Niche technology

Astra Microwave Products Ltd (AMP), a Hyderabad-based electronics company was promoted by technocrats B. Malla Reddy, who has worked for over two decades in ISRO, Bangalore, and DRDL, Hyderabad, P. A Chitrakaar, who has worked as a scientist for over 20 years with Defense Electronics Lab, Hyderabad and C Prameelamma, who has had a distinguished career with Electronics R&D Establishment, Bangalore, and the DERL, Hyderabad. It is engaged in designing and manufacturing high value added RF (Radio Frequency) and microwave super components and sub-systems for defense, space and civil communication systems. Its products are widely used in VSAT operations, radars, satellite applications, antennas, etc.  with European Aeronautic Defence and Space Company, Israel Aerospace Industries, Elettronica, Italy's SIAE Microelettronica among its top foreign customers.

AMP operates in very niche and high-tech space with very few listed peers. The biggest listed competitors/peers to it on the Indian exchanges are the PSU BEL, BEML which work as monopolies in the supplying defense equipment to the government. With privatization being allowed in defense procurement recently (as evidenced in MoD officials’ pronouncements in Defexpo India 2012), quite a few private companies are gearing up to enter this field. The major players/groups who have shown interest and are already active in this space are the Mahindras (thru Mahindra Aerospace and Mahindra Systech, both private companies in the group), Larsen & Toubro, Tatas (thru Tata Technologies which has a JV with HAL, a PSU), Pipavva Defence & Offshore Company (also referred as Pipavav DOC which was formerly Pipavav Shipyard), and Kirloskars. The rising defense expenditure in India is throwing up huge opportunities for private sector as they can enter into partnerships with global majors for manufacturing. Shipyards are another area where private sector smells an opportunity. Pipavav DOC (formerly Pipavav Shipyard) has already entered into a JV with Mazgaon Dock, India's biggest defense shipyard for shipbuilding with more than 85% of indigenous defense vessels being built there. With Mazgaon Dock already executing huge orders for the govt., some of it will surely come Pipavav’s way.

As with retail, this sector (defense equipment and services) is more or less out of bounds for the private sector, a scenario which is undergoing winds of change. As with retail, govt. is taking small but steady steps in opening up this sector to private participation realizing that PSUs such as BEL alone may not be able to supply India’s growing needs for this sector. FDI is currently 26% in this sector but private sector is lobbying for this to be increased to 49 (similar to Retail and Insurance). It may be a matter of time when the govt. gives the nod for this keeping all stakeholders happy. The govt. has already decided to issue licenses to Indian and foreign private companies to invest money and to start manufacturing defense equipments. So far, they have given licenses to 24 companies, including Larsen & Toubro, Tata and Mahindra and Mahindra.

AMP is backed by Strategic Ventures Fund (SVF), a PE fund managed by Mauritius-based Frontline Strategy Limited with a 15%. Besides this, other major players who have found Astra to be investment worthy are L&T which has a near 10% stake, Reliance Capital with 5.6% and Skanda Aerospace, a Hyderabad-based company with 7%.

Recently, a few month back, in one of the largest defense offset contracts awarded to a mid-tier Indian firms, AMP has bagged a Rs 310 crore deal from one of its overseas customers, the first time that they have bagged such a large order in their history. Including the new order Astra Microwave will now be executing orders worth approximately Rs 730 crore outsourced by its foreign and domestic customers – DRDO and ISRO. The order will significantly add to the Astra's revenues. India's defense authorities plan to spend Rs 75,000 crore over the next decade to procure new radar systems in a bid to modernize the armed forces with more sophisticated weapon systems. So there is ample scope for companies small and large to scale up their divisions in this area. Once there is a steady stream of work coming in, the bigger companies may well look at sub-contracting some of the work to smaller players like AMP or even outright acquire them if they appear attractive enough with niche skills and inability to scale up on their own. AMP would fit the bill perfectly here. A couple of years back, L&T was looking to increase its stake in AMP by buying some from SVF, but the deal fell thru. Later BEL was also looking to get into AMP which also didn’t materialize.

AMP @44 is currently quoting at a PE of about 10.6.  It has a reasonable low equity of 16 crores with healthy OPM consistently maintained at 25-30% and PAT margin of 12-15%, This year they also gave a bonus of 1:1.

The major risk for AMP would be adverse government policies, but given the strategic nature of their business this should be largely under control. Also, they have their overseas business to fall back on if this were to happen. Considering the healthy demand scenario both domestically and overseas, as well as sound operating metrics, AMP should do well going ahead. Any M&A activity will be a bonus.