Apollo Micro Systems

Niche defence player

The company is well positioned to address the growing requirements in Defence Electronics through Indigenous programmes in which they have been partners for past several years.

CM RATING

48/100

Incorporated in 1997 and promoted by Karunakar Reddy Baddam, Apollo Micro systems (AMS) is in the business of electronic, electro-mechanical, engineering designs, manufacturing and supply. The company design, develop and sell high-performance, mission and time critical solutions to defence, space and homeland security for the Ministry of Defence, government-controlled public sector undertakings and private sectors.

Company's customized solutions are developed using common hardware and software technology intellectual properties (IPs) which can be re-configured to suit the end application and domain requirements of end customer. The company offer custom built COTS (commercially off-the shelf) solutions based on specific requirements to defence and space customers. The systems undergo various stages of approvals right from design, prototyping, functional acceptance, manufacturing and qualification testing. The solutions offered by the company are used by the customers during development and user trials on account of which these solutions are qualified to be a part of supply chain in production phase.

AMS has its participation in several indigenous missile programmes, underwater electronic warfare, underwater missiles, surface to air missiles, nuclear missile programmes, surface to surface missile programmes, indigenous submarine programmes unmanned-aircraft vehicle (UAV)'s long and short endurance, ships, space programmes.

The defence and space solutions require expertise in advanced technology development and engineering knowledge to make the systems withstand harsh environmental conditions. Broadly within defence system, the company supplies both on-board systems and ground support equipments like the electronic systems which are integrated onboard a weapon or a vehicle (Vehicle could be a missile, aircraft, ship, submarine or battle tank) which are used for navigational requirements, on-board computation, instrumentation & control, telemetry, Payload acquisition and encoding, command & guidance, signal Processing, Seeker data processing, height analyzers requirement (altimeter), power electronics to power the onboard electronics including command control communication, ground checkout, launch of vehicles and other associated systems.

The company intends to diversify its business services to sectors like railways, homeland securities, e vehicles and other non defence sector.

The company's manufacturing base is located in Hyderabad. It has a strong R&D team of 56 engineers with core competencies in development of Embedded Hardware and Software along with engineering designs team. The company is certified company to carry out airworthy designs by CEMILAC (Centre for Military Airworthiness), and is registered vendor of Defence public sector undertakings and other public sector undertakings. The company is a collaborative R&D partner for Bharat Electronics in embedded hardware designs, embedded software designs, IP cores for field

program gate array (FPGA) & digital-signal processing (DSP) (radar, sonar and image).

As on November 2017, the company has total order book of around Rs 97.50 crore.

The Offer and the Objects

The offer comprises initial public offering of Rs 156 crore, which at lower price band of Rs 270 per share, works out to 57.78 lakh equity shares and at higher price band of Rs 275, the issue size works out to 56.73 lakh equity shares.

The minimum bid lot is 50 equity shares and in multiples of 50 equity shares. The issue is made through the book-building process and will open on 10 January and will close on 12 January.

There is a discount of Rs 12 per share for retail investors.

The objects of the issue is to meet the working capital requirement to the tune of Rs 118.92 crore and balance for other corporate purposes apart from the benefits of listing the equity shares on the BSE and the NSE and to enhance its visibility and brand image and provide liquidity to its existing shareholders.

Strengths

Strong entry barrier

Proven track record in developing new technological systems and long standing relationship with the defence sector

As the systems designed and developed are exclusively developed for a programme, the developed systems enjoy proprietary status and thus have no competition.

The company is well positioned to take advantage of the growth opportunities and increasing government spending arising out of the Digital India, Smart Cities and the Make in India programs of the Indian government and huge initiatives to grow ESDM (electronic system design and manufacturing) sector.

The company provides end to end customised solutions to the clients which help in getting repeat orders. All the products and solutions are developed under one roof which provides better productivity and zero dependence on outsourcing.

The huge repository of knowledge and technology base that the company has developed since inception supports the company to constantly upgrade the technologies to meet present and futuristic requirements of their customers.

The company's sales and net profit have grown at a compounded annual growth rate of 54% and 58% between FY 2013-FY 2017.

Weaknesses

Entire business currently comes from defence sector and thus is heavily dependent on government, public sector undertakings and semi government agencies.

The defence budget is unpredictable and so are the tenders and orders. There is a lot of volatility in spending which can affect the future business.

A high working capital business.

Any change in government regulations and policies on defence sector can significantly affect the business of the company. Change in leaderships, tax policies and revenue collections can also affect the overall approach of the government towards defence sector and its spending towards the sector.

Exposed to forex risks and company has not hedged its forex exposure for the six months ended September 2017.

The company's business is not of continuous production in nature but is a programme driven and thus results vary for different operating periods.

Valuation

For FY 2017, net sales were up 33% to Rs 211.27 crore. The OPM stood at 19.3% up by 310 bps thus resulting in an OP growth of 61% to Rs 40.67 crore. Other income stood at Rs 0.53 crore up by 8%. Interest cost was higher by 41% to Rs 11.44 crore while depreciation was higher by 44% to Rs 3.93 crore. Thus PBT growth was 74% to Rs 25.83 crore. After paying total tax of Rs 8.54 crore up by 76%, PAT for FY 2017 of Rs 18.57 crore, up by 86%.

For the half year ended September 2017, net sales stood at Rs 109.33 crore with OPM of 17.7% resulting in an OP of Rs 19.34 crore. Interest cost was at Rs 5.82 crore and depreciation stood at Rs 3.04 crore. After providing for total tax of Rs 3.51 crore PAT stood at Rs 7.11 crore. Due to seasonality of business, half yearly earnings cannot be annualised.

The diluted equity share capital of the company stands at Rs 20.67 crore of face value of Rs 10. EPS for FY 2017 works out at Rs 9. At higher price band of Rs 275, The P/E on FY 2017 diluted EPS works out to 30.6.

Nearest listed peers are Astra Microwave and Centum Electronics. For FY 2017, Astra Microwave reported net sales and PAT of Rs 425.08 crore and Rs 56.56 crore. This gives an EPS of around Rs 6.5. At current market price of around Rs 121, the stock trades at P/E of 18.6.

For FY 2017, Centum Electronics reported net sales of around Rs 387.25 crore and PAT of Rs 30.82 crore. This gives an EPS of around Rs 24.2. At current market price of Rs 777, the scrip trades at P/E of around 32.