Rationale

 The assigned ratings of Data Patterns (India) Limited (DPIL) factor in its established track record of more than three decades in the design, development and manufacturing of electronic equipment for the defence and aerospace sectors. This has supported DPIL in establishing strong relationships with reputed defence organisations in the domestic market, leading to repeat orders. DPIL's healthy order book position at Rs. 577 crore as on December 31, 2021 translating into an order book/operating income of 2.6x provides medium-term revenue visibility. The ratings also favorably factor in the healthy growth in revenues at a CAGR of 22% during FY2016-FY2021 to Rs. 224 crore, backed by an increased execution of production contracts. During the same period, net cash accruals grew at a CAGR of 68% to Rs. 60.8 crore, supported by a sharp improvement in operating profit margins owing to the execution of high-margin orders and economies of scale. The company is expected to report Rs. 280-290 crore of revenues in FY2022 with an OPM in the range of 35-40%. The company raised Rs. 240 crore of equity through an initial public offering (IPO) in December 2021. The proceeds of the IPO are expected to be deployed towards capex, debt prepayment and working capital requirements to support the growth in scale. The limited debt levels along with healthy OPM resulted in strong debt coverage metrics, which are expected to sustain in the near term. The liquidity position has also remained strong with Rs. 281.7 crore of free cash and cash equivalents as on December 31, 2021. Further, DPIL's growth prospects remain healthy supported by the Indian Government's focus towards indigenisation in the defence sector amid the Make in India thrust. The ratings, however, continue to be constrained by the company's working capital-intensive nature of operations (NWC/OI of 77% in FY2021) due to high inventory holding and a long receivable cycle. More than 70% of the sales are concentrated towards the last quarter of the fiscal, adding to the elevated working capital indicators as on year ending dates. Milestonebased billing along with extensive trials and testing for technically critical products before the final acceptance also results in elongated receivables. The inventory levels remained high at 224 days as on March 31, 2021 and are expected to remain elevated in the near term due to high stocking of electronic components, given the supply side constraints and logistics issues. The ratings are also constrained by the company's moderate scale of operations despite an improvement in revenues in FY2021 and 9M FY2022. ICRA expects the company to report a healthy revenue growth in the range of 25-28% in FY2022 and 16-18% in FY2023, backed by a healthy order book. Nonetheless, the smooth execution of the orders in hand without any delays will be a key monitorable. The ratings also factor in the nature of projects executed by the company, which generally have a long gestation cycle of investments for the design and development of products. Further, there is a relatively high likelihood of projects being deferred due to procedural delays (leading to revenue deferment), as inherent in the defence industry. The Stable outlook reflects ICRA's opinion that DPIL will continue to benefit from its established relationship with key clientele with repeat orders, a healthy order book and a strong liquidity position.