Buy Astra Microwave; target of Rs 195: Karvy

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Buy Astra Microwave; target of Rs 195: Karvy

Karvy Stock Broking has recommended buy rating on Astra Microwave with target price of Rs 195. At CMP, the company trades at 18.8x FY08 and 13.4x FY09.

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Karvy Stock Broking has recommended buy rating on Astra Microwave with target price of Rs 195. At CMP, the company trades at 18.8x FY08 and 13.4x FY09.

Karvy Stock Broking report on Astra Microwave:

The government's focus on private sector participation in defence as well the offset policy is expected to be positive for Astra Microwave (AMPL). The company has been working on a larger number of R&D projects which is expected to increase the predictability of revenues. Space revenues are expected to contribute significantly to FY08 revenues. We expect earnings to grow at 44% CAGR over FY08 and FY09.We rate the stock BUY with a price target of Rs 195. Astra Microwave is one of the few private sector companies engaged in designing and manufacturing of RF (Radio Frequency) and microwave subsystems used in defence, space and telecom applications. 60% of the company's revenues are from the defence segment, 25% from the space segment and the remaining 15% from the telecom segment.

Defence industry outlook in India:

The Indian government has been focusing on increasing the share of the private sector in the defence segment. For this purpose, the Ministry of Defence has introduced the "Offset policy" for defence procurement. It stipulates that all contracts over Rs 3 billion awarded to foreign companies must have a minimum offset of 30% and the offset obligation should be discharged in India concurrently. The ministry of defence is trying to identify large private sector companies that can become lead system integrators, and also take responsibility for serial production. These industries will be termed as Raksha Udyog Ratnas (RURs) and will be placed at par with Defence public sector undertakings (DPSU). The RUR concept will provide an opportunity for the big players to play a very major role in the production of defence systems. In addition, the ministry of industries has also certified more than 30 large size private sector companies for the production of certain specific defence systems. These companies have been provided licenses for the manufacture and production of items for the ministry of defence. In the current scenario, subsystem providers like Astra Microwave are potential beneficiaries as they can partner with foreign defence suppliers who have to discharge their offset obligations as well as become suppliers to the private sector companies participating in system integration.

Business segments

Defence

Within defence, AMPL provide subsystems for various purposes like missile application, radar application, electronic warfare (EW). The company gets associated with the defence laboratories in the R&D phase of a particular project, where it provides certain subsystems for the product. On commercial induction of a product, the technology gets transferred to a DPSU, which in turn places bulk orders on AMPL for the subsystem. Under the segment of missile electronics, AMPL provides guidance subsystems for various missiles. The company is currently working on 5 missiles; Akash, Astra, Trishul, Brahmos and Pechora. Within radar applications, the company provides the Transmit/Receipt (T/R) module for several radars. The Battle Field Surveillance Radar (BFSR) on which the company did R&D got inducted in 2004. Over FY05 and FY06, the company executed an order of Rs 750 million for 1,000 subsystems. In FY06, the L Band/S Band radar got inducted for which the company has been providing a subsystem. The company received an order of Rs 236.8 million from the Defence Research Laboratory in March 2007 for the supply of the subsystem. This order is likely to get executed by March 2008. The company has been doing R&D work on several other radars likes the Rajendra radar and CAR1100 from which it receives steady R&D revenues. Induction of any of these radars would prove to be potential upsides for the company's business. AMPL supplies a subsystem to BEL, Hyderabad which is undertaking the production of Electronic Warfare Applications. This EW application was developed by DRDL (Defence Research & Development Laboratory).and the technology was then transferred to BEL. This project steadily contributes close to Rs 50 million per annum to AMPL's revenues. The company has also recently forayed into the avionics segment and has developed some amplifiers for Hindustan Aeronautics (HAL) In the defence segment, induction of any product which APML has been working on will prove to be a significant driver of revenues. On induction with the armed forces, the company normally receives bulk orders for the product.

Space

The space segment is expected to contribute significantly to AMPL's topline. The company has on its books an order of Rs 450 million for the supply of T/R modules for the Radar Imaging Satellite (RISAT) to be launched by the Indian Space Research Organisation (ISRO) in 2008. The company executed an R&D order of Rs 100 million for the same in FY07. The Rs 450 million order is expected to be executed by FY08. Repeat launches of the RISAT as planned by the ISRO would result in potential business for AMPL. AMPL has also signed an agreement with Antrix Corporation, the commercial arm of Department of Space for the production and supply of the Automatic Weather Station (AWS) to be deployed in various parts of the country. The AWS was developed by ISRO and AMPL was involved in this development. The AWS is a data collection platform used to continuously record weather data like temperature, humidity, wind speed etc from different locations including remote areas. This data collected can be relayed to ISRO's INSAT satellites. This product is also required by the meteorological department of India. The potential of this product is up to Rs 200 million per year. The company plans to enter the area of payload fabrication and satellite integration for ISRO. This venture is likely to take two years to materialize. Successful entry into these segments will provide signification traction for AMPL's business.

Telecom

The company's telecom division steadily contributes close to 15% of revenues. It operates in the segments of cellular and fixed line telephony. The company provides equipment for telecom operators The Company has been focusing on introducing new products in this segment.

Beneficiary of the "Offset clause"

With the government introducing the offset policy, APML is likely to benefit. The company is talks with certain foreign suppliers to form partnerships in this regard. The company is likely to partner with ELTA, an Israeli defence company. ELTA is likely to receive an order from the Ministry of Defence for the supply of radars. APML is likely to supply certain subsystems to ELTA for this order to execute their offset obligation. Larsen and Toubro is likely to be ELTA's offset partner for their hardware requirement.

Financials and Valuations

We expect earnings to grow at 44% CAGR over FY08 and FY09. The company's current order book stands at Rs 1.15 billion. We expect the company to report revenues of Rs 1.4 billion in FY08 and Rs 1.9 billion in FY09. The company's operating margins are likely to be 46.8% in FY08 and 49% in FY09. The company is expected to report PAT of Rs 42 billion in FY08 and Rs 0.69 billion in FY09. The company's return on capital is expected to be 47% in FY08 and 50% in FY09. The return on equity is likely to be 37.7% in FY08 and 38.4% in FY09. At CMP, the company trades at 18.8x FY08 and 13.4x FY09. We rate the company BUY with a price target of Rs 195.