Data Patterns (India) Ltd Management Discussions

Global Economy Overview

Global economic growth is projected to continue at the same pace in 2024 and 2025 as in 2023 at 3.2%. The forecast for 2024 is revised up by 0.1 percentage point from January 2024. The pace of expansion is low by historical standards, owing to both nearterm factors, such as still-high borrowing costs and withdrawal of fiscal support, and longer-term effects from the COVID-19 pandemic and other geo political issues; weak growth in productivity; and increasing geo economic fragmentation. Global headline inflation is expected to fall from an annual average of 6.8 percent in 2023 to 5.9 percent in 2024 and 4.5 percent in 2025, with advanced economies returning to their inflation targets sooner than emerging market and developing economies.

The global economy has shown surprising resilience, despite significant central bank interest rate hikes aimed at restoring price stability. Inflationary pressures from supply chain disruptions, increased demand, and rising input costs have been major challenges. Central banks are closely monitoring these issues and considering adjustments to monetary policies to maintain stable prices.

Risks to the global outlook are now broadly balanced. On the downside, new price spikes stemming from geopolitical tensions, including those from the war in Ukraine and the conflict in Gaza and Israel, could, along with persistent core inflation where labour markets are still tight, raise interest rate expectations and reduce asset prices.

Overall, the economic landscape of 2024 is characterized by resilience, innovation, and opportunity, providing a favourable environment for businesses to prosper in the global market.

Indian Economy

The International Monetary Fund (IMF) has adjusted its growth forecast for Indias economy, now expecting it to expand by 6.8% in the current fiscal year and by 6.5% in the following year. The nominal GDP growth for the fiscal year 2023-24 is predicted to be around 9.1%, slightly lower compared to the previous year. The driving factors behind this growth are strong domestic consumption and increased investment, especially noticeable in the first few months of the ongoing fiscal period.

Nominal GDP in FY24 is estimated at Rs. 293.90 lakh crores (US$ 3.52 trillion), against the First Revised Estimates of GDP for FY23 of Rs. 269.50 lakh crores (US$ 3.23 trillion). The growth in GDP in FY24 is estimated at 9.1% as compared to 14.2% in FY23. Governments continued emphasis on capital expenditure along with strong domestic demand for consumption and investment are seen as among the key drivers of the GDP in the first half year. In January-March 2024, Indias exports stood at US$ 119.10 billion, with Engineering Goods-25.01%, Petroleum Products-17.88% and Organic and Inorganic Chemicals-7.65% being the top three exported commodity. Rising employment and increasing private consumption, supported by rising consumer sentiment, will support GDP growth in the coming months.

With proactive measures from the government, alongside stable global commodity prices and smoother supply chains, theres an expectation that inflationary pressures will ease, creating a favourable economic environment.

India has emerged as the fastest-growing major economy in the world and is expected to be one of the top three economic powers in the world over the next decade.

(Source: Industry Reports)

Indian economic reforms and Budget 2023-24 provisions

In the 75th year of Indias Independence, the Indian economy has been acknowledged as a "bright star" by the world due to its estimated economic growth of 6.8%, which is the highest among all major economies. This is a remarkable achievement considering the global slowdown caused by COVID-19 and the Russia- Ukraine War. Despite facing challenges, the Indian economy seems to be on the right path and headed toward a promising future.

Major Budgetary Reforms

Defence outlay is set to be increased by 11.1% to US$ 133.9 Billion (Rs 11 Lakh crore), which will be 3.4% of GDP The FY25 capex target has been set at US$ 133.8 (Rs 11.1 lakh crore), marking an 11.1% increase.

A rise in domestic investments has been one of the most significant contributors to the growth story of India. The concept of ‘Make in India - Atmanirbhar Bharat, various PLI schemes, and financial incentives provided by the government are a few examples of investor-friendly programmes that domestic companies are utilising to increase their production base and create new capacities, which leads to increasing domestic investments.

