Astra Microwave Products Stock Research Report

Growth trajectory intact…..

Astra Microwave Products (AMP) posted steady performance in Q2FY25. Key points: 1) Consolidated EBITDA rose 18.2% YoY at INR 492mn while revenue rose 21% YoY at INR 2.3bn; 2) EBITDA margin stood at 21.4% on higher proportion of domestic defence products; 3) ARC performance was impacted by prevailing geopolitical situation; 4) working capital build-up due to WIP and impending delivery of two system-related products; and 5) prospects look firm with H2FY25 order inflow expected at INR 5-6bn. Going ahead, management expects steady execution and is keen to get into more products/solutions through JVs/collaboration. In our view, the order inflow from (higher-margin) domestic defence looks robust. Hence, margins are expected to stay steady between 22-24%. Retain BUY on AMP stock with an unchanged TP of INR 935 (DCF-based methodology), implying 32.6x FY26E.

A steady quarter

AMP posted consolidated EBITDA of INR 492mn (up 18.2% YoY) and EBITDA margin of 21.4% in Q2FY25. Key points: 1) EBITDA margin was aided by higher proportion of domestic defence- 80%, while exports were down to 11.8%; 2) order inflow of INR 2.3bn in Q2FY25 (H2FY25: INR 5.3bn) was also predominantly for domestic defence platforms (including EW systems); 3) endSep’24 orderbook (consolidated) stood at INR 22.7bn of which INR 1.76bn comprised high margin service orders; 4) significant working capital build-up was primarily due to higher inventory, rising by INR 1.2bn in H1FY25 owing to WIP; and 5) management is focused on both people-related interventions and products/solutions through appropriate JVs/collaborations to drive growth. Going ahead, management believes working capital is likely to be unlocked as deliveries occur and sees no challenge to FY25 revenue of over INR 10bn.

Collaboration to fast-track product development

We are positive on management’s approach to dovetail their capabilities with other players to develop products/solutions such as: 1) MoU with premier explosives to combine the competencies of both the partners in electronics and explosives; 2) JV with Manjeera Digital Systems for NAVIC chips; and 3) agreement with a global production partner for hard-kill counter-drone systems with significant indigenous content. We believe there is a vast market potential for such products and it is likely to be a good earnings growth driver.

Outlook: Earnings growth in sight

While we factor in 20-25% p.a. revenue growth for AMP over the next couple of years, the margin is also likely to expand as both current orderbook and potential inflows have significant domestic defence content (which is of higher-margin). Besides, foray into developing products and solutions in telemetry, NAVIC chips and counter-drone system (CDS) is also likely to boost earnings in medium term. We would keep a tab on debt/working capital trajectory in H2FY25. Maintain BUY on AMP with an unchanged TP of INR 935, based on DCF methodology. The implied valuation by using P/E methodology works out to 32.6x FY26E EPS.