astra microwave products limited. initiation in s band. worked on sub-systems for astra, pichora and...

Anand Rathi Research

Time Horizon – 12 Months

December 14, 2015

Sep-15 Jun-15 Mar-15 Dec-14

Promoters 17.7% 17.7% 17.5% 18.0%

FII 2.9% 2.1% 0.8% 0.6%

DII 25.7% 24.5% 27.6% 24.9%

Bodies Corporate 19.0% 19.3% 18.8% 15.9%

Others 34.7% 36.4% 35.3% 40.6%

Total 100% 100% 100% 100%

Source: Company, Anand Rathi Research, Bloomberg

V

A

L

U

E

P

I

C

k

(In ₹ Mn.) FY14 FY15 FY16E FY17E

Net Sales 5,312 6,336 4,354 5,693

EBITDA 887 1,157 1,001 1,338

EBITDA Margin 16.7% 18.3% 23.0% 23.5%

EPS (₹) 6.2 7.7 5.9 7.4

EV/Sales 2.0 1.7 2.4 1.9

EV/EBITDA 10.9 8.7 9.9 7.4

P/E (x) 20.8 16.8 21.7 17.5

Price Performance CY12 CY13 CY14 YTD

Absolute 18% 49% 96% 9%

Relative -10% 42% 64% 17%

Analyst: Narendra [email protected]

Relative stock performance (Dec’14=100)

CMP: ₹134

Target: ₹180

Shareholding Pattern (as on Sep’15)

Key Data

Bloomberg Code ASTM IN

NSE Code ASTRAMICRO

BSE Code 532493

Sector Technology Hardware

Industry Communications Equipment

Face Value (₹) 2.0

BV per share (₹) 36

Dividend Yield (%) 0.9%

52 Week L/H(₹) 100 / 167

Market Cap. (₹ mn.) 10,965

Astra Microwave Products Limited (ASTM)

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Nifty ASTM

2 Anand Rathi Research

Astra Microwave Products Limited (ASTM) was established in 1991 by a team of industry professionals / scientists and isengaged in designing and manufacturing of high value added RF and microwave super components and sub-systems findingapplications in Defense, Space and Civil communication systems.

The company has Four production facilities in Telangana (two in Medak District and two in Ranga Reddy District) and twoR&D centres in Ranga Reddy District, Telangana and Bengaluru, Karnataka.

ASTM has a long association with DR&DO in design, development and manufacturing of RF and Microwave systems forRADAR, Telemetry, Surveillance and Radio Proximity System. Astra in association with RCI (Research Centre Imarat) hassuccessfully executed projects like AKASH missile RPF, TRISHUL RPF, ASTRA RPF, RPF_SOC including fabrication of MFCs,AKASH and TRISHUL RPF. The company has delivered more than 100 AKASH missile RPF production units including antennato BDL (Bharat Dynamics Limited).

Astra is also a part of Joint venture between BEL, Larsen & Toubro and Entec, to produce Central acquisition radar (CAR), amedium-range high-resolution 3D surveillance radar. The radar can handle 150 targets using a planar array antenna andprovides simultaneous multi-beam coverage.

ASTM has lately entered into JVs with OEMs like Rafale, Unique Broadband Systems and has also incorporated a whollyowned subsidiary in Singapore. Whit these tie ups, ASTM is managing to leverage its existing capabilities in subsystemsdomain for exports market while also simultaneously moving ahead in value chain through gaining knw how by workingwith OEM players.

The company has planned to raise about ₹1700 billion through a mix of debt and equity to expand in the product chain,setting-up of joint venture companies and expanding its R&D facilities in Bangalore.

As of October 2015 ASTM has outstanding order book of ₹5,364 million. The management has guided an order inflow ofaround ₹5,500-6,000 million in FY-16. As per the management the short term slack in order book is due to fluid situation asmajor OEMs are in early stage of setting up facilities and tie-ups post which ordering activities are expected to pick up.

Transforming from subsystem player to a systems player…



According to the defence budget, India’s defence spend is expected to reach US$65.4bn in 2020 from USD 38.38bn in2013-14. Along with higher expenditure, GoI is also seeking to expand procurement through indigenous sources, from thecurrent 30% to the target 70% over the next decade.

