Stocks in the industry, whereby the government is a major buyer, are now fetching exorbitant prices. And if there is a component of today’s technology involved, advancement is likely to be rapid.

Drone maker ideaForge Technology is now the IPO market’s favourite. The offering ended at the end of June 2023, and the shares are likely to be listed soon.

Will ideaForge receive the high-end IPO listing it deserves?

Yes, most likely. The stock market recovered from its lows, and ideaForge is launching an IPO with a scarcity premium in the amount of INR 567 crore at the higher price band. The goal is to pay off debt while still managing working capital requirements. Both are advantageous to the firm. The issue, which has been subscribed 106 times, is well-valued and might see a substantial listing gain.

This one appears to be obvious for growth investors searching for a stock with some earnings to brag about.

While drones are becoming increasingly popular, ideaForge is a well-known brand. Remember the film Three Idiots? The tale centred around 3 engineering college pupils who resonated with the public and was released in 2009, becoming one of the year’s highest-earning pictures. Those who saw the film will recall the moment in which main actor Aamir Khan flies a drone built by another student.

The identical drone was an early prototype of ideaForge Technology’s vertical take-off and landing unmanned aerial vehicles, or VTOL UAV, which was developed in 2007 by IIT Bombay graduates and first-generation entrepreneurs Ankit Mehta, Rahul Singh, and Ashish Bhat.

ideaForge, which has received funding from Infosys and Qualcomm, is going public. The initial public offering (IPO) was completely subscribed within hours of its launch in June. The offer comprises a fresh issuance of INR 240 crore in shares and an offer for sale of up to 4.87 mn shares at a price band of INR 638 to INR 672 per share.

The amount set aside for eligible institutional purchasers received the most subscriptions, at 125.81x, followed by workers and retail investors, who purchased 96.65x and 85.20x, respectively. The issue was subscribed to 106.06x times in total.

IdeaForge’s shares are selling at a premium of more than 80% over the top end of the price range on the grey market, an unauthorised forum for trading unlisted shares.

In order to encourage the domestic drone sector, the government has taken many initiatives over the years, including a prohibition on imports, production-linked incentives, and policy formulation. ideaForge has benefited significantly.

In an industry with strong entry barriers, the business enjoys a first mover advantage. Its track record of execution, along with an in-house product development centre, indigenous design, technological skills, and a diverse range of products created for numerous use cases, puts it in a prime position to capitalise on growth prospects.

Motilal Oswal Financial Services anticipates listing profits as a result of the present bullish market and increased demand in military stocks.

The brokerage likes ideaForge because of its sophisticated or broad product range, presence in specialist markets, strong client relationships, and high entry hurdles. On a post-issue basis, the issue is appropriately priced at 5x P/BV peers avg: 8x. It is expected that ideaForge would profit from government initiatives in the defence sector as well as increased corporate demand.

According to SBICAP Securities, the firm is anticipated to garner the scarcity premium and will continue to trade at high valuations due to its unique development narrative in the drone market. The brokerage also anticipates listing advantages as a result of the decreased issue size.

Since its appearance in 3 Idiots, the business has gone on to establish itself as the most rapidly expanding in the unmanned aerial vehicles industry, with a market share of over 50% in FY22. It dominates the operational deployment of unmanned aerial vehicles (UAVs) in India. According to their false herring prospectus, which cited a drone industry analysis issued by 1Lattice, formerly PGA Labs, a market research organisation, ideaForge built drones taking off every five minutes on average for observation and mapping as of March 2023 end.

According to the RHP, the firm hired and paid for the research only in conjunction with the IPO.

It has received many contracts for military and domestic applications, including a USD 20 mn agreement with the Indian Army for its SWITCH 1.0 unmanned aerial vehicles, which were delivered on schedule in November 2021.

IdeaForge’s net profit declined 27% year on year to almost INR 32 crore in FY23, while revenue increased 17% to INR 186 crore.

According to the 1Lattice study, the company’s revenue from operations increased at a CAGR of 137% between FY20 and FY23, above the 8%-43% stated by its rivals, which include Hindustan Aeronautics Limited, Bharat Electronics Limited, MTAR Technologies Limited, Astra Microwave Products, and Data Patterns.

