Ideaforge Technology

To forge ahead

Strong dual-use product basket backed by in-house design-to-delivery capability

IdeaforgeTechnology is the pioneer and the pre-eminent market leader in the Indian unmanned aircraft systems (UAVs) market, with a market share of 50% in FY 2022. It caters to domestic and international customers across defence and civil sectors, primarily for applications in surveillance, mapping and surveying. The company also builds its own software stack required for flight safety, autopilot sub-system, battery, power and communication in its UAVs. The company was founded in 2007 by IIT Bombay alums Ankit Mehta, Rahul Singh and Ashish Bhat.

The company had the largest operational deployment of indigenous UAVs across India, with an Ideaforge manufactured drone taking off every five minutes on average for surveillance and mapping as of FY 2023.

The company also ranks 7^th globally in the dual use category (civil and defence) drone manufacturers as per the industry. Its UAVs are equipped with industry leading specifications and capabilities, comparable to those of other established global players in the UAV industry.

Strong indigenous design and technological capabilities, i.e.,ability to invent, design and deliver customer centric offerings (i.e., hardware, software and solutions). Its vertically integrated operationsallow the company to design, develop, engineer and manufacture its UAVs in-house with a control on performance, reliability and autonomy.

In addition to being among the first few players in India to enter the UAV market, it also has the distinction of being the first company to indigenously develop and manufacture vertical take-off and landing (VTOL) UAVs in India in 2009. It is also the first company to participate in the demonstration of 5G enabled UAVs at the Indian Mobile Congress in 2018.

It has a broad range of products targeted at both civil and defence applications with feature-based differentiation such as weight class (2-7 kg), endurance class (25-120 minutes flying time), take-off altitude range (up to 6,000 meters), communication range (2-15 km), and payload types. Beyond UAVs, it undertakes a full integration of payloads, communication system and packaging. Integration of complex technologies while optimizing for performance, reliability and autonomy helps the company to differentiate itself from other players in the market.

Its product offerings consists of (a) hardware, which primarily includes UAVs, payloads, batteries, chargers and communication system (which enables communication between the ground control station and the UAVs), (b) software and embedded sub-systems, which includes the GCS software, which enables the controlling and management for its UAVs and autopilot sub-system, which enables remote control and autonomous completion of flights, and (c) solutions, which enables industry/ application specific software that enhances the value of its UAVs to the end customer.

As a result of its continuous product development and innovation efforts, it has filed 41 patent applications, which comprise of 20 applications filed internationally and 21 patent applications filed in India, as on June 17, 2023.

A validation of its product competency and an example of global acceptance of its product, it wonthe largest mini-VTOL UAV contract in March 2022, against global competitors from Russia, Israel, France, Ukraine and other countries for supply of its product, i.e., Switch UAV.

As of May 31, 2023, it had about 100 channel partners and three national distributors. It has one of the best support networks in India for UAVs.

In FY2023 about 69% of its revenue came from defence and balance 21.5% came from civil. Its customers include Indian defence customers and civil customers comprising certain of the central armed police forces, state police departments, disaster management forces, and forest departments, private contractors in connection with smart cities, Pioneer Foundation Engineers Private Limited and C.E. Info Systems Limited.

The company is one of the few original equipment manufacturers (OEMs) globally to have its own proprietary autopilot sub-system and ground control software.

The issue and object of the issue

The initial public issue comprises fresh issue of equity shares aggregating upto Rs 240 crore and offer for sales of upto 4869712 equity shares by one of the promoter and other selling shareholders.

Out of the net proceeds Rs 50 crore will be used to repay/prepay borrowing of the company, Rs 135 crore will be used to meet funding working capital gap, Rs 40 crore towards investment in product development and balance towards general corporate purposes.

Consolidated borrowing as of April 30, 2023, stood at Rs 85.132 crore. It had cash/bank balance and current investment in mutual fund/bonds of Rs 6.50 crore and Rs 124.08 crore, respectively.

Strength

Operating in a sunrise sector of UAV/drone technology, which is poised for exponential growth worldwide. The global UAV/drone market expected to grow at 20%CAGR to reach USD 91.3 billion by CY2030.

Pioneer and the pre-eminent market leader in the Indian UAS industry, with first-mover advantage

Integrated operation with in-house product development centre that allow it to design, develop, engineer and manufacture UAVs along with track record of successful outcomes in critical use cases with allows the company to expand its product portfolio and meet evolving demands of diverse customers across industries and cater to evolving needs of customers and new end-use applications and industries.

One of the few vendors globally to have a full stack UAV solution, along withground-control software, firmware and solutions as well as robust after sales support.

The order book as end of Mar 2023 stood healthy at Rs 192.272 crore of which about 96.3% is from government entities.

Regulatory tailwinds in the Indian drone market with ban on imports of drones, except for usage for R&D, defence and security effective February 2022 and launch of production linked incentive (PLI) scheme in September 2021.

Weakness

Considering the lumpy nature of defence order placement and high level of dependence on government orders based on competitive bidding, any delay in tendering/order placement or cut in defence budget relating to drone/UAV will impact the order inflow and operations of the company.

Any delay in supply or availability of components at fair rates will impact the operations of the company.

Have sustained negative cash flows from operating activities in the past and may experience earnings declines or operating losses or negative cash flows from operating activities in the future.

Change in regulatory environment governing operation of Unmanned Aerial Vehicles including certification by DGCA will impact the growth of the industry.

The company is shortlisted as one of the beneficiaries of the Government of India’s PLI scheme for drone manufacturing and any discontinuance of the scheme or non-compliance will impact the profits.

Entry into ‘drone as a service’ market [a ready-to-fly network of drones which allows users to schedule or request on demand flights, without the hassle of owning hardware, software or trained manpower] may not be successful, and it might adversely impact its financial condition.

Valuation

Consolidated sales (restated) for FY2023 were up by 17% to Rs 186.01 crore primarily driven by increase in sales of its UAVs execution of large contract for supply of Switch UAVs as well as PLI incentive of Rs 17.42 crore. The OPM crashed by 2060 bps to 25.3% and thus the operating profit was down by 36% to Rs 47.09 crore impacted by higher material cost as well as higher employee cost which was driven by additional employee cost due to increase in salaries as well as increase in head count and increase in ESOPs granted to employees. Eventually the PAT was down by 27% to Rs 31.99 crore.

The EPS based on post issue expanded equity on higher price band works out to Rs 7.7. Thus,the offer price at the upper band of Rs 672 discounts the FY2023 EPS by about 87.3 times.

There is no strict comparable peer with business that is completely mirroring to that of the company. However, defence suppliers such as Data Patterns, Avantel, Astra Microwave Products and MTAR Technologiesquotes at a P/E of 82.5 times, 41.8 times, 52.3 times and 58.3 times, respectively, of their consolidated FY2023 EPS.