With such a massive spend on defence, the offset obligations to the tune of ₹250bn expected in the next 7-8 years.

The government is gradually opening the strategic defence sector for private sector participation helping foreign originalequipment manufacturers to enter into strategic partnerships with Indian companies and leverage the domestic marketsand also aim at global business thorough its ‘Make in India’ campaign.

ASTM has also entered into joint venture with two companies namely Rafael Advance Systems, Israel and UniqueBroadband Systems, Canada for production and marketing of products in the field of defence and civil sector respectively.

We believe ASTM is currently in a sweet spot in long term as its product offerings are very niche and technicallycomplicated. On the other hand, its ongoing shift towards becoming a complete systems player from current subsystemsplayer is also expected to add premium to its existing offerings.

We initiate our coverage on Astra Microwave Products Limited with a BUY rating and a target price of ₹180 per share.

…while leveraging its existing capabilities to focus on exports market



A 24 year old company.


Year Key Milestones

1991 Incorporated as Astra Microwave products Pvt. Ltd.

1994 Merger of Kaveri Microwave Components Limited.

2001 Awarded the Defence Technology Absorption Award by the DRDO.

2004 Entry into space segment through supply off MSS terminals

2008 Designed, developed and delivered TR modules for RISAT programme

2009 Merger of Astra Microelectronic Technologies Limited, Wholly owned subsidiary company

2012 Received ₹3,100mn offset order from a overseas customer

2013Incorporation of Bhavyabhanu Electronics Private Ltd, as a wholly owned subsidiary Company in India.

Received offset order from a overseas customer

2014Recognised as a leading technology company in the Deloitte Technology Fast 50 India 2014 programme.

Started new R&D centre from leased premised in Bengaluru

2015

Recognised as a leading technology company in the Deloitte Technology Fast 50 India 2015 programme

Incorporation of Aleius Semiconductors Pte. Ltd, as a wholly owned subsidiary company in Singapore

Signed MoU with a global satcom and broadcast technology companySigned term sheet with a global defence company.


Radar:• Transmit/receive (T/R) modules in UHF, L, S, C, X and

Ku band• Low power microwave sub-systems for central

acquisition radar (CAR)• Electronic beam former for 3-D radar• Microwave receivers and Higher power limiters.

Telemetry:• Data & video telemetry transmitter systems for LCA & IJT• Video telemetry receivers

Ground-based Surveillance:• 8 and 16 channel frequency synthesizers• VHF/UHF and microwave range front end, LRUs• VHF/UHF and microwave range biconical, dual-polarised

antennae

Missiles:• Command guidance sub-systems• Radio proximity sub-systems

Offering niche and targeted products catering to defence & Space sector.


AMWP’s Business Offerings

Source: Company, Anand Rathi Research

OthersSpaceDefence & Security

Ground Based:• Type-D mobile satellite

terminals• 8x8 routers• Automatic weather stations• 16 channel transceivers L-

band TR module

Onboard (shuttle/space):• C band T/R modules• S band transmitter• Ku band MMIC receivers• TR controller units

• Automatic weather stations (AWS)

• Met Towers• Mobile jammers• Tower mounted

amplifiers and boosters• MSS terminals• RFID solutions• Industrial security

system• Non linear junction

detector


Defence & Space sector remains bedrock for company’s technological development…


Year Key Milestone Events for ASTM inDefence

FY-03Designed and developed RF front-end sub-system for LRDE. Absorbed technology from GoI’s defence labs and deliveredsub-system to BEL.

FY-05Received bulk production order for radar sub-systems which were in the R&D phase. Designed and developed T/Rmodule for active aperture radar. Designed and developed broadband FERs for electronic warfare applications.

FY-07Supplied sub-systems for the defence communication project. Complete development of T/R modules for phased arrayradars in S band. Worked on sub-systems for Astra, Pichora and Brahmos. Worked on LNAs, seeker components,telemetry products, power amplifiers.

FY-08 Production of Akash missile started on a limited scale. Central acquisition radar (3D-CAR) in association with LRDE.

FY-10 S band active aperture array using 100 WTR module was developed.

FY-12 Production orders of Akash missile and some programs started.

