IdeaForge Technology Ltd – IPO Note – Equity Research Desk

Company Overview:

IdeaForge Technology Limited (“IdeaForge”) was incorporated on February 8, 2007. IdeaForge is the pioneer and the pre-eminent market leader in the Indian unmanned aircraft systems (“UAS”) market, with a market share of approximately 50% in Fiscal 2022. They had the largest operational deployment of indigenous UAVs across India, with an IdeaForge manufactured drone taking off every 5 minutes on average for surveillance and mapping as of Fiscal 2023. The company ranked 7th globally in the dual-use category (civil and defence) drone manufacturers as of December 2022. They have a broad range of products with feature-based differentiation such as weight class (approximately 2-7 kg), endurance class (25-120 minutes flying time), take-off altitude range (up to 6,000 meters), communication range (approximately 2-15 km), payload types, etc.

Objects of the Offer:

• Repayment/prepayment of certain indebtedness availed by the Company.
• To fund working capital requirements of the Company.
• Investment in product development.
• Achieve the benefits of listing the Equity Shares on the Stock Exchanges.

Investment Rationale:

• Strong Position: IdeaForge is the pioneer and the pre-eminent market leader in the Indian UAS (Unmanned Aerial System) market. Their promoters built their 1st quadrotor drone in 2004. They started their operations in 2007 and with a first-mover advantage, they are among the 1st few companies in India to enter the UAV (Unmanned Aerial Vehicles) market and the 1st organisation to indigenously develop and manufacture VTOL (Vertical Take-off and Landing) UAVs in India in 2009. They are also the 1st company to participate in the demonstration of 5G enabled UAVs at Indian Mobile Congress in 2018. As of May 31, 2023, IdeaForge has served approximately 265 customers. Their customers include Indian defence customers and civil customers comprising certain of the central armed police forces, state police departments, disaster management forces, forest departments, private contractors in connection with smart cities, Pioneer Foundation Engineers Pvt Ltd, and C.E. Info Systems Ltd.

• Manufacturing Prowess: IdeaForge is a vertically integrated company equipped with in-house product development centre, which allows them to design, develop, engineer, and manufacture their UAVs. The company undertakes their manufacturing operations at their manufacturing facility, situated in Navi Mumbai, Maharashtra which has an area of approximately 21,000 sq. ft., and is equipped with advanced equipment, modern technology and automation systems to manufacture a wide range of products. The product wise installed capacity per day as on FY23 for Quadcopter UAV stands at 5 units, Switch UAV at 4 units, Payload UAV at 15 units, Battery at 20 units and Communication box at 15 units.

• Financial Track Record: The company’s revenue from operations grew at a massive CAGR of 137% between FY20-23 from Rs.14 crs in FY20 to Rs.186 crs in FY23. The Gross margin has improved from 53% in FY20 to 68% in FY23. The EBITDA of the company has turned positive to Rs.47 crs in FY23 from being negative in FY21 at -Rs.11 crs. The order book of the company as on FY23 stands at Rs.192 crs which is nearly 1.03 times of FY23 revenue. In that, Defence segment (Government) covers up the 96% of the total orderbook and the rest is covered by Civil segment.

Key Risks:

• Working Capital Risk – The company has a significant gap in working capital. Hence, if the company is unable to raise additional capital in the future, it would adversely impact the business of the company.

• Raw Material Risk – The company is highly dependent on global vendors for the supply of components and raw materials. Hence, if any difficulties arise in the import of raw materials, it would lead to delays in manufacturing and the subsequent processes.

Outlook:

The IPO is a mix of offer for sale (OFS) and Fresh issue with OFS being 58% of the overall issue size. The adjusted EPS (including the fresh issue) is at Rs.10.5 for FY22 and Rs.7.67 for FY23. According to RHP, there are no listed companies which is exclusively into manufacturing of drones. So, peers are mostly into electronic manufacturing products who serves to defence sector namely MTAR Technologies, Data Patterns, Astra Microwave, etc. At the higher price band, the listing market cap will be around ~Rs.2800 crs and the company is demanding a P/E multiple of 78x based on the last two years weighted average EPS and 88x based on FY23 EPS. When most of its peers are trading high between 50-80x P/E, IdeaForge being a full-fledged drone manufacturer may justify the high P/E. Based on the above views, we provide a ‘Subscribe’ rating for this IPO.

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