Indian Defence & Aerospace Segment review

The Indian Defence sector, the second largest armed force is at the cusp of revolution. The Government has identified the Defence and Aerospace sector as a focus area for the ‘Aatmanirbhar Bharat or Self-Reliant India initiative, with a formidable push on the establishment of indigenous manufacturing infrastructure supported by a requisite research and development ecosystem.

With an estimated domestic defence opportunity ranging between USD 100-120 billion over the next 5-6 years, the sector anticipates a visible 13 per cent industry Compound Annual Growth Rate (CAGR) from FY 2019 to FY 2025.

The Government, headed by Prime Minister Shri Narendra Modi, is focusing on long-term gains and not short-term outcomes to make India a developed nation by 2047. Indias defence sector, the second-largest armed force, is on the brink of a significant shift. The country is aiming to move from being a net importer to self-reliance, which is expected to transform its global positioning in the defence industry. The Government has been focusing on the integration of the Indian Army, the Indian Navy and the Indian Air Force, which will ensure enhanced coordination among them in times of crisis. To achieve this, Ministry of Defence notified five positive indigenisation lists of the Services, comprising over 500 items, and four other lists, with over 4,600 items for DPSUs, to ensure that the soldiers use made in India weapons. The export defence opportunities are projected to witness a commendable 21 percent CAGR from FY23 to FY30, with Indias defence exports surging 16-fold from FY17 to FY24E, reaching USD 3 billion. Annual defence production is expected to touch Rs. three lakh crore.

In order to promote indigenous design and manufacturing, funds have also been earmarked for procurement from indigenous sources. For FY24, funds have been earmarked in the ratio 67.75:32.25 between Domestic and Foreign procurement in the Capital Acquisition Budget of the Ministry of Defence (MoD). In addition, the MoD has also directed spending an amount of Rs. 1,500 crore (US$ 181.1 million) towards procurement from startups.

Ministry of Defence has set a target of achieving a turnover of Rs 1.75 Lakh Cr. in aerospace and defence manufacturing by 2025, which includes exports of Rs 35,000 Cr. Till Apr 2023, a total of 606 Industrial Licences have been issued to 369 companies operating in Defence Sector.

The focus on indigenization is expected to be a significant driver, fostering double-digit growth in domestic defence spending.

To support the domestic defence industry the government aims to ensure transparency, predictability, and ease of doing business by creating a robust eco-system and supportive government policies. Towards this end the government has taken steps to bring about de-licensing, deregulation, export promotion and foreign investment liberalization. This increase in budget is intended to close critical gaps in combat capabilities, equip the forces with ammunition, and sustain weapons and assets to ensure they are battle-ready. The increased budget allocation demonstrates the governments commitment to sustainable modernization and infrastructure development of defence services.

(Source: Industry Reports)

Government Initiatives

The Government has taken several policy initiatives in the past few years and brought in reforms to encourage indigenous design, development and manufacture of defence equipment, thereby promoting self-reliance in defence manufacturing & technology in the country.

These initiatives, inter-alia, include

• according priority to procurement of capital items of Buy Indian (IDDM) category from domestic sources under Defence Acquisition Procedure (DAP)-2020;

• Notification of four ‘Positive Indigenisation Lists of total 411 items of Services and three ‘Positive Indigenisation Lists of total 3,738 items of Defence Public Sector Undertakings (DPSUs), for which there would be an embargo on the import beyond the timelines indicated against them;

• Simplification of Industrial licensing process with longer validity period;

• Liberalization of Foreign Direct Investment (FDI) policy allowing 74% FDI under automatic route;

• Simplification of Make Procedure;

• The Indian government is focussing on innovative solutions to empower the countrys defence and security via ‘Innovations for Defence Excellence (iDEX), which has provided a platform for start ups to connect to the defence establishments and develop new technologies/products in the next five years (2021-2026). Working through partner incubators, iDEX has been able to attract the start-up community to participate in the Defence India Start-up Challenge (DISC) programme.

