IdeaForge IPO opens today. Will it soar or come a cropper?

(Representative Image)

The initial public offering (IPO) of IdeaForge Ltd (IFL), which has a 50 percent share of the Indian drone market, opened for bidding on June 26, with analysts largely taking a favourable view of the issue.

Analysts highlight the company’s leadership position in the market, strong financial growth and relationship with customers as key strengths. They also underline certain risks such as negative cash flows in the past and only one manufacturing unit.

“We like IFL given its complex/wide product portfolio, presence in niche space, strong client relationship and high entry barriers,” said Sneha Poddar, Research Analyst at Motilal Oswal Financial Services. “The issue is valued at 5x P/BV (against peers' average of ~8x) on a post-issue basis, which is fairly valued.”

IFL could benefit from the government’s push for the defence space as well as rising enterprise demand, she said. “Hence we recommend subscribe. Further given the current buoyant market and high interest for

defence stocks, the issue could see listing gains as well,” Poddar added.

IFL, which enjoys the first-mover advantage in the space, has one of the industry’s leading product portfolios with a dual presence in civil as well as defence applications. Most of its revenue, however, comes from the government, including the military and departments such as police and disaster management.

As on June, the company had 41 patent applications with 20 filed internationally and 21 in India. It ranked seventh globally in the dual-use category (civil/defence) drone manufacturers, as per the Drone Industry Insights report published in December 2022.

The drone manufacturer has set the issue price at Rs 638-672 a share and is looking to raise Rs 567 crore at the upper band.

The offer comprises a fresh issuance of shares worth Rs 240 crore and an offer for sale of 48.69 lakh equity shares by promoter and investors.

As many as 13,112 shares have been set aside for employees who will get a discount of Rs 32 a share to the final issue price.

The net proceeds from the fresh issue will be used for repaying debt (Rs 50 crore), funding the working capital gap (Rs 135 crore) and investing in product development (Rs 40 crore) besides general corporate purposes, the company has said.

IdeaForge’s revenue jumped over five times during FY21-23 to Rs 190 crore, while net profit turned positive in the last two years, with FY23 profit at Rs 32 crore on the back of orders from the Indian military. EBITDA margin stood at 25 percent in FY23. However, high ESOP cost impacted the profitability of the company in all three years.

The government’s push for the drone industry through a clear policy and guidelines on the use of these unmanned aerial vehicles along with a performance-linked incentive (PLI) scheme have benefited the company in recent years.

Analysts at Marwadi Financial Services noted that considering the FY23 annualised EPS of Rs 7.68 on a post issue basis, the company is going to list at a P/E of 87.54x with a market cap of Rs 2,800 crore.

Its peers namely MTAR Technology, Data Patterns and Astra Microwave Products are trading at a P/E of 58.52x, 84.95x, and 52.27x, respectively.

“We assign “subscribe” rating to this IPO as the company is a pioneer and the pre-eminent market leader in the industry, with first-mover advantage and strong relationships with a diverse customer base,” the broker said in a note. It is available at reasonable valuation, considering the future growth potential of the company, it said.

“They stand out as one of the few vendors globally to provide a full stack UAV solution, including ground control software, firmware, and robust after-sales support," said Yash Kukreja, Research Analyst, Mehta Equities.

"Based on FY23 earnings, P/E stands at 87 x which means the issue is priced a bit expensive with no clear peers to be compared in drone space. Based on the industry demand and growth in the recent performance, the issue fetches the first-mover listing advantage in the segment, hence we recommend investors may consider subscribing the issue for listing gain only."

Despite initial successes in the industry, IdeaForge has a significant working capital gap, which can hit the business if it is not bridged, analysts said. The fund raised from the IPO will alleviate the problem to an extent.

The company has had negative cash flows from operating activities which may continue in the future as well. It is also highly dependent on global vendors for the supply of components and any chinks in the supply chain will hurt the company.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.