Not many companies can boast of Defence Research Development Organisation (DRDO), Indian Space Research Organisation (ISRO), Hindustan Aeronautics Limited (HAL) and Vikram Sarabhai Space Centre as their clients. Astra Microwave Products Limited (AMPL) can. Not many can boast of earning 65% of their revenue from exports. This company can. And not many saw their topline more than double last year. It did. What is it that makes this defence technology provider so special?

Shakti Shankar Patra | @TheDollarBiz

When the Indian army recently conducted a ‘low altitude near boundary trial’ of Akash, the Defence Research and Development Organisation (DRDO), Ordnance Factories Board (OFB) and Bharat Electronics Ltd. (BEL) developed surface-to-air missile (SAM) – the successful test being the last among validation trials – 67-year-old B. Malla Reddy, CEO & MD, Astra Microwave Products Ltd. (AMPL), was a satisfied man. For, although small, AMPL does play a part in the production of the indigenously developed SAMs. Born just a couple of weeks before India’s independence, the former Defence Research Development Laboratory scientist is the heart and soul of AMPL, which designs and manufactures high value-added radio frequency and microwave super components and sub-systems for the defence, space and civil communication industry. Founded in 1991, the company’s products include sub-systems for radars, command guidance units and radio proximity fuse for missiles and other counter measure warfare products. Although most of AMPL’s revenue comes from the defence segment, its products are also used in microwave & ground based systems for satellites and automatic rain gauge & weather systems.

 Firing away 

AMPL earns most of its revenue from two sources. Firstly, when DRDO starts designing a defence equipment that would be beneficial to the armed forces, it outsources the development of various components of the equipment to firms like AMPL. Once AMPL gets such a R&D order, it develops the component in its laboratories and then hands it over to DRDO. Once DRDO receives all the necessary components, it integrates them and lets the armed forces take a final call on its efficacy. And once the armed forces give a thumbs up to the equipment, DRDO transfers the technology to defence PSUs and AMPL automatically gets an order to manufacture the component that it had developed. Here, AMPL earns its revenue from DRDO by (a) developing the product, and from defence PSUs by (b) manufacturing the component. The other, relatively new but large, source of revenue for AMPL is exports. Thanks to the defence offset policy of the government, which mandates a foreign vendor to source at least 30% of the value of an order (when the order is worth Rs.300 crore or more) from Indian manufacturers, almost every time India places a large defence order abroad, AMPL ends up receiving orders to supply components to foreign manufacturers. For instance, if India decides to buy $1 billion worth of fighter jets from Lockheed Martin (say), the company has to procure $300 million worth of components from Indian manufacturers like AMPL. Other than this, AMPL also earns a bit of its revenue from supplying components to agencies like Indian Space Research Organisation (ISRO).

Although several other companies also help DRDO design defence equipment for the armed forces, AMPLs contribution is remarkable. In a note published by DRDO last year, the agency notes that “AMPL has a long association with Defence in design, development and manufacturing of RF and microwave systems for radar, telemetry, surveillance and Radio Proximity Systems (RPS).” The note also adds that “AMPL has developed Radio Proximity Fuse System for the production of Akash, Advance Air Defence, PDV and Astra missiles.” Roger that 

Being the only listed company of its kind, AMPL is very highly regarded by a certain section of Dalal Street. Brokerage house ICICI Direct feels AMPL is uniquely placed to “benefit from India’s missile programme.” In a recently released report, the brokerage claims that each Akash missile – 5,000 of which are to be produced over the next few years – will give AMPL about Rs.15 lakh of business. Analysts also feel that even if a small portion of AMPL’s R&D initiatives end up in the production stage, its revenue and profit will go through the roof. Speaking at the AGM in July, AMPL’s Chairman, Shiban Koul shared similar sentiments. He said, “The existing R&D center is working on bringing out new products to broad base the product offerings for the domestic market. It is undertaking development work on products like Seekers, Advance Radar Warning Receivers and Wind Profile Radar, which has the potential to deliver volume business down the line.” The focus of the Modi government to reduce defence imports, which was validated by its decision to allow 49% FDI in the defence industry, can also be a game changer for AMPL. But the real reason why AMPL has been in focus in recent months and for its shares to have quadrupled in the last 12 months is, without doubt, exports. Thanks to the government’s defence offset policy, AMPL had got a massive order from Israel-based ELTA systems, the execution of which saw exports rise six-fold and revenue more than double in FY2014.  

Friendly territory

Any company that is in the defence sector is bound to see a lumpy order flow. And AMPL is no different. This is probably one reason why not everyone in Dalal Street is comfortable with AMPL, particularly since there is no other listed peer to compare it with. Similarly, the Promoter Group holding less than 20% equity in the company and “the management being full of scientists and not businessmen” are other minor concerns regarding the company. Notwithstanding, there is no doubt that AMPL is doing a wonderful job, providing indigenous technology to India’s defence forces. And if you believe the secular rise in defence spending is here to stay, there’s no way you can take your eyes off AMPL.  

Interview with B. Malla Reddy, MD & CEO, Astra Microwave Private Ltd. (AMPL) next page...