• Implementation of Public Procurement (Preference to Make in India) Order 2017;

• Reforms in Offset policy with thrust on attracting investment and Transfer of Technology for Defence manufacturing by assigning higher multipliers; and

• The government has established two Defence Industrial Corridors (DICs) in the country, one in Uttar Pradesh called the Uttar Pradesh Defence Industrial Corridor (UPDIC) and the other in Tamil Nadu called the Tamil Nadu Defence Industrial Corridor (TNDIC), with the goal of attracting Rs. 10,000 crore (US$ 1.31 billion) in investment in each.

• Earmarking of 25% of R&D Budget for Industry led R&D;

• Progressive increase in allocation of Defence Budget of military modernization for procurement from domestic sources, etc.

• More than 34,000 items are available for public view and 10,000 items have been indigenized till January 2024.

• Till April 2023, a total of 606 industrial licences were issued to 369 companies operating in the defence sector. Defence exports rose 240% over five years in FY23, to US$ 1.9 billion. India now exports to over 85 countries due to collaborative efforts.

• The Indian Defence Ministry has set a target of achieving 70% self-sufficiency in weaponry by 2027, creating a favorable environment for industry players.

• A Green Propulsion System developed under the Technology Development Fund (TDF) scheme of DRDO, showcased successful in-orbit functionality on a payload launched during the PSLV C-58 mission.

• Hindustan Aeronautics Limited (HAL) and Bharat Electronics Limited (BEL) signed a contract for the co-development and co-production of the Long Range Dual Band Infra-Red Search and Track System (IRST) for the Su-30 MKI under the MAKE-II procedure of Defence Acquisition Procedure (DAP) 2020 as a part of the Make in India initiative.

• According to data released by the Department of Defence Production, 68 artificial intelligence (AI) projects in the field of defence have been planned upto March, 2024, with 40 AI projects already completed as on 30 April, 2022.

(Source: Industry Reports)

Outlook

India continues to prioritize its defence sector, evident from its consistently increasing defence budget allocation. The governments commitment to modernizing the armed forces, enhancing indigenous defence production capabilities, and strengthening national security infrastructure bodes well for the sectors growth. With initiatives like "Make in India" and "Atmanirbhar Bharat" (Self-Reliant India), theres a concerted effort to reduce dependency on foreign defence equipment and promote indigenous manufacturing and innovation. With rapid technological advancements, theres a growing emphasis on leveraging cutting-edge technologies such as artificial intelligence, cybersecurity, and unmanned systems in defence operations. Indias vibrant technology ecosystem and strong talent pool position it well to harness these innovations for defence applications.

Company Overview

Data Patterns (‘the Company) is one of the fastest growing companies in the Defence and Aerospace Electronics sector in India and has proven inhouse design and development capabilities and experience of more than three decades in various electronic products used in the Aerospace and Defence requirements, like, avionics, Automatic Test Equipment (ATE), Radars, Communication Systems and Electronic Warfare solutions, the company offers a comprehensive suite of projects tailored to the unique requirements of each industry, catering to the entire spectrum of Defence and Aerospace platforms - space, air, land, and sea.

The Companys capabilities across the spectrum of defence and aerospace electronics solutions from design to delivery allow it a significant competitive advantage in terms of overall development time and cost and also be competitive in pricing when bidding for defence and aerospace projects. These platform- specific products and products certified for ongoing programs will allow Data Patterns to be the preferred OEM for such qualified product requirements, driving growth and revenue visibility over many years.

SWOT Analysis Strengths

• Data Patterns has built a strong reputation for delivering high-quality products and services in the defence and aerospace sectors.

• Robust domain capability in Radars, Electronic Warfare, Communication systems, Avionics & Satellite Systems.

• Data Patterns invests significantly in research and development, allowing it to innovate and stay ahead of market trends.

• Excellent quality process coupled with strong internal quality team ensures quality products.

• Scalable business; potential to build complete systems

• The company possesses deep technical expertise in areas such as electronic systems design, embedded software development, and manufacturing, giving it a competitive edge in the industry.

