Potential Multibagger: After a 49% decline from listing price, AMSEC sees over 119% upside in Ideaforge in 2 years

One of the most successful listings of 2023, Ideaforge Technology is now trading at ₹732, just 9 percent higher from its IPO price of ₹672. The stock doubled versus its IPO price while debuting in July 2023 and hit a record high of ₹1,344 (100% premium to IPO price) on its listing day but has seen a downward trend since then.

Last week (February 14), the stock hit its record low of ₹689, down 49 percent from its listing price (record high) and up just 2.5 percent from its IPO price.

The stock has gained over 4 percent in February so far after an over 14 percent decline in January this year. Meanwhile, post its listing in July 2023, the stock crashed over 13 percent in August 2023, 9 percent in September, 11 percent in October and 2 percent in November. However, it rose 6 percent in December, the only month in 2023 where the stock was positive post-listing.

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Despite such a dismal performance, brokerage house Asian Market Securities (AMSEC) sees the stock delivering multi-bagger returns by December 2026.

It has initiated coverage on the defense stock with a buy call and a target price of ₹1,607, indicating an upside potential of 119.5 percent from its CMP.

"We expect ideaForge to see robust 30 percent/60 percent revenue/ PAT CAGR during FY23-26E, driven by its outstanding order book, and a substantial pipeline of potential awards. We are initiating coverage with a 'BUY' rating, considering the medium-term perspective. With a significant addressable market, we assign a target price of ₹1,607 per share, valuing the company at 50x FY26E," the brokerage said.

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Earnings

ideaForge reported a net profit of ₹14.8 crore during the December quarter surging sharp 1,562 percent compared to ₹0.89 crore in the previous quarter. It had reported a net loss of ₹7.8 crore in the year-ago quarter. The same was helped by strong improvement in the operating performance. ideaForge earnings before interest tax depreciation and amortization (EBITDA) at ₹26.19 crore during the quarter also grew 272 percent sequentially. ideaForge had reported an EBITDA loss of ₹13.87 crore in the year-ago quarter. ideaForge revenues during the December quarter at ₹90.9 Crore grew more than 11 folds from ₹7.8 Crore in the same period last year. On a sequential basis, they were up 283 percent.

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Investment Rationale

A pioneer in drone manufacturing, with a robust technology stack: Since its inception in 2007, ideaForge prioritized building a resilient technological infrastructure. It now offers a full range of in-house design-to-delivery capabilities in hardware and software, which have helped the company launch new drone variants, noted the brokerage.

Long-standing relationship with customers: ideaForge in the initial years, used the facilities of the Indian Army for testing their drones. This helped the company understand the Indian army's requirements better and offer solutions accordingly. Over the years, the company has built a strong relationship with the Indian Army and is expected to reap the benefits of this in the near-to-medium term, it further highlighted.

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Soaring to new heights- One of the largest drone companies in India: ideaForge has benefitted from faster growth in Defence & Homeland Security to establish itself as the leading player in the drone industry. On the other hand, the commercial sector has enjoyed the advantages of scale of operations, stated AMSEC. It also pointed out that the need for increased surveillance is evident due to India's extensive boundaries with hostile neighbours. ideaForge's early-mover advantage, close relationship with its end user proved beneficial when it was granted the power to procure drones in large quantities under the Emergency Procurement (EP) route, added the brokerage.

A leader in ISR drones: As per AMSEC's estimate, the total addressable market from the IA side for ideaForge during FY21-23 was 1,000-1,200 drones. As per the order inflows of the company, it projects that ideaForge has secured 50-60 percent of last-mile ISR (Intelligence, Surveillance, and Reconnaissance) drones awarded between FY21 and 23.

Well-positioned to bag deals over the next few years: Based on the open tenders of the Indian Army, it is expected that 2,700 drones will be awarded in the last mile ISR category, believes AMSEC. This offers more than 4x visibility of orders won by ideaForge from the Indian armed forces during FY21-23. Additionally, a new round of tenders will be floated in Sept/Oct 2023 under the EP route, boosting visibility on the deal pipeline for the next 2-3 years, it said.

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Spreading wings to propel growth: Capitalizing on the demand from the Indian Armed Forces, ideaForge is expanding its horizons beyond the domestic drone market. With a focus on one of the largest public safety markets ($330-440mn of yearly opportunity), ideaForge established a subsidiary in the US. The company has already made its presence felt in Oman and is considering entry into other Asian markets such as Bangladesh, Vietnam, and Nepal. It is also venturing into inspection and delivery applications, catering to asset inspection missions like telecom towers and Oil & Gas assets, stated the brokerage. Over the next 2-3 years, ideaForge aims to expand into tactical UAVs and middle-mile logistic drones with vertical take-off and landing capabilities, it added.

Outlook & Valuation

Based on the strong order book of ₹190 crore at the end of FY23, expected execution over the next 12+ months, a robust ordering funnel, and ideaForge's strong leadership position in the domestic ISR market, the brokerage maintains an optimistic outlook. 

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It anticipates a revenue CAGR of 35 percent and a PAT CAGR of 60 percent during FY23-26E.

"While many drone companies globally have gone public, several have failed to meet investor expectations in the long run, failing to live up to the initial hype. The presence of diversified defense companies with drones as part of their product portfolio has also garnered investor attention. ideaForge holds the distinction of being the first standalone drone company to be listed in the Indian markets, making direct comparisons with other drone companies difficult," it said.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decision.