The initial public offering (IPO) of IdeaForge Tech, a leading player in the Indian unmanned aircraft system (UAS) space, opens on June 26 and closes on June 29. The offer is priced at ₹638-672 a share. The company proposes to raise a total of ₹567 crore at the upper end of the price band, which constitutes fresh issue of ₹240 crore and offer for sale by investors and one of the promoters totalling ₹327 crore (at ₹672 apiece).

Incorporated in 2007, by a team of three IITians, the company is into design, development and manufacture of a variety of Unmanned Aerial Vehicles (UAV), also known as drones. Besides the principal product, which is UAVs and its hardware accessories such as payloads, batteries, chargers and communication system, the company has a portfolio of software and embedded sub-systems, which includes the ground control station (GCS) software, autopilot sub-system and other solutions.

IdeaForge caters to customers for applications such as surveillance, mapping and surveying. About 96 per cent of the company’s revenue in FY23 was from Government agencies, including defence. The company operates a manufacturing facility, located at Navi Mumbai.

While IdeaForge has, over the last decade, built a strong product portfolio, with focus on niche technology and serves a large market, which is continuing to grow at a healthy pace, investors can wait for clarity on the growth trajectory in the medium term and better entry points post listing as the issue appears to be pricey, based on FY22-23 performance. At the upper end of the price band of ₹672, the stock is priced at 79 times its FY23 earnings.

We recommend that investors wait before considering investment in the stock, for three reasons.

For one, the current order book of ₹192 crore (as of March 2023) is a concern, given that companies that serve the defence/Government sector typically have an order book of at least 3-4 times their sales. In the case of IdeaForge, FY23 sales were ₹186 crore and the current outstanding order book is just marginally higher than its FY23 sales. Even as the market opportunity for drones is large in India and globally, at $2.7 billion and $21.1 billion respectively, translation of the opportunity into order book will be important to instil confidence in the growth trajectory.

The management believes that there is scope to procure additional order under the fast track procurement route, wherein the execution happens in less than 12 months, and has also cited request for proposal by the Government, for Indian Army to purchase quadcopters for surveillance. However, it is better to wait for further clarity on how the growth pans out in the current year, given that the company’s revenue growth moderated to 17 per cent year-on-year, much lower than the five-fold jump seen in FY22.

Also, operating profit margin in FY23 declined from about 47 per cent in FY22 to 25 per cent in FY23 which, according to the management, was largely on account of the ₹26-crore employment benefit expense pertaining to its ESOP scheme. However, even adjusting for the one-time expense, the operating margin is 39 per cent, which is lower by 8 percentage points. 

Second, the company has debt and obligations of ₹129 crore in the books, which is 0.5 times of its net worth of ₹324 crore. Further, the working capital cycle has also increased in FY23 with a net working capital days of 301 days, as against 121 days in FY22. This has been on account of increase in both inventory and debtor days as compared to FY22. Even though the company will use ₹50 crore from the IPO proceeds for repayment and use ₹135 crore to meet working capital gap, improvement in the working capital cycle will be critical for operational cash flow generation. The company plans to spend ₹40 crore, of the IPO proceeds, for product development.

Third, the offer is priced at 75-79 times its FY23 earnings, which is not attractive. Given that the company has made profits only in the last two years, and FY23 revenue growth has been in the mid teens, we think the offer price does not leave much on the table for long term investors. This is higher than peers’ that also cater to the defence and aerospace segment, such as MTAR Technologies (56 times price earnings), Zen Technologies (74 times) that have a relatively better balance sheet and longer track record of running profitable operations.

Though the company is in an interesting space with a large market opportunity, we believe the risk to growth is there since, for the foreseeable future, the business will continue to depend predominantly on Government orders. Delays or cancellation of orders can significantly impact growth. Also, based on the company’s limited operating track record of only three years available with us, no clear trend is discernable. Only two years were profitable with significant decline in FY23 revenue growth rate, and with the current order book also muted, investment risk remains high.

Even for investors with a high risk appetite who may still want to bet on the growth opportunity, getting it at a reasonable price will be important. Investors can hence wait for clarity on the execution, growth trajectory and an attractive price to buy into the stock.  

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