The initial public offering (IPO) of IdeaForge Tech, a leading provider of unmanned aerial systems (UAS) in India, starts on June 26th and ends on June 29th. The price of the offer is ₹638-672 per share. The Company is proposing to raise a total of ₹567 crore at the higher end of the price range, which equates to a new issue of ₹240 crore and an offer to sell by investors and one of the promoters totaling ₹327 crore (at ₹672 each).
Founded in 2007 by a team of three IIT employees, the company is engaged in the design, development and manufacture of various unmanned aerial vehicles (UAVs), also known as drones. In addition to the main product, which is UAVs and their hardware accessories such as payloads, batteries, chargers and communication systems, the company has a portfolio of software and embedded subsystems, which includes ground control station (GCS) software and autopilot subsystems belong. system and other solutions.
IdeaForge serves customers for applications such as surveillance, mapping and surveying. About 96 percent of the company’s revenue in FY23 came from government agencies, including defense. The company operates a manufacturing facility in Navi Mumbai.
While IdeaForge has built a strong product portfolio over the past decade with a focus on niche technology and serves a large market that continues to grow at a healthy pace, medium-term investors can wait for clarity on the growth path, with better entry points post-listing as the issuance is based on performance seems expensive in FY22-23. At the top end of the price range of ₹672, the stock is priced at 79 times its earnings for FY23.
We recommend investors wait before investing in the stock for three reasons.
For one, the current backlog of ₹192 crore (as of March 2023) is a matter of concern as companies involved in the defence/government sector typically have backlogs of at least three to four times their revenue. In the case of IdeaForge, FY23 revenue was ₹186 crore and the current backlog is only marginally higher than FY23 revenue At $21.1 billion, translating the opportunity into the backlog will be important to instill confidence in the growth trajectory.
Management believes there is scope for sourcing additional orders under the Fast Track procurement route, with execution in less than 12 months, and has also cited a government request for the Indian Army to provide quadrocopters for to buy monitoring. However, it’s better to wait for further clarity on how year-to-date growth will play out, as the company’s revenue growth has slowed to 17 percent year over year, much less than the five-fold jump in fiscal 22.
Also, the FY23 operating profit margin declined from about 47 percent in FY22 to 25 percent in FY23, which management said was largely due to ₹26 crore of unemployment benefit expenses related to the ESOP program. But even taking into account the one-off expenses, the operating margin is 39 percent, which is 8 percentage points lower.
Second, the company has debts and liabilities of ₹129 crore on its books, which is 0.5 times its net worth of ₹324 crore. In addition, the working capital cycle has also increased in FY23, with net working capital days of 301 compared to 121 days in FY22. This is due to increases in both inventories and days days receivable compared to FY22. Although the Company will use ₹50 crore of IPO proceeds to repay and ₹135 crore to close the working capital gap, improving the working capital cycle will be critical to generating operating cash flow. The company plans to spend ₹40 crore of the proceeds from the IPO on product development.
Third, the offering is priced at 75 to 79 times earnings for the fiscal year 23, which is not attractive. Given that the company has only made profits in the last two years and fiscal 23 revenue growth was in the mid-teens, we think the asking price doesn’t leave much open for long-term investors. That’s more than peers that also serve the defense and aerospace segment, like MTAR Technologies (56x stock price) and Zen Technologies (74x), which have relatively better balance sheets and a longer track record of leadership more profitable businesses.
Although the company is in an interesting environment with great market opportunity, we believe there is a risk to growth as the business will continue to be predominantly dependent on government contracts for the foreseeable future. Order delays or cancellations can significantly impact growth. Also based on the company’s limited operational track record of only three years with us, there is no clear trend. Only two years have been profitable, with a sharp drop in the revenue growth rate in FY23, and with the current backlog also subdued, investment risk remains high.
Even for high-risk investors who may still want to take advantage of the growth opportunity, getting it at a reasonable price will be important. Investors can therefore wait for clarity on execution, growth trajectory and an attractive purchase price for the stock.
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