Weakness

• Data Patterns business heavily relies on government contracts, making it vulnerable to fluctuations in government spending and regulatory changes. Extensive gestation of development contracts.

• The nature of the defence industry often involves high upfront costs and long development cycles, which can strain the companys financial resources and affect profitability.

• Rapid advancements in technology could potentially render Data Patterns existing products and solutions obsolete if not continuously innovated upon.

• Challenging working capital cycles.

Opportunities

• Continued government initiatives to modernize defence systems and infrastructure present opportunities for Data Patterns to secure additional contracts and expand its market share.

• Theres potential for the company to expand its presence in international markets by forming strategic alliances, joint ventures, or establishing subsidiaries in key regions.

Threats

• Changes in government regulations, export controls, or compliance requirements could impact the companys ability to operate and export its products.

• Dependence on suppliers for critical components and materials exposes the company to risks associated with supply chain disruptions, such as raw material shortages, transportation issues, or geopolitical instability.

Financial overview

Analysis of the profit and loss statement

Revenues:

Revenues from operations increased from INR 453 Cr in FY 2022-23 to INR 520 Cr in FY 2023-24, a growth of 15%.

Other income for the year reported a whopping 411% growth from Rs. 9 Cr in FY 2022-23 to Rs. 46 Cr in FY 2023-24, due to increased bank deposits and investment in Mutual Funds. Other income (mainly interest on Bank Deposits and gains from Investments) accounted for 8.85% of the total revenue (1.99 % in FY 2022-23), reflecting the Companys dependence on its core business operations.

Expenses:

Total expenses increased by 7.05% from Rs. 298 crore in FY 2022-23 to Rs. 319 Cr in FY 2023-24.

Gross Margin generally varies with products/projects. For the year 2023-24 the Gross Margin stood at INR 355 Cr (68% of the Operating Revenue) as compared to INR 282 Cr (62% of Operating Revenue) in FY 2022-23.

Employee benefit expenses increased by 26% from Rs. 79 Cr to Rs. 100 Cr and accounted for a 19% share of the Companys revenues. This increase is mainly attributable to the increase in head count from 1130 in March 2023 to 1318 in March 2024 and regular annual wage revision.

Finance Cost increased by 19% from Rs. 7.32 Cr to Rs. 9.21 Cr due to increase in the working capital limits from Banks.

There was a marginal increase in the administrative and other expenses.

Analysis of the Balance Sheet

Sources of funds

The net worth of the Company increased by 14% from Rs. 1,167 Cr as on March 31, 2023 to Rs. 1,331 Cr as on March 31, 2024 due to retained earnings.

Return on capital employed, a measurement of returns derived from every rupee invested in the business increased by 6 basis points from 13% in 2022-23 to 19% in 2023-24 due to increase in profit.

The Company was zero debt as on March 31,2024.

Applications of funds

Fixed assets (gross) of the Company increased by Rs. 42.76 Cr, an increase of 28% as compared to the Gross Block as on March 31, 2023. During the year the Company commissioned its EMI EMC Test facility installed at a cost of Rs. 13.44 Cr.

The Company also started its new product development for various products under Radar, Electronic Warfare and Communication Systems during the financial year 2023-24 and capitalized Rs. 40.90 Cr. These product development initiatives are funded through the proceeds from QIP raised in March 2023.

The Company has a separate policy regarding capitalization and amortization of such capitalization of product development efforts.

Company has written off Rs. 15.80 Cr depreciation during the year which include accelerated depreciation of Rs. 3.13 Cr on assets which are no longer usable.

Working capital management

Current assets of the Company increased by 13% from Rs. 1,325 Cr as on March 31, 2023 to Rs. 1,396 Cr as on March 31,2024 owing to increase in inventory and advances paid to suppliers of material.

The current ratio of the Company stood at 4.04 at the close of 2023-24 compared to 9.82 at the close of FY 2022-23.

