Data Patterns IPO: How good is it?

In our story, Data Patterns IPO: Information analysis, we shed light on the key details of the IPO, along with important information about the company. Here we will answer some questions about Data Patterns and evaluate the company on parameters like management, financials, valuations, etc.

IPO questions

The company/business

1) Are the company's earnings before tax more than Rs 50 crore in the last 12 months?
Yes. In the last 12 months ended September 2021, the company's earnings before tax stood at Rs 111.7 crore.

2) Will the company be able to scale up its business?
Yes. The company plans to enhance its offerings and would utilise a portion of the IPO proceeds to double its manufacturing capacity. Thus, it would be able to scale up its business.

3) Does the company have recognisable brands truly valued by its customers?
Yes. The company is a preferred partner, owing to its quality and variety of product offerings.

4) Does the company have high repeat customer usage?
Yes. The company participates in the tender process and wins contracts to manufacture specific products.

5) Does the company have a credible moat?
No. Even though the company has strong product and components capabilities, it has to compete with various small and large companies.

6) Is the company sufficiently robust to major regulatory or geopolitical risks?
Yes. The company is sufficiently robust to major regulatory or geopolitical risks.

7) Is the business of the company immune from easy replication by new players?
Yes. The company is involved in manufacturing complex electronics for defence and aerospace applications. The industry is highly regulated and customers have strict technical requirements and quality standards.

8) Is the company's product able to withstand being easily substituted or outdated?
Yes. There are no substitutes for electronic systems.

9) Are the customers of the company devoid of significant bargaining power?
No. The company wins contracts by bidding in the tender process. The lowest bidder who clears the technical evaluation wins the contract. There is no assurance that upon expiry of the contracts, customers will re-enter into such agreements in a timely manner and at favourable terms.

10) Are the suppliers of the company devoid of significant bargaining power?
Yes. The company is not dependent on any single raw-material supplier. It imports raw materials from various domestic and foreign suppliers.

11) Is the level of competition the company faces relatively low?
No. The competition is at two levels: a. from small- and medium-size companies during the development stage in DRDO requirements and b. from large corporates offering complete systems.

Management

12) Do any of the company's founders still hold at least a 5 per cent stake in the company? Or do promoters hold more than a 25 per cent stake in the company?
Yes. Post-IPO, the promoter and promoter group will hold about a 32.8 per cent stake in the company.

13) Do the top three managers have more than 15 years of combined leadership at the company?
Yes. Chairman and managing director Srinivasagopalan Rangarajan (one of the promoters) has been associated with the company since its incorporation in 1998.

14) Is the management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
Yes, we have no reason to believe otherwise.

15) Is the company free of litigation in court or with the regulator that casts doubts on the management's intention?
Yes, the company is free from any material litigation.

16) Is the company's accounting policy stable?
Yes. As per the auditors' report, the accounting policy is stable.

17) Is the company free of promoter pledging of its shares?
No. 26.2 per cent of the promoter stake has been pledged.

Financials

18) Did the company generate a current and three-year average return on equity of more than 15 per cent and return on capital employed of more than 18 per cent?
Yes, the company managed to generate a three-year (FY19-21) average return on equity of 15.4 per cent and a return on capital employed of 23.5 per cent. For FY21, the company generated a return on equity of 26.8 per cent and a return on capital employed of 34.7 per cent.

19) Was the company's operating cash flow positive during the last three years?
No, the company reported a negative operating cash flow in FY19.

20) Did the company increase its revenue by 10 per cent CAGR in the last three years?
Yes. The company's revenues increased from Rs 131.1 crore in FY19 to Rs 224 crore in FY21 at a CAGR of 30.7 per cent.

21) Is the company's net debt-to-equity ratio less than one or is its interest-coverage ratio more than two?
Yes. The company's interest-coverage ratio stood at 10.1 as of September 2021.

22) Is the company free from reliance on huge working capital for day-to-day affairs?
No. Its operations require significant working capital. Over FY19-21, the net working capital as a percentage of revenue averaged 103.2 per cent.

23) Can the company run its business without relying on external funding in the next three years?
Yes. As the company plans to utilise the IPO proceeds for capital expenditure and working-capital requirements, it won't need any external funding in the next three years.

24) Have the company's short-term borrowings remained stable or declined (not increased by greater than 15 per cent)?
Yes. Short-term borrowings fell from Rs 60.1 crore in FY19 to Rs 43.6 crore as on September 30, 2021.

25) Is the company free from meaningful contingent liabilities?
Yes, the company does not have any contingent liabilities.

Stock/valuations

26) Does the stock offer an operating-earnings yield of more than 8 per cent on its enterprise value?
No. The stock will only offer an operating-earnings yield of 2.9 per cent on its enterprise value.

27) Is the stock's price-to-earnings less than its peers' median level?
Yes. Post-IPO, the company's stock will trade at a P/E of around 49.6, which is less than its peers' median P/E of 64.2.

28) Is the stock's price-to-book value less than its peers' average level?
No. Post-IPO, the company's stock will trade at a P/B of around 8.2, which is greater than its peers' average P/B of 6.6.

Also read about Data Patterns IPO: Information analysis to learn about key IPO details and important company information.

Disclaimer: The authors may be an applicant in this Initial Public Offering