Because there are no listed firms that solely manufacture drones, the companies mentioned above serve as a proxy group of peers.

In FY23, ideaForge’s gross margin declined to roughly 68% from 74% in FY22, but it was still better than its peers. Similarly, the prior fiscal year’s Ebitda margin of 62.3% was better than rivals.

However, it has the lowest return ratios among its rivals. Returns on equity declined to 9.9% in FY23 from 26.9% the previous year, while returns on capital employed were 10.4% lower at 37.6%.

Analysts believe that future revenue is dependent on order book execution. The company’s order book remained at INR 192 crore as of March 31, down from INR 311 crore a year ago.

But here’s the rub. Government organisations account for more than 96% of the current order book. Brokers have identified this as the most significant risk, along with negative cash flows and prolonged working capital cycles.

Analysts believe that such reliance is dangerous since government contracts are susceptible to fiscal limits. Furthermore, revenues are contingent on the corporation winning these bids. Furthermore, delayed processing, as well as delays in payments from government bodies, may have an influence on financials.

If they continue to have long working capital cycles in the future, it might have a negative impact on their financial health, according to Anand Rathi Share & Stock Brokers in an IPO note.

The business intends to use INR 50 crore of the entire net IPO proceeds for debt reduction or prepayment, INR 135 crore for addressing working capital gaps, and INR 40 crore for product development investment.

According to the 1Lattice research, India’s drone business is in its infancy. Thus, the requirements are constantly growing. The Indian drone industry has a potential market size of around USD 2.71 billion by 2022.

Drones now have the capability of carrying anything, including vaccinations and other medical supplies, and equipment for agriculture, energy utilities, construction, and mining, as well as passengers, public safety, and logistics, according to the report.

The sector has been on the radar of business groupings because of its commercial potential. Adani Group is relying on this industry as part of a strategy to extend its defence presence. M&M Group was one of three businesses approved to utilise drones for agricultural research in 2021.

ideaForge’s rivals include Asteria Aerospace Private Limited, DCM Shriram Limited, Adani Defence and Aerospace, as well as multinational businesses like Lockheed Martin Corporation and Autel Robotics Corp. These businesses are either in the same industry or provide comparable items.

IdeaForge is primarily reliant on government-funded initiatives, which creates a substantial risk owing to its reliance on a single funding source. Other big participants, like the Adani Group, have entered the industry through joint ventures with international drone companies, adding to the rivalry. Furthermore, Swastika Investment stated in its IPO letter that IdeaForge’s absence of long-term contracts and dependence on established ties for winning transactions is a possible weakness.

In FY23, sales to government bodies accounted for approximately 70% of the company’s revenue from operations, down from 89% the previous year.

ideaForge intends to launch new UAVs using its in-house tech and design and development expertise in order to acquire a larger wallet share from new and existing customers.

They now cater mostly to surveillance and mapping applications, with plans to extend to inspection and delivery applications in the future.

The business wants to release improved versions of UAVs like NETRA, SWITCH, and Q6 with the goal of enhancing the UAVs’ performance, dependability, and autonomy. The NETRA UAV was used to assist rescuers in search and rescue activities during the Uttarakhand floods in 2021.

Similarly, the firm is experimenting with the DraaS concept, which is a ready-to-fly network of drones that allows consumers to book or request on-demand flights without the inconvenience of owning gear, software, or trained labour. Customers can employ DraaS services on a pay-per-use basis, which can assist in boosting company services and software income.

Ankit Mehta, CEO of ideaForge, stated that while innovation is important, it must be translated into outcomes.

Unfortunately, in the drone industry, money frequently follows outcomes rather than the other way around. However, because of the capital-intensive nature of the firm, it becomes a bit of a chicken and egg situation, he explained.

Investors who supported ideaForge’s IPO are undoubtedly hoping for greater returns.

Conclusion.

ideaForge has recommended using the proceeds of an IPO to pay down debt and manage working capital. Analysts believe that the fulfilment of the order book will determine future revenue. According to them, ideaForge relies largely on government-funded initiatives, posing a substantial risk. Such businesses’ slow processing and payment delays may have an influence on their financials.