FY-13 Supplied T/R modules to ELTA under the offset clause. Delivered sub-systems for radars and Akash missile.

FY-15 Supplied T/R modules to ELTA under the offset clause. Delivered sub-systems for radars and Akash missile.

Year Key Milestone Events for ASTM in Space

FY-03Supplied mobile satellite service (MSS) terminals through strategic relationship with Space Application Centre,Ahmedabad.

FY-04Started supplying MSS terminals in bulk quantities. Received prototype development orders for T/R modules for RISATprogram.

FY-05 Started design and development of T/R module for the RISAT program against development order.

FY-07 T/R module for RISAT program entered critical stage and some sub-systems of flight model were delivered.

FY-08 RISAT program delivered.

FY-13 T/R module delivery started.


…while Telecom & Meteorology operated as diversification tool.


Year Key Milestone Events for ASTM in Telecom

FY-02 Designed and developed Cell Jammers and V-SAT antennas in Ku band.

FY-03 Designed and developed CDMA filters.

FY-04 Supplied VSAT and other antennas. Launched Ku band antenna.

FY-05 Designed and developed optical repeater for cellular applications.

FY-07 Working on tower mounted amplifiers and other products.

FY-10 5W outdoor unit part of Ka band VSAT terminal developed.

Year Key Milestone Events for ASTM in Meteorology

FY-05Bagged production orders for the same. Designed and developed AWS for ISRO. Signed MoU with Antrix Corp.(of ISRO) to supply the same in bulk quantity.

FY-09 Supplied Automatic Weather Stations (AWS) to IMD and ISRO.

FY-13 Supplied AWS.

FY-14 Supplied AWS.



Long drawn development process showing signs of conversion into top line


Sales (₹ Mn.) EBITDA & PAT Margins

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8000

FY-11 FY-12 FY-13 FY-14 FY-15

Defence Space Meteorology & Telecom Exports

ASTM has reported a compounded growth of 40% in last five years. Its key segments for the growth were defence

(excluding offsets) , space and exports (offsets). In terms of segment growth over the past five years, the exports

(offsets) sales grew at largest rate of 40.5% due to large ELTA order followed by space related sales growing at

33% and defence growing at 19%.

During the latest financial year, the company has reported a growth of 19.3% in sales at ₹6,336 million as against

₹5,312 million in FY-14. Its operating margins improved 160 basis points and stood at 18.3% in FY-15 at ₹1,157

million as against ₹887 million in FY-14.

0%

10%

20%

30%

40%

FY-11 FY-12 FY-13 FY-14 FY-15

EBITDA Margins PAT Margins



…with order book too at healthy levels while promising higher growth in future.


Order Book outstanding (₹ Mn., as of Sep-15) Order Book to Sales ratio

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3,000

6,000

9,000

12,000

FY-11 FY-12 FY-13 FY-14 FY-15

Defence Space Meteorology & Telecom Exports0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

FY-11 FY-12 FY-13 FY-14 FY-15

ASTM’s current un executed order book as of Oct-15 stands at ₹5,364 million of which defence related order book

stood at ₹4,477 million, Space at ₹426 million, Meteorology & Telecom at ₹90 million and Export (Offsets) at ₹371

million. Its order book to bill ratio currently stands at 1.5 times its sales.

The company’s order book remains healthy for the short term and recent decline in order book was mainly due to

full execution of offset order from ELTA during current financial year.

Going ahead, the management has maintained a guidance of ₹6,000 million of order book by Mar-16 of which

major contributors are expected to be domestic Defence and Space related orders.


Understanding microwave technical, the bands


BandFrequency

RangeUsage

L 1 to 2 GHz L-band radars are mostly used for clear air turbulence studies.

S 2 to 4 GHzS-band radars are not easily attenuated. This makes them useful for near and far range observation. The drawback to this band of radar is that it requires a large antenna dish and a large motor to power it. It is not uncommon for a S band dish to exceed 25 feet in size. S band is more suitable to ship based radars.

C 4 to 8 GHzThe dish size does not need to be very large. This makes C-band radars affordable for TV stations. The signal is more easily attenuated, so this type of radar is best used for short range observation. The frequency allows C-band radars to create a smaller beam width using a smaller dish.

