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Data Patterns: A Monopoly on Earth and Beyond 🖥️

Over the past year, we’ve covered iconic defence stocks like Hindustan Aeronautics, Bharat Dynamics and Mazagon Docks. While these might be industry titans in the Air Force, Army and Navy respectively, there is one company that has exposure to all three of those, has a monopoly in what it does, and is one that we’ve made a 2.5x return on through our Monopolies portfolio (for obvious reasons) - Data Patterns!

Having IPO-ed in December 2021, this company is the exclusive designer and producer of certain important electronic systems for the entire Indian Armed Forces and the Indian Space and Research Organisation, a relationship and leadership that is over 20 years in the making.

Its product line-up includes a bunch of cool gadgets that are integrated into aircrafts, tanks, ships, submarines and spacecrafts, without which those vessels might either get blown up by the enemy or blow up on their own!

With these products needing constant upgrades (products under development make up 60% of the order book while repeat orders make up the rest), these gadgets are a staple in Indian defence and aerospace, making Data Patterns a government-trusted source!

Yet the question remains - how did this not-as-popular-as-the-others company establish enough dominance to claim the title of a monopoly in its field, and stay that way?

1. Worked Its Way Up

While its current product line-up looks like something straight out of a sci-fi movie and has the Indian defence and aerospace sectors wrapped around its fingers, the company didn’t start off being this cool, and had to level up over time:

Over the next 22 years, Data Patterns became known as the only Indian firm to create such a wide range of mission-critical electronics across the board, making it the monopoly that it is today!

🖥️ Due to the immense expertise it takes to create these highly technical and bespoke electronics, Data Patterns acted before anyone else and created relationships with the right players, making it very difficult for another company to disrupt its market leadership

2. Constantly Upgrading

Setting up a monopoly position is a task in itself, but maintaining one is a whole other ball game - one that Data Patterns has accepted as a challenge. Through these 2 moves, it intends to continually improve itself to remain miles ahead of its competition:

  • Product Innovation - While its product line is robust, it still uses foreign patents to make its radar and electronic warfare devices. In an attempt to indigenise, the company issued another round of funding via QIP worth Rs. 500 crore in FY23. It plans to partner with foreign entities (like SAAB, a reputed global defence company that makes aircraft, submarines and weapon systems) and use those funds to create new technology. It has even started working on aircraft stealth tech that cannot be detected by radar, which could put them on the world map!

  • Manufacturing Expansion - Its state-of-the-art facility in Chennai that spans 9 acres (that is about 7 football fields) is its only base of operations, making it the largest of its kind in India. To improve on this, it has not only improved its existing facility but launched another within the same area in FY23 by expanding additionally by 2 acres, virtually doubling the capacity of key radar and electronic warfare tech, keeping competitors at arm’s length in terms of scale (the company has used 90% of its Rs. 588 crore IPO issue towards this)

🖥️ Coupled with timely upgradation of tech at its facilities, this ensures that Data Patterns remains at the top of its game in the longer term, and has managed to do this without incurring debt, retaining balance sheet strength in the process

3. Solid Clientele

Creating a solid business is one part of the monopoly game, but having a resolute client base is the other. Along with DRDO and ISRO that engage in developmental projects like creating cool tech that can be indigenised in its manufacturing, the rest of its clientele includes a range of big players:

  • HAL - integration of avionics systems into the Tejas aircraft and helicopters

  • BDL - integration of electronic warfare into weapons systems to counteract enemies

  • Mazagon Docks - integration of naval tracking systems into ships and submarines

With these companies having a cumulative order book that crosses the Rs. 3 lakh crore mark, owing to the government capex initiatives in the budget, the management expects that at least 1-2% of this would trickle down to Data Patterns, with its current order book already at Rs. 1,000 crore as of 1HFY24 (2x FY23 revenue)!

Now that we have established that Data Patterns is a monopoly and made sure it retains that title, does this also translate into strong financials? Well, it seems like the company checks this box too!

🖥️ The estimate stands at the next 2-3 years and could see order book growing by 3x its current level, indicating revenue visibility for the next 5 years at the least

Monopolies = Good Stocks?

Having the advantage of being a monopoly in this rapidly growing market has resulted in the company getting virtually all the orders in its area of expertise, and the growth numbers that come from executing those orders speak for themselves.

So monopoly in good business + good financials = good stock?

The company does trade at a 2-year Forward PE multiple of 34x currently, equivalent to its listed peers/clients like HAL, BDL and Mazagon Docks, despite Data Patterns being one of the only companies of its kind where you can play the entire defence sector and aerospace missions in one shot - so the stock could just perform well from here on out too!

The Monopolies portfolio definitely has this stock on its “radar”, and maybe you could add it to yours too!


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