Fundamental Analysis of Apollo Micro Systems: India recently made global headlines with the Chandrayaan-3 mission, which had the Vikram Lander enter the moon’s orbit & land on its south pole. It showcased India’s capabilities to be an innovative power amongst other nations. Alongside the space industry, India is also making a big name for itself elsewhere.
India is becoming a major exporter of defense products, shipping to over 80 countries & generating a revenue of over Rs. 16,000 Cr. At the same time, the country also produced defense systems worth an aggregate of Rs. 1,06,800 Cr, growing by 12% from FY22.
Both sectors make us Indians very proud & what’s even better is that these segments are poised for immense growth, fueled by huge government spending. This leads us to look at a small-cap designer & manufacturer of equipment that aides big machinery in space & defense.
In this Fundamental Analysis of Apollo Micro Systems, we look at the company, its clients, industry, financials, future plans & more..
Fundamental Analysis of Apollo Micro Systems
Today, we will learn about when the Company was founded & what exactly does it do. We will learn who are its biggest clients and move on to fundamentally analyzing the Company and finally reaching a conclusion.
Company Overview
Apollo Microsystems (AMS) was founded by Mr. B. Karunakar Reddy in 1985, as a proprietary Company offering Electronic CAD design services. The Company was first involved with the Defense Ministry in 1990 by manufacturing indigenous processor boards for defense applications.
AMS is headquartered in Hyderabad, Telangana. The Company is headed by the founder who still serves the Company as its Managing Director. It exclusively designs and manufactures Turn-key projects for DRDO & ISRO. It has a vast defense-based portfolio of Avionics, Aerospace, Naval, Satellite space, and homeland security systems.
Apart from DRDO & ISRO, the Company also calls multiple public sector undertakings such as ONGC, HAL, NMDC, and NTPC among others. They also cater to private entities such as Tata Steel and General Electric.
During FY23, AMS completed the commercialization of its unit at Adibatla, Hyderabad, the construction of which commenced in FY22. During the year, the Company was in discussions with multiple innovative start-up companies, in the defense and space research domain. AMS is in the deal finalization stage with several such companies.
Industry Overview
Based on industry reports, the global defense markets compounded steadily at a 4% CAGR from 2016 to 2021, reaching $474.69 billion in 2021. The market is expected to continue its upward trajectory, anticipated to surge to $687.84 billion by 2026, compounding at 7.7% CAGR.
Indian defense sector was allocated Rs. 5.94 Lakh Cr in Budget 2023-24, a 13% jump over the previous year. The budget would focus on the modernization of armed forces, production & maintenance of facilities, and more focus on Research and development.
India’s proactive approach to foreign trade and its increasing joint agreements with countries like UAE, Kazakhstan, and the US for defense manufacturing and strengthening defense ties present significant opportunities for growth in the defense manufacturing sector in India.
Indian space startups have received a total funding of over $200 million since 2021 and with ISRO’s plan to set up its own space station by 2030, there is potential for further investments. From a single start-up in 2012, India now has 196 start-ups in the space sector registered with the Department for Promotion of Industry and Internal Trade (DPIIT).
The government allocates around US$2 billion to support space-related projects, and since 1999, India has successfully launched 381 foreign satellites for 34 countries, generating revenues of US$279 million.
The government aims to make India’s space sector account for 9% of the global industry by 2030 and has implemented various reforms and policies to achieve this goal. One such key policy, the Indian Space Policy 2023, aims to enhance India’s space capabilities and provide regulatory certainty.
Apollo Micro Systems – Financials
Revenue & Net Profit
Apollo Micro Systems reported a revenue of Rs. 298 Cr in FY23, growing by 22% from Rs. 243 Cr in FY22. 90% of its revenue comes from the sale of products, while the remaining 10% comes from the sale of its services. Revenue growth fell into negative territory in FY20 & FY21, leading to a very slow 5-year CAGR growth of 2.82%.
Net Profits grew by 30%, from Rs. 15 Cr in FY22 to Rs. 19 Cr in FY23. The growth in Net Profits was a result of more inventories being produced in a year, than what was sold (Unsold Inventory), which led to a decrease in Expenses, leading to inflated profits. Long Term Profits of the firm fell by 10.05% CAGR in the past 5 years.
| Fiscal Year | Net Sales | Net Profit |
|---|---|---|
| 2023 | ₹297.52 | ₹19.06 |
| 2022 | ₹243.19 | ₹14.61 |
| 2021 | ₹203.07 | ₹10.25 |
| 2020 | ₹247.39 | ₹14.01 |
| 2019 | ₹266.20 | ₹29.11 |
| 5-Year CAGR | 2.82% | -10.05% |
Profit Margins
Operating Profit Margins of the Company stood at 16.98% in FY23, increasing by 145 Bps from 15.53% in FY22. They remained at a 5-year high of 13.66%.
