Shares of Data Patterns (India) Ltd. remain a remains a compelling investment opportunity in the defense electronics sector despite a challenging second quarter, global investment banking firm Jefferies wrote in its note on Tuesday, November 10.
Jefferies has maintained its “buy” recommendation on Data Patterns with a price target of ₹5,545, which indicates an upside potential of 47% from current levels.
Data Patterns’ September quarter Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) was 61% below what Jefferies had anticipated, due to a sharp revenue miss and margins being 590 basis points lower than expectations.
Despite a 39% drop in the first half, the management has reiterated its 20% to 25% revenue growth guidance for the full year, as it is confident on an execution uptick backed by a strong order book, which jumped 2.6x on a year-on-year basis.
To meet its guidance, Data Patterns will need to grow its revenue between 66% to 75% in the second half of the year, and the ₹1,700 crore order book provides visibility ahead, according to Jefferies.
Data patterns began sub-system exports in the September quarter of last year and the company delivered a fully developed precision approach radar (PAR) system to Europe, highlighting that this should open the doors for further export contracts. The company is also looking to expand into avionics and sensors for civil aviation applications, Jefferies’ note said.
The price target of ₹5,545 values Data Patterns at 65 times its estimated September 2028 earnings, which is a 20% discount to its peak since its listing in November 2021, according to Jefferies. The firm projects a 2.4x increase in absolute profits over financial year 2026-2030, a Return on Equity (ROE) of over 18% and a debt-free balance sheet coupled with in-house technology in a growing defence pie should keep valuations elevated, according to Jefferies.
Obsolescence of the company’s technology and the lack of management bandwidth are some of the key downside risks as highlighted by Jefferies in its note.
In its “upside scenario” Jefferies expects the Data Patterns stock to rise 63% from current levels to ₹6,160 in case defence orders move at a faster pace with more proposals being cleared and tenders being floated in the near future. Additionally, the Make In India program gathers pace with thrust on a higher proportion of domestic orders being placed, can add to the upside, Jefferies said.
Shares of Data Patterns ended 8.7% higher on Monday at ₹4,025. The stock has gained 55% so far this year.
Stocks To Buy: The Defence Stock where Jefferies sees 47% upside despite weak Q2 results