land, and sea. The company's core competencies include electronic hardware design and development, software design and development, firmware design and development, mechanical design and development, product prototype design and development, functional testing and validation, environment testing and verification, and engineering services opportunities. It has design capabilities across the entire spectrum of strategic defence and aerospace electronics solutions including processors, power, radio frequencies (RF) and microwave, embedded software and firmware and mechanical engineering. On the concern side, the company requires substantial power and fuel for its manufacturing facilities, and energy costs represent a significant portion of the production costs for its operations. The products the company manufactures are complex, require technically advanced and costly equipment and involve hazardous materials. The components and systems it manufacture may involve risks, including breakdown, failure or substandard performance of equipment, improper installation or operation of equipment and industrial accidents.
The issue has been offered in a price band of Rs 555-585 per equity share. The aggregate size of the offer is around Rs 570.36 crore to Rs 601.20 crore based on lower and upper price band respectively. On the performance front, the company’s overall revenue from operations increased to Rs 223.95 crore for Fiscal 2021 from Rs 156.09 crore for Fiscal 2020, representing an increase of 43.46%. The company’s profit for the year increased by Rs 34.52 crore or 164.02% to Rs 55.57 for Fiscal 2021 from Rs 21.05 crore for Fiscal 2020. The company intends to continue to expand its capabilities and product portfolio to enhance its offerings in the defence and aerospace electronics space, especially in complex technology based products. It also intends to augment its design and development capabilities for its various verticals, including its design verticals, through procurement of additional software, testing equipment or other related hardware.