Net Profit Margins of the Company came around 6.41% in FY23, 40 Bps higher than the previous year. The Company’s Net profit margins have been trailing mostly in the single-digit region, just slightly higher than 5%. However, in FY19 margins touched a double-digit high of 11.07%.
| Fiscal Year | Operating Profit Margin (%) | Net Profit Margin (%) |
|---|---|---|
| 2023 | 16.98% | 6.41% |
| 2022 | 15.53% | 6.01% |
| 2021 | 7.12% | 5.05% |
| 2020 | 10.27% | 5.70% |
| 2019 | 18.42% | 11.07% |
| 5 Year Average | 13.66% | 6.85% |
Return Ratios
AMS reported its RoCE at 13.32% in FY23, which was 237 Bps higher than 10.95% in FY22. The reason for the increase in RoCe is due to an increase in earnings coupled with slower growth in equity.
Return on Equity was in the single-digit territory of just 5.32%, up by 65 bps from FY22. RoE of FY23 was lesser than its 5-year average of 5.84%. These RoE margins need to be worked upon, as the business in its current state is not too lucrative to any equity holder.
| Fiscal Year | RoCE | RoE |
|---|---|---|
| 2023 | 13.32% | 5.32% |
| 2022 | 10.95% | 4.67% |
| 2021 | 9.45% | 3.67% |
| 2020 | 13.30% | 5.22% |
| 2019 | 15.50% | 10.32% |
| 5 Year Average | 12.50% | 5.84% |
Debt Analysis
The Debt to equity of the Company is at 0.8x as of FY23. It had been on an increasing trend until FY22 (excluding FY19). The Company should work on either increasing its earnings to maintain such high debt or must work on reducing this leverage.
The reason for such a high level of debt is exactly unknown, but it’s due to severely high exposure to Borrowings as well as Trade Payables.
Interest Coverage Ratio (ICR) was reported at 2.32x as of FY223. It had fallen to its lowest point of 1.9x in FY21, which has only been increasing since then. ICR Above 1.5x is an acceptable figure.
| Fiscal Year | Debt / Equity | Interest Coverage |
|---|---|---|
| 2023 | 0.80 | 2.32 |
| 2022 | 0.87 | 2.19 |
| 2021 | 0.74 | 1.90 |
| 2020 | 0.57 | 3.33 |
| 2019 | 8.13 | 3.90 |
| 5 Year Average | 2.22 | 2.73 |
Fundamental Analysis of Apollo Micro Systems – Key Metrics
The Key Metrics of Apollo Micro Systems (AMS) are given below.
| Particulars | Amount | Particulars | Amount |
|---|---|---|---|
| CMP | ₹71 | Market Cap (Cr.) | ₹2,147 |
| EPS | ₹9.18 | Stock P/E (TTM) | 101.38 |
| RoCE | 13.32% | RoE | 5.32% |
| Promoter Holding | 59.10% | FII Holding | 0% |
| Debt to Equity | 0.8 | Price to Book Value | 2 |
| Operating Profit Margin (%) | 16.98% | Net Profit Margin | 6.41% |
Future Plans
- AMS plans to invest nearly 7% to 8% of revenues in R&D every year, to enhance operational efficiency and to introduce pioneering products & services.
- The board has set aside a CAPEX of Rs. 150 Cr for setting up of two additional facilities, that will scale its capacity to 3,00,000 SqFt.
- In the coming years, the Company intends to focus on building strengths in key projects such as a Homing System for Light & Heavy Weight Torpedoes, Landing Gear Actuators for Avionic Platforms, a Digital RF Seeker Signal Processor, Integrated Guidance Kit for Various Platforms, and Under Water Mines, among others.
Conclusion
We are finally reaching the end of our Fundamental Analysis of Apollo Micro Systems; we see that it’s a decently performing small cap in terms of revenue. It can go on to achieve much higher growth in the coming years, however, there are a few concerns.
Operating Cash Flows have fallen into the negative category due to a rise in Trade Receivables, and a decrease in Trade Payables has led to cash depletion in the Company. Nearly 70% of the total assets of the Company are held up collectively as Trade Receivables and inventories.
These above metrics mixed with low return on equity & capital Employed raise some concerns about the Company’s ability to generate returns to shareholders. The Company also trades at a PE ratio of 101x.
So, do you think that it is justified for Apollo Micro System to trade at such a high Price? Do let us know in the comments below.
Written By Nasir Hussain
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