X 8 to 12 GHz

The X-band radar is more sensitive and can detect smaller particles. These radars are used for studies on cloud development because they can detect the tiny water particles and also used to detect light precipitation such as snow. X band radars also attenuate very easily, so they are used for only very short range observation. Also, due to the small size of the radar, it can therefore be portable like the Doppler on Wheels. (DOW) Most major airplanes are equipped with an X-band radar. This band is also shared with some space radars.

K 18 to 27 GHzThis band is split down the middle due to a strong absorption line in water vapor. This band is similar to theX-band but is just more sensitive.


ASTM’s one of the key products in defence & space segment is radar based surveillance and communication subsystems.


Active/Phased Array Antenna

Subsystem

TransmitDigital Sub-array data

Beam FormerWave FormGenerator

DigitalReceiver/Exciter

(DREX)

Processor Subsystem

Beam DataReceive

Radar architecture has four major subsystems

MMICs

Components

Microwave Assemblies

Integrated Microwave Assemblies (IMAs)

Integrated Subsystems

A Typical Defence Subsystems market Value Chain

Source: Cobham, Anand Rathi Research

Source: Cobham, Anand Rathi Research


Of which Transmit/Receive (T/R) modules forms one of the key components


T/R modules are the building blocks of the radar hardware in jets, ships, ground based etc. Each radar based on its technical requirement in terms of

detection, range and role is built by assembling multiples related T/R modules in a larger unit called AAAU unit. A normal fighter jet has approx. 1000-

1800 T/R modules while a ship radar has approx. 4000-8000 T/R modules. A single T/R module costs around $50 to $80 depending upon band, complexity,

size and other technical specifications.

MMICs are highest cost item are the highest cost item and have greatest variation across industry. GaAs (Gallium arsenide) cost significantly varies among

suppliers. MMICs are also being made with GaN/SiC which is currently under development and is more costly then existing GaAs.

In a simplistic radar parlance on electronic warfare, a radar with a strongest transmit power in Kilowatts wins, and its very difficult to package such system

to the requirements of a fighter aircraft due to its space, size, power and cooling requirements. High power compact size and low heat T/R modules

technology has been a closely guarded technology.

On average, a normal radar operates at between 1 to 5 Kilowatts while latest fighter aircraft radars like APG-81 (F-35) & IRBIS-E N035 (Su-35) which has

close to 20 Kilowatts transmit power at peak and has potential to render all but top end stealth technology ineffective.

Source: PEO IWS, Naval Sea Systems Command, U.S.A.

X-band T/R Module Cost Breakdown

GaAs

Packaging

Labor

Other

MMICs

Antenna Elements

Balance Material

Assembly

Test

Active Antenna Array Unit (AAAU) Cost Breakdown

Source: PEO IWS, Naval Sea Systems Command, U.S.A.


ASTM has its own MMIC design and manufacturing facility under its AMTL division


AMTL, the MMIC Division of AMPL, is India's largest and best equipped GaAs MMIC design and production house. AMTL

has its own RF on-wafer probing test and measurement facility for optimizing designs to various foundry processes. On-

wafer RF probing provides an excellent platform to validate and fine tune designs.

Currently ASTM has in house MMIC manufacturing capacity to manufacture up to ~5Watts capacity per T/R module while

latest tech modules of operational APG and IRBIS radars are capable of ~10watts per module, cited as per public

information available.

ASTM has acquired vast experience over time while working as a component supplier for various OEMs and is set to

leverage know how on various technical aspects regarding designing, fabricating and manufacturing of complex high yield

components for its own subsystems in near future.

Source: PEO IWS, Naval Sea Systems Command, U.S.A., Company, Anand Rathi Research

Products of AMTL Division

Low noise amplifiers

Wideband amplifiers

Digital phase amplifiers

Attenuators

Switches

Power Amplifiers

Mixers

Core Chips (MMIC)

Modular Products

Miscellaneous (Equalizers, Limiters)


Recent JVs to further develop ASTM capabilities and increase its value proposition


In Apr-15, ASTM has incorporated a wholly‐owned subsidiary Aelius Semiconductors in Singapore. The company is looking at

monetizing its newly developed technology products in the field of RF and microwave devices to export markets. The management is

expecting a revenue target of $1 million for the first year and $5 million by the third year. The subsidiary has become operational

during Q2-FY16.

