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Niche player in sunrise sector…
We recently met the CFO of Astra Microwave Products (AMP), Mr S
Gurunatha Reddy, to understand the business model of the company.
AMP is a leading player in designing, developing & manufacturing of subsystems
for radio frequency (RF) & microwave systems used in defence,
space, meteorology & telecommunication. The company was founded in
1991 by three Defence Research & Development Organisation (DRDO)
scientists - B Malla Reddy, PA Chitrakar and C Prameelamma. They still
continue to manage AMP. In the defence segment, the company’s
products include subsystems for radars, command guidance unit and
radio proximity fuse for missiles & other electronic counter measure
warfare products. The company’s products find applications in other
segments like space (microwave & ground based systems for satellites),
telecom (repeaters, jammers, antennas) & meteorology (automatic rain
gauge systems, automatic weather systems). Revenues for FY14 stood at
| 531.2 crore, with major concentration in the defence segment, which
forms ~90% of total revenues (export-63% domestic-26%). AMP’s major
customers in the domestic segment are Bharat Electronics, Bharat
Dynamics, DRDO and ISRO. With the increase in FDI cap in defence from
26% to 49%, opportunity for more export orders under offset policy and
expected step up in spending on defence capex by the new government,
the company is poised for an exciting growth journey ahead.
High entry barrier business
The business model of AMP is characterised by high gestation periods
and lumpy orders. A company involved in this business has to pass
through a stringent & long approval process before starting commercial
production for defence PSUs like Bharat Electronics & Bharat Dynamics.
Given the experience & technological expertise accumulated over the past
two decades, AMP is way ahead of its competitors, which are smaller in
size and currently going though their R&D phase of the approval process.
Beneficiary of improved industry environment
In recent years, AMP has been one of the major beneficiaries of the
defence offset provision, under which for all defence equipment imports
of value above | 300 crore, the foreign company has to source at least
30% inputs from Indian suppliers. This offset provision led to export
orders forming ~47% of the company’s outstanding order book, which
currently stands at | 850 crore. On the domestic front, AMP will benefit
from India’s missile programme, where the Akash missile (5000 missiles
to be produced over a five to eight year period) is in the commercial
production phase while Astra is in the design phase.
�� India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details ��
��
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Niche player in sunrise sector…
We recently met the CFO of Astra Microwave Products (AMP), Mr S
Gurunatha Reddy, to understand the business model of the company.
AMP is a leading player in designing, developing & manufacturing of subsystems
for radio frequency (RF) & microwave systems used in defence,
space, meteorology & telecommunication. The company was founded in
1991 by three Defence Research & Development Organisation (DRDO)
scientists - B Malla Reddy, PA Chitrakar and C Prameelamma. They still
continue to manage AMP. In the defence segment, the company’s
products include subsystems for radars, command guidance unit and
radio proximity fuse for missiles & other electronic counter measure
warfare products. The company’s products find applications in other
segments like space (microwave & ground based systems for satellites),
telecom (repeaters, jammers, antennas) & meteorology (automatic rain
gauge systems, automatic weather systems). Revenues for FY14 stood at
| 531.2 crore, with major concentration in the defence segment, which
forms ~90% of total revenues (export-63% domestic-26%). AMP’s major
customers in the domestic segment are Bharat Electronics, Bharat
Dynamics, DRDO and ISRO. With the increase in FDI cap in defence from
26% to 49%, opportunity for more export orders under offset policy and
expected step up in spending on defence capex by the new government,
the company is poised for an exciting growth journey ahead.
High entry barrier business
The business model of AMP is characterised by high gestation periods
and lumpy orders. A company involved in this business has to pass
through a stringent & long approval process before starting commercial
production for defence PSUs like Bharat Electronics & Bharat Dynamics.
Given the experience & technological expertise accumulated over the past
two decades, AMP is way ahead of its competitors, which are smaller in
size and currently going though their R&D phase of the approval process.
Beneficiary of improved industry environment
In recent years, AMP has been one of the major beneficiaries of the
defence offset provision, under which for all defence equipment imports
of value above | 300 crore, the foreign company has to source at least
30% inputs from Indian suppliers. This offset provision led to export
orders forming ~47% of the company’s outstanding order book, which
currently stands at | 850 crore. On the domestic front, AMP will benefit
from India’s missile programme, where the Akash missile (5000 missiles
to be produced over a five to eight year period) is in the commercial
production phase while Astra is in the design phase.
�� India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details ��
��
Other management meet highlights
In the defence business, products need to be developed by DRDO in
partnership with private defence based companies like AMP. DRDO
initiates tenders for specific products and after the rounds of
technical & commercial bidding, the selected company is absorbed
by DRDO for product development. In this phase, DRDO places
small orders with a private company. Once the product is proven,
the private company becomes an approved vendor for commercial
production by defence PSUs like BEL, BDL, etc
The phenomenal revenue CAGR of 48.8% in FY11-14 was driven by
growth in the export business, which grew ~10x from | 34.2 crore
in FY11 to | 341.9 crore in FY14. In the same period FY11-14, AMP’s
order book grew at a CAGR of 51.3%, driven by export orders,
which grew from | 14.9 crore in FY11 to | 481.4 crore in FY14. The
company aspires to achieve a revenue of ~| 1000 crore by FY18-19
The management has guided a topline of | 650 crore & bottomline
of | 70 crore for FY15E, implying growth of 22.4% in revenues &
37.8% growth in profits. Of the total order book of | 850 crore,
export order worth | 400 crore will be executed by Q1FY16. In case
of domestic orders, ~| 100 crore will be executed by FY15 end
while balance will get executed in FY16. Unless AMP bags any new
order, FY16 topline is expected to decline. However, management is
hopeful of bagging an export order of ~ $8.5-9 million from ELTA &
domestic order of ~ | 200 crore by the FY15 end
Flow and execution of export orders is faster than domestic orders.
Foreign vendors typically provide their list of approved vendors
before making their technical & commercial bid. Currently, export
order book is composed of orders from ELTA (subsidiary company
of Israel airforce). Apart from ELTA, AMP has relations with other
foreign vendors like Rafael (Israel), Thales (France) & Dassault
(France). The order opportunity from Dassault is worth ~| 500 crore
spanning over five years. On the domestic front, there is demand for
5000 Akash missiles to be produced in the next five to eight years,
where the earnings opportunity for AMP is ~| 15 lakh per missile
The ~35% advance payment during the execution of export order &
debtor days of 30 for the balance payment leads to stronger cash
flow generation from export orders. Defence PSUs in India do not
provide any advance payment facility and have debtor days of 90-
120 days. DRDO, which places smaller orders with AMP, gives 20%
advance while it pays the balance amount in 90-120 days.
The company recently set up an R&D centre in Bangalore, where
AMP is looking to focus on development of radar systems, missile
seeker systems & electronic warning systems. The company is also
looking to move from the “Make” category to “Buy & Make”
category where it will buy technology from foreign vendors and
produce indigenously
Bhavyabhanu Electronics, a subsidiary of AMP, provides critical
components like PCB/power amplifiers for export orders.
Bhavyabhanu Electronics is expected to generate revenues of | 200
crore for AMP
Link :
http://content.icicidirect.com/mailimages/IDirect_AstraMicro_MgmtNote.pdf
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