Recommendation from Defense and Aerospace Sector

This section gives a recommendation of a stock having stock price below Rs 150 with sound fundamentals and expected to give handsome returns over a one-year time horizon.

APOLLO MICRO SYSTEMS : STRENGTHENING INDIA’S DEFENCE SYSTEMS 

HERE IS WHY
✓ Vast knowledge and technology base
✓ Contributor to India’s defence sector indigenisation
✓ Expanding production capabilities 

India’s aerospace and defence market presents a significant opportunity for both Indian and foreign companies. India is a major importer of conventional defence equipment, spending 40 per cent of its total defence budget on capital acquisitions. Between 2006 and 2010, India surpassed China as the world’s largest importer of weapons systems. The government opened the sector to private and foreign investment in 2001 and has set a target of 70 per cent indigenisation (localisation). 

To fully utilise this opportunity, original equipment manufacturers and suppliers are leveraging India’s competitive advantages in manufacturing and information technology by setting up units in India. Owing to this, our low-price scrip recommendation for this issue is Apollo Micro Systems Limited (AMS), which is an electronic, electromechanical, engineering designs, manufacturing and supplies company that designs, develops, and sells highperformance, mission, and time-critical solutions for defence, space and home land security. 

AMS has participated in various indigenous missile programmes, underwater electronic warfare, underwater missiles, surface-to-air missiles, nuclear missile programmes, indigenous submarine programmes, UAV’s long and short endurance, ships, and space programmes. The company offers custom-built COTS solutions based on specific requirements for defence and space customers. A leading Tier I OEM manufacturer and research and development design service provider for Bharat Electronics Limited (BEL) in the defence and aerospace industry, the company is experiencing strong growth due to several factors. It is investing in a new weapon integration facility, which will expand production capabilities and strengthen its supply chain. The company is a recognised supplier to BEL and has received orders worth ₹28.74 crore from BEL and CNA (OF) Pune, Indian Navy. 

The company has also been declared the lowest bidder for orders worth ₹21.42 crore from BEL and a private company, and ₹16.96 crore from DRDO. The company has also received orders from Adani Group and others worth ₹4.65 crore. These orders and investments position the company for future growth and stability in the defence ESDM sector. In Q2FY25, on a consolidated basis, the company’s revenue increased by 84.38 per cent YoY to ₹160.71 crore compared to ₹87.16 crore from the previous year’s same quarter. On a sequential basis, the revenue increased by 76.21 per cent. The PBIDT excluding other income increased by 79.08 per cent to ₹32.89 crore YoY as compared to ₹18.37 crore from the previous year’s same quarter, while sequentially it increased by 47.04 per cent. Its net profit stood at ₹15.73 crore compared to ₹6.56 crore, a YoY increase of 139.84 per cent, while sequentially it increased by 86.61 per cent from ₹8.43 crore. 

At TTM, the shares of the company are trading at a PE of 88 times, which is higher than its three-year median PE of 53.3 times and also higher than the industry PE of 72.2 times. However, considering the company’s strong growth prospects, robust order book, and strategic focus on the high-growth defence sector, we believe the premium valuation is justified. The company has a three-year compounded sales and profit growth of 22 per cent and 46 per cent, respectively. It has a debt-to-equity ratio of 0.37 times. Considering the aforementioned factors, we recommend BUY.