“When India places a large defence order, we end up getting export orders” - B. Malla Reddy, MD & CEO, Astra Microwave Private Ltd. (AMPL)

An automation engineer from the Indian Institute of Science, B. Malla Reddy, MD & CEO, Astra Microwave Private Ltd. (AMPL), is a veteran of the defence industry. In a freewheeling interaction with The Dollar Business at AMPL’s Head Office in Hyderabad, Reddy talks about India’s defence sector and how the defence offset policy has opened up great opportunities for his company

B. Malla Reddy, MD & CEO, Astra Microwave Private Ltd. (AMPL)

TDB: Why is the visibility of a Rs.1,000 crore market-cap company like that of yours so low, particularly since you are in the high-profile defence sector?

B. Malla Reddy (BMR): Being in a strategic industry like defence, we have deliberately kept a low profile. I, personally, have been avoiding speaking to the media as much as possible.

TDB: In that case, can you please explain Astra Microwave Private Limited’s (AMPL) various business segments and also give a brief overview of your business model?

BMR: We don’t supply any end product that goes to the direct user. We are a back-end to systems integrators and systems manufacturers. Typically, at the time of a new product development, we get associated with DRDO laboratories, who provide us with specifications of required sub-systems. We interact with them, develop sub-systems, go through iterations and finally, deliver the product. It’s they who integrate the entire system. Thereafter after testing, they give it to the Defence Services for evaluation. Once the Services approve, the technology is transferred to a defence PSU, where it goes for production. At that time, we become an approved vendor and automatically get orders. The whole process takes a lot of time. In fact, for some of our products, this process has taken more than 15 years! T

DB: Would it be fair to say that you develop products keeping in mind the requirement of the defence forces and then wait for their approval?

BMR: No, we don’t develop anything of our own accord. The requirement comes from DRDO laboratories. Then we develop it. Any system that they might think would be useful to our defence forces, should also be acceptable to the latter. In fact, this is why the success rate of the products that we develop comes down drastically.

TDB: So, is DRDO is your main client?

BMR: DRDO laboratories are our main clients at the time of R&D. Afterwards, Bharat Electronics Ltd. (BEL), Bharat Dynamics Ltd. (BDL) and all defence PSUs are our clients.

TDB: In that case, how is it that you export so much?

BMR: Our exports started only 5-6 years back because of the government’s defence offset policy. Although the policy was introduced in 2005, orders started flowing in only after 2007. As per the policy, whenever our government places a defence order of Rs.300 crore or more with an overseas vendor, the vendor is obligated to source at least 30% of the order value from India. It’s because of this the export orders have started flowing in.

TDB: Who are your main overseas clients? Can you name the biggest client?

BMR: As of now, we have only one major international client – ELTA Systems Ltd., a 100% subsidiary of Israeli Aerospace Industries. ELTA Systems accounted for more than 95% of our exports last year.

TDB: Do you think the fact that your client base is very concentrated might be a turn-off for investors?

BMR: In the defence sector, there are only three end clients – the Air Force, the Navy and the Army. Even when it comes to manufacturing, India has only two defence PSUs in our line of production. Similarly, DRDO has 4-5 laboratories, from whom we get our business. One has to understand that we are in the defence segment and not in consumer market.

TDB: In the last 10 years, your revenue has grown from Rs.65.23 crore to Rs.531.16 crore, but profit margin has fallen from over 26% to about 10%. Is it something inherent to the business you are in or is it something specific to Astra Microwave?

BMR: In 2005, we were a small company and our expenses were very low. With time, expenses have grown. The business mix has also changed. Earlier, it used to be 100% indigenous business. Today, exports account for over 50% of our revenue. When it comes to exports, we just manufacture and don’t develop products. Since the value addition in exports is very low, margins are also lower.

TDB: Where do you think margins will settle going forward?

BMR: Margins will depend on the business mix. If indigenous business is more, our profit margins will rise to about 13-14%. But if exports dominate, we might go down to 10%.

TDB: Last year, your exports surged six-fold to Rs.341.85 crore. Do you think this trend will continue?

BMR: This year, we will do about Rs.400 crore of exports. But in FY2016, exports are likely to fall. We get export orders only when our country places a large defence order. So, the ride is bound to be bumpy. It’s just the nature of the business, something we can’t control.  

TDB: What are some of the big opportunities for your company?

BMR: We should get large orders if and when India’s multi-billion dollar deal to buy 126 Rafale combat aircraft is closed. A good aspect of the deal is that they have accepted a 50% offset obligation.

TDB: When a big order comes, is funding an issue?

BMR: No, funding is not an issue at all, although it might become an issue if many large opportunities come together. At the same time, the new government is seriously looking at indigenous equipment. So, I expect more indigenous opportunities to open up for us. 

TDB: How does the recent decision to hike foreign direct investment (FDI) in defence to 49% affect you?

BMR: More FDI in the sector will see more system manufacturers setting up shop in India. This will give us a larger customer base. The Tatas, Mahindras and L&Ts are all aspiring to enter the defence sector and will, most likely, create more clients for us.

TDB: Lastly, how has been the journey so far. Are you content with what you have achieved since Astra Microwave came into being in 1991?

BMR: I joined DRDO in 1974 and continued for 10 years. Thereafter, I moved to the private sector. In the early 1990s, I realised there was a lot of demand for microwave sub-systems and components since the communication sector was taking off. So, I, along with 4-5 of my ex-colleagues, started the company. Till 1998 we survived in the telecom industry, but later shifted focus to DRDO. Even in the defence sector, we survived only on R&D orders from DRDO till about 2006. Only since 2007, have we started seeing production orders.