150% YTD Gain: Choice Broking Sees Over 35% Upside On This Multibagger Defence Stock: Here’s Why

Apollo Micro Systems (AMS) is a small-cap company that operates in the defense and aerospace domains. Given the fact that the stock has gone up by around 150% YTD, it is one of the multibagger stocks that Dalal Street has recently produced. Still, Choice Broking believes that this defence stock, which has an outperform rating, has a good deal of upside. Apollo Micro Systems shares are presently trading at about Rs 76 a share, and an eventual rally to Rs 103 per share could result in a 36% potential upside, per a recent Choice Broking research.

Commenting on the valuation of Apollo Micro Systems, the equity research analysts of Choice Broking said "Given the Government of India's push for the "Make in India" initiative, supported by various policy implementations, we believe the defense sector, particularly the defense electronics sector, will witness a high-growth cycle over the next 5-6 years. In missile technology, India has very low dependency on foreign parts; hence, we expect companies like AMS to benefit from the Gol's local manufacturing initiatives.

AMS, which largely provides EDD services in the areas of weapons and EW, is poised to grow at a healthy rate in the coming years. We initiate coverage on AMS driven by 1) its participation in most of the indigenous weapon programs, 2) commencement of production of these programs following successful trials, 3) capacity expansion to meet the rising demand from defense, 4) shift in the business model from a solution provider to a development level solution provider, and 5) execution of various ToT agreements from DRDO. We expect AMS's Revenue/EBIDTA/PAT to grow at a CAGR of 38%/41%/68% over FY23-26. We assign a multiple of 35x on FY26E EPS, considering the high-growth phase, and arrive at the TP of Re. 103 with an OUTPERFORM rating."

Commenting on its dedicated product portfolio, the brokerage said "AMS has participated in 55-60 programs, catering to Missiles, Naval Torpedoes and Underwater Mines. With strong order execution visibility and capacity expansion, management expects to increase revenue to grow by 35-40% over FY24-25.

The company's product portfolio serves the Line Replaceable Units (LRUs) of defense systems in the fields of Missiles, Torpedoes, Submarines, Bombs, Artillery Systems, ATGMs, and Radar. Some of the programs include AGNI, PINAKA, AKASH-NG, VLSRSAM, VARUNASTRA, TAL, NIRBHAY, ATAGS, MIGM, and more. AMS has actively participated in most of the Indigenous missile programs. One such program is MIGM (Underwater Mine), which is an import-banned product, and the Ministry of Defense's requirement must be fulfilled through local vendors. AMS is involved in all indigenous programs and is the sole supplier in more than 60-70% of the programs."

Stating Apollo Micro Systems's plans to grow the size of its business, Choice Broking said, "The company is looking to increase its facility size from the current 55,000 square feet to 3.3 lakh square feet over the next 12 months, with a capex of Rs. 150 crore. This investment will be allocated to machinery and testing equipment.

The management intends to fund this capex with a 70:30 ratio of debt to equity. Unit-2, spanning 50,000 square feet, is set to be commissioned by December-January. Unit-3, which spans 240,000 square feet, will be commissioned in H1FY25. The management anticipates that 3-4 programs, for which they have received product development approval, will undergo trials in the upcoming season, with the torpedo program having AMS supplying the seeker and accounting for roughly 50% of the total content value."

Commenting on the growth strategy of Apollo Micro Systems (AMS), the equity research analysts of the broking company said in a note that "AMS is now operating as a solution provider and collaborates with Tier 1 players, DRDO, and other DPSUs from the development stage. Currently, the company is investing in its R&D for system-level development and intends to move into platform-level R&D. Management also has a positive outlook on the defense opportunity as the program upgrade cycle is getting shorter, reducing from 10 years to 3-4 years."