Inventories including raw materials, work-inprogress and finished goods among others increased by 32% from Rs. 193 Cr as on March 31, 2023 to Rs. 255 Cr as on March 31, 2024. The increase is mainly due to advance procurement for execution of some of the on-going projects and owing to a growing scale of business. Inventory turnover ratio improved from 1.09 to 0.74.

Receivables showed a significant improvement with receivables days decreasing to 267 days in March 2024 as against 308 days in March 2023. Receivables turnover ratio also showed improvement from 1.56 to 1.37 during the year under review.

Since, all the receivables are considered good and recoverable, no provision has been made, expect provision of Rs. 0.55 Cr. on long pending receivable as per the policy. However, the Company is confident of realising the amount in the coming year after necessary approvals.

Cash and bank balances and Investment in Mutual Funds increased from Rs. 600 Cr in March 2023 to Rs. 675 Cr in March 2024 and thus improved the liquidity position of the Company. Cash and Bank balances include Rs. 16 Cr of deposits out of IPO and Rs. 240 Cr of deposits out of QIP Deposits held towards margin for Bank Guarantees is classified as Other Financial Assets under Non-Current Assets.

Increase in Other Current Assets is mainly due to increase in advances paid to suppliers of material.

Margins

The EBIDTA margin of the Company is 43% in FY2023-24, an improvement over 38% in FY 2022-23.

Companys PAT increased by 47% from Rs. 124 Cr in FY 2022-23 to Rs. 182 Cr in FY 2023-24 and PAT Margin improved from 27% in FY 2022-23 to 35% in FY 2023-24.

Ratios

Particulars	FY 2023-24	FY 2022-23
EBIDTA/Turnover (%)	42.64%	37.89%
Return on equity (%)	13.72	10.62
Book value per share	234.53	206.47
(Rs.)
Earnings per share (Rs.)	32.45	23.8
Debtors Turnover (days)	280	308
Inventory Turnover	508	333
(days)
Interest Coverage	26.96	22.30
Ratio (x)
Current Ratio (x)	4.00	9.76
Debt Equity Ratio (x)	0	0.01
Net Profit Margin (%)	34.95%	27.34%

Note: Details of significant variation in key ratios along with reasons for such variations is available in Note. 40 forming part of the audited financial.

Internal Control Systems

At Data Patterns (India) Limited, we prioritize the establishment of a robust internal control system to safeguard our assets, ensure compliance with regulations, and enhance operational efficiency. Our internal control framework encompasses a comprehensive set of policies, procedures, and practices designed to mitigate risks across all aspects of our operations. We implement segregation of duties to prevent fraud and error, regularly review and update our processes to adapt to changing business environments and regulatory requirements. Additionally, we conduct internal audits to assess the effectiveness of our control measures and identify areas for improvement. Through a proactive approach to internal controls, we aim to promote transparency, accountability, and integrity throughout the organization, fostering trust among stakeholders and sustaining long-term success.

Human Resource

At Data Patterns (India) Limited, our Human Resources department is dedicated to fostering a dynamic and inclusive work environment where every employee can thrive and contribute their best. We believe that our people are our most valuable asset, and we are committed to attracting, developing, and retaining top talent. Our HR team works tirelessly to ensurethatourhiring processes arefairand transparent, providing equal opportunities for all applicants. We prioritize employee growth and development through continuous learning initiatives, mentorship programs, and career advancement opportunities. Additionally, we understand the importance of work-life balance and offer comprehensive benefits packages to support the well-being of our employees. We strive to create a culture of excellence, collaboration, and innovation, where every individual feels valued and empowered to achieve their fullest potential.

As on March 31, 2024, the company has employed 1345 employees as compared to 1130 as at the end of previous year.

Cautionary Statement

Statement in the Management Discussion and Analysis describing the Companys objectives, projections, expectations and estimates regarding future performance may be "forward-looking statements" and are based on the currently available information. The management believes these to be true to the best of its knowledge at the time of preparation of this report. However, these statements are subject to certain future events and uncertainties, which could cause actual results to differ materially from those, which may be indicated in such statements.