The ASTM has incorporated its JV with Rafael Advanced Defence Systems Ltd. of which ASTM is currently holding 51% stake which is

expected to become a 50:50 JV subject to approval. The joint venture company is expected to receive an investment of around

$20mn over next 2 years. Once operationalized, the JV will produce and supply Tactical Radio Communication systems, Electronic

war-fare systems and Signal intelligence systems for the Indian defence market under ‘Make in India’ scheme.

ASTM has recently also entered into Memorandum of Understanding (MOU) to form a 50:50 joint venture company with Unique

Broadband Systems Ltd., Canada to do business in the areas of UHF broadcasting, satellite up linking and medical imaging products

for Indian and other regional markets specially South Asia and Russian Federation.

ASTM

AeliusSemiconductors

JVC with Rafael Adv. Sys .Ltd.

JVC with Unique Broadband Sys.

51% Stake 50% Stake

100% Stake

Production and supply of• Tactical Radio

Communication systems• Electronic war-fare

systems• Signal intelligence systems

Business of• UHF broadcasting• Satellite up linking• Medical imaging

products

Marketing of ASTM Products• RF & Microwave

Products


…preparing company to tap future expected orders


Few key Program/ Projects Potential Opportuinity

AEW&C ₹2.5 billion within a span of 3 years approx.

3D-CAR ₹1 billion for approx. for 50 units. Produced by BEL, ASTM, L&T, Entec jointly.

WLR (Weapon Locating Radar) Approx. 50 radars for ₹15 nillion worth. Opportuinity of ASTM to be around ₹0.7-0.8 million.

MPR (Medium Power Radar) X-Band TRMMs, expected opportuinity of 50 radar units.

Tejas LCA AESA radar for Tejas MK-II, currently in development stage.

KonkursProgram to convert wired links in missiles to RF based. Development contract awarded. Final orderopportuinity for 10,000 units.

Multi-function Radars Supply of TRMMs

Hin Shakti Supply of TRMMs and microwave subsystems

Automatic Weather Station (AWS)

IMD plans to set up new AWS under phase -II of its modernization. Expected opportunity around ₹35million.

Source: Company, Anand Rathi Research, Media Reports, Ministry of Defence


…helping it drive growth at much higher levels in medium to long term.


With recent policy steps like offset clause, ‘Make in India’ and increase in FDI limits taken by government in

strengthening India’s domestic defence manufacturing capabilities. India’s defence market is poised for a

sustained growth for next 8 to 10 years. The offset market alone is pegged at around ₹250 billion in next 7-8

years.

We believe ASTM to be one of the beneficiaries. We estimate ASTM to report ₹4,350 million in revenues for FY-

16E and ₹5,693 million for FY-17E.


8%

13%

18%

23%

28%

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2,000

4,000

6,000

8,000

FY-14 FY-15 FY-16E FY-17E

Sales EBITDA margins (RHS)

Sales (Rs. Mn.) & EBITDA Estimates


With policy clarity emerging on some key projects,

ordering activity is expected to gain momentum going

ahead in defence related products.

We believe ASTM is one of the few defence sector

company which has a impeccable track record of

execution, technology absorption and innovation

amongst other Indian companies.

ASTM with its latest JV and new R&D facility seems set

to transform itself into a systems player from current

component and subsystems space.

At CMP the stock is trading at 22.6x FY16E earnings and

17.6x FY17E earnings.

We initiate our coverage on ASTM and recommend BUY

on the stock with a target price of ₹180 per share.

NOTE: As per latest announcement by the company on exchanges (12th Dec-

15), ASTM has planned to conduct QIP to raise ₹650 million by issuing equity

shares. Since the issue is not complete, we have not factored it in our

financial projections.

