Astra Microwave: Operating in a challenging industry environment

Jitendra Kumar Gupta Moneycontrol Research

Astra Microwave has maintained a lean balance sheet and silently built capabilities, which is now helping it tide over a difficult period that the industry is going through. It is sitting on a cash equivalent of about Rs 160 crore, which helps in working capital management. The management is confident of repaying its long term debt, which is maturing soon.

On the capabilities front, it has built a huge manufacturing base and formed key joint ventures with Rafael Advanced Defence. This JV has already started working with equity contribution from its partner and key executive recruitments are underway. The JV is expected to go commercial in FY20.

During its analysts call, the management indicated that there is a significant downturn in the defence industry. Most industry players are awaiting awarding of projects as many government flagship programmes are getting delayed. The situation has come to a point where companies like Astra Micro are barely able to cover their operating cost. Excluding the benefits of past export incentives (under dispute), which it booked in the June quarter, the company has just managed to break-even at the operating level.

One-time income boost to profitability Despite a 6.25 percent year-on-year growth in sales during Q1, its operating profit before other income dropped 24 percent to Rs 6.33 crore. If one deducts interest cost and depreciation of Rs 9 crore, it would have reported a loss. On the contrary, it has reported a net profit of close to Rs 8 crore, up 91.4 percent, led by other income of close to Rs 13 crore as against Rs 4 crore in the corresponding quarter of last year. During the quarter gone by, operating margin fell to 11.8 percent as against 16.5 percent YoY.

This fiscal, the company is facing margin pressure on account of increasing competition and pricing pressure in the market, along with adverse changes in the product mix. Contribution of one of its products, which had an operating margin of about 75 percent and accounts for over 50 percent of sales, dropped and is thus impacting margin.

Outlook and valuations Margin would continue to drift lower because of a high base. Contribution of high margin products will fall to about 10 percent of sales this year and that would hit margin. Most businesses operate at a margin of about 8-12 percent.