Astra Microwave Products Ltd – Counting Stars

Astra Microwave has been around for a while now and has garnered respect and patronage from various Defence, Space and Telecommunication outfits in India. The company has invested a lot of time and energy between 2008-2012 developing various products and is miles ahead of the competition in a host of products. After concentrating majorly on prototypes and services, the game changed in 2011-12 when the company began manufacturing on a large scale and with the announcement of the defence offset policy, the company has just about taken off.The company clocked sales of 550cr in FY2014 with a PAT of 51 cr and has a guidance of 650 cr for Fy2015 with a PAT of 70 cr.

Read Crisil’s initiation report from 2012  Crisil AMP -Initiation

At 86 Rs a share the company has a M.Cap of 705 cr and is expected to deliver a PAT of 70 cr, a 10% net return. With little debt, a worthy management and financials that tick more boxes than cross them, the company won’t get you excited until you read the following facts.

1. The current Defence Offset Policy makes it mandatory for all vendors who get orders of over 300 cr from DRDO to source at least 30% from indigenous manufacturers.
2. AMP has no competition, yes zilch, from India in sub-systems for the missile and radars sub-systems that it manufactures. Niche product + Monopoly, yay ! The local competition is at least 4-5 years away in R&D to be able to produce this product and a little more time to get the product approved by DRDO and BEL. A clear, undisturbed advantage for at least 5 years.
3. The DRDRo has confirmed that the production of Akash missile is to be doubled.
4. Foreign players cannot compete with AMP because of the offset policy.
5. No Capex required until a production of 1500 cr. Currently AMP is just producing 650cr a year.
6. Maintenance Capex is just 10-20 cr  a year.
7. AMP has begun R&D in systems. With the current track record, it is highly likely that AMP will get there in the not so distant future.
8. AMP has no line of succession as most of the technocrats had all stated together and are already in their late 50s and early 60s.L&T has picked up a 10% stake in the company, appointed a non-executive director and has even expressed interest in becoming their strategic partner. The issues of lineage are sort of taken care of here.
9. Of the 8.2 cr shares, Mutual funds and public holding larger than 1% account for about 45% shareholding and promoters have 22% holding leaving just about 33% to the public.
10. Dividend payout policy is to be maintained at 18-20% of PAT.
11. The products that AMP makes have a very low tolerance for error, and thus it takes really long for them to get approved by the regulators. This also give AMP certain pricing power as it does not have competition. A real sweet spot for AMP. This also allows AMP the luxury to spend by itself on R&D.
12. AMP has had a good track record of launching successful products and it is quite certain of its success unmaking systems for
    1. Electronic warfare/ control measures
    2. Radars
    3. Missile Seekers
13. The current BJP government has been quite vocal on local procurement, which means that the offset policy % can also be increased.
14. I wont be surprised if Modi get aggressive in reclaiming lost territory from both Pakistan and China. If a govt with a 300+ majority cannot, i wonder who can.

A few issues with AMP

1. Orders take at least about 10 months to complete, that will always keep the inventory levels are Working Capital high.
2. More often than not, the sales will be lumpy.
3. The order flow has been healthy, but this sector is characterised by excessive dependence on a small number of clients. Their relationship will be key to AMP. However, AMP is a listed vendor on all System supplier and has a long history with DRDO and has also been recognised by it.

AMP gives me comfort primarily because of its niche monopoly and now the current government. The counter has traditionally traded at a PE of about 12 and is currently trading at about 13.5. If it ever trades at 70 or below, i urge you to jump in. Its not everyday that you can ride a missile and count stars.