Relative stock performance (Dec’14=100)

Valuation and Recommendation:

Source: Bloomberg, Anand Rathi Research


(In ₹ mn) FY-14 FY-15 FY-16E FY-17E

EPS (₹) 6.2 7.7 5.9 7.6

P/E (x) 21.6 17.5 22.6 17.6

P/B (x) 4.5 3.8 3.2 2.7

ROE 21.1% 21.5% 14.3% 15.5%

ROCE 14.5% 29.5% 17.7% 17.9%

EV/EBIDTA (x) 11.7 9.3 10.6 7.9


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Margins FY-14 FY-15 FY-16E FY-17E

Sales Growth % 133.5% 19.3% -31.3% 30.8%

Operating Margin % 16.7% 18.3% 23.0% 23.5%

Net Margin % 9.6% 9.9% 11.2% 10.6%

Consolidated Financials:


(In ₹ Mn.) FY-14 FY-15 FY-16E FY-17E

Liabilities

Equity Share Capital 164 164 164 164

Reserves & Surplus 2,248 2,755 3,002 3,366

Totat Shareholder's Funds 2,412 2,918 3,166 3,529

Minority Interest 0 0 0 0

Long-Term Liabilities 262 326 1,001 1,951

Other Long-term Liabilities 24 34 34 34

Deferred Tax Liability 83 109 109 109

Short-term Liabilities 2,866 1,554 1,089 1,423

Total 5,646 4,942 5,399 7,047

Assets

Net Fixed Assets 1,261 1,416 1,947 2,852

Long-Term L&A 83 17 17 17

Non Current Investments 3 1 1 1

Other Non-Current Assets 3 4 4 4

Current Asset 4,296 3,502 3,429 4,172

Total 5,646 4,942 5,399 7,047

(In ₹ Mn.) FY-14 FY-15 FY-16E FY-17E

Net Sales 5,312 6,336 4,354 5,693

Operating Expense 4,424 5,178 3,353 4,355

EBITDA 887 1,157 1,001 1,338

Other Income 78 63 65 85

Depreciation 148 220 261 356

EBIT 817 1,000 805 1,067

Interest 119 152 150 255

Misc. items (2) (1) - -

PBT 696 847 655 813

Tax 188 220 170 211

Minority Interest - (0) - -

PAT 508 628 486 602



The company is highly dependent on government orders which are very slow and lumpy in nature, thus ASTM is

exposed to such delays which are not in its control.

Key Risks:



Rating and Target Price history:

Date Rating Target Price (₹) Share Price (₹)

14-Dec-15 BUY 180 134

ASTM rating detailsASTM rating history & price chart

Source: Bloomberg, Anand Rathi Research Source: Bloomberg, Anand Rathi Research

NOTE: Prices are as on 14th Dec 2015 close.


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1ARSSBL/its Associates/ Research Analyst/ his Relative have any financial interest in the subject company? Nature of Interest (if applicable), is givenagainst the company’s name?. NO

2

ARSSBL/its Associates/ Research Analyst/ his Relative have actual/beneficial ownership of one per cent or more securities of the subject company, at theend of the month immediately preceding the date of publication of the research report or date of the public appearance?. NO

3ARSSBL/its Associates/ Research Analyst/ his Relative have any other material conflict of interest at the time of publication of the research report or atthe time of public appearance?. NO

4 ARSSBL/its Associates/ Research Analyst/ his Relative have received any compensation from the subject company in the past twelve months. NO

5ARSSBL/its Associates/ Research Analyst/ his Relative have managed or co-managed public offering of securities for the subject company in the pasttwelve months.

NO

6ARSSBL/its Associates/ Research Analyst/ his Relative have received any compensation for investment banking or merchant banking or brokerageservices from the subject company in the past twelve months. NO

7

ARSSBL/its Associates/ Research Analyst/ his Relative have received any compensation for products or services other than investment banking ormerchant banking or brokerage services from the subject company in the past twelve months. NO

8ARSSBL/its Associates/ Research Analyst/ his Relative have received any compensation or other benefits from the subject company or third party inconnection with the research report. NO

9 ARSSBL/its Associates/ Research Analyst/ his Relative have served as an officer, director or employee of the subject company. NO

10 ARSSBL/its Associates/ Research Analyst/ his Relative has been engaged in market making activity for the subject company. NO


astra microwave products limited. initiation in s band. worked on sub-systems for astra, pichora and...

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