The quarter's standout performance was driven by significant order deliveries characteristic of the defence sector's project-based revenue recognition model. However, margin compression emerged as a key concern, with operating margins (excluding other income) declining to 22.27% from 32.30% in the previous quarter, whilst PAT margins contracted to 16.00% from 25.67%—highlighting execution challenges despite robust top-line growth.
The company, which specialises in advanced defence electronics systems including radar, electronic warfare equipment, and communication systems, operates in India's rapidly expanding aerospace and defence sector. With a small-cap classification and promoter holding stable at 42.41%, Data Patterns has emerged as a key beneficiary of India's push towards defence indigenisation under the Atmanirbhar Bharat initiative.
Financial Performance: Lumpy Revenue Recognition Masks Margin Pressure
Data Patterns' Q2 FY26 results showcased the inherent volatility of defence sector revenues, where large order executions create dramatic quarterly swings. Net sales of ₹307.46 crores represented a staggering 209.53% quarter-on-quarter increase from ₹99.33 crores in Q1 FY26, and an even more impressive 237.79% year-on-year surge from ₹91.02 crores in Q2 FY25. This lumpiness is characteristic of the sector, where project completion milestones trigger revenue recognition.
However, the profit trajectory revealed execution challenges. Net profit of ₹49.19 crores, whilst up 92.90% sequentially, grew at just 62.44% year-on-year—significantly lagging the revenue expansion. The divergence between top-line and bottom-line growth stemmed from substantial margin compression across multiple levels. Operating profit (PBDIT excluding other income) reached ₹68.48 crores but delivered a margin of only 22.27%, down sharply from 32.30% in Q1 FY26 and 37.68% in Q2 FY25.
The margin compression warrants deeper scrutiny. Employee costs rose to ₹37.88 crores from ₹36.38 crores sequentially, representing 12.32% of sales versus 36.63% in Q1 FY26—suggesting the revenue surge came from projects with different cost structures. PAT margins contracted to 16.00% from 25.67% in Q1 FY26 and 33.27% in Q2 FY25, indicating either lower-margin project execution or increased operational expenditure.
| Quarter | Net Sales (₹ Cr) | QoQ Growth | Net Profit (₹ Cr) | QoQ Growth | Operating Margin | PAT Margin |
|---|---|---|---|---|---|---|
| Sep'25 | 307.46 | +209.53% | 49.19 | +92.90% | 22.27% | 16.00% |
| Jun'25 | 99.33 | -74.93% | 25.50 | -77.65% | 32.30% | 25.67% |
| Mar'25 | 396.21 | +238.53% | 114.08 | +155.50% | 37.73% | 28.79% |
| Dec'24 | 117.04 | +28.59% | 44.66 | +47.48% | 46.16% | 38.16% |
| Sep'24 | 91.02 | -12.55% | 30.28 | -7.66% | 37.68% | 33.27% |
| Jun'24 | 104.08 | -42.90% | 32.79 | -53.88% | 35.72% | 31.50% |
| Mar'24 | 182.29 | — | 71.10 | — | 51.03% | 39.00% |
On a half-yearly basis (H1 FY26), the company reported combined revenues of ₹406.79 crores and net profit of ₹74.69 crores, translating to an 18.36% PAT margin. This compares favourably to H1 FY25's ₹195.10 crores in revenue and ₹63.07 crores in profit (32.33% PAT margin), indicating strong top-line momentum but concerning margin erosion on a sustained basis.
Capital Efficiency: Strong ROCE Underpins Quality Despite ROE Weakness
Data Patterns demonstrates robust capital efficiency metrics that distinguish it within the defence manufacturing space. The company's latest ROCE (Return on Capital Employed) stands at an impressive 24.60%, reflecting efficient deployment of capital in generating operating profits. The average ROCE over recent periods of 28.56% positions the company well above typical manufacturing benchmarks, indicating superior project selection and execution capabilities. This high ROCE is particularly noteworthy given the capital-intensive nature of defence electronics manufacturing, where significant investments in R&D, testing facilities, and specialised equipment are prerequisites for securing orders.
However, the company's ROE (Return on Equity) of 13.02% average and 14.22% latest presents a contrasting picture. Whilst positive, this metric lags behind defence sector peers like Bharat Electronics (23.15% ROE) and Mazagon Dock (24.55% ROE), suggesting that Data Patterns generates relatively lower returns for shareholders despite efficient capital deployment. The divergence between strong ROCE and moderate ROE stems from the company's minimal leverage—it operates as essentially a net cash company with negative net debt-to-equity of -0.30, meaning cash and liquid investments exceed total debt.
Balance Sheet Strength: Zero-Debt Defence Player
Data Patterns operates with virtually no long-term debt (₹0 crores as of March 2025) and maintains a net cash position, providing significant financial flexibility for organic growth and strategic investments. Current assets of ₹1,451.36 crores comfortably exceed current liabilities of ₹276.72 crores, yielding a healthy current ratio of 5.24x. Shareholder funds have grown consistently to ₹1,508.22 crores in FY25 from ₹574.51 crores in FY22, reflecting strong internal accrual generation and prudent capital allocation.
The company's asset-light operating model is evident in its sales-to-capital-employed ratio of 0.45x, which whilst modest, reflects the defence sector's typical characteristics where order execution cycles are extended and working capital requirements fluctuate with project milestones. Fixed assets stood at ₹217.32 crores as of March 2025, up from ₹122.40 crores a year earlier, indicating ongoing capacity expansion to support future order execution.
The Margin Conundrum: Project Mix or Structural Shift?
The dramatic margin compression in Q2 FY26 emerges as the quarter's most significant concern, raising questions about whether this represents temporary project-specific dynamics or a more structural shift in the company's profitability profile. Operating margins (excluding other income) of 22.27% marked a sharp 1,003 basis points decline from Q1 FY26's 32.30% and a substantial 1,541 basis points drop from Q2 FY25's 37.68%.
Several factors potentially explain this margin pressure. First, the defence sector's project-based revenue model means different contracts carry varying margin profiles depending on complexity, technology content, and competitive dynamics during bidding. The Q2 FY26 revenue surge may have come from execution of lower-margin, higher-volume orders secured in earlier periods. Second, employee costs as a percentage of sales at 12.32% in Q2 FY26, whilst lower than Q1's 36.63%, suggest the company maintained staffing levels in anticipation of future orders, creating fixed cost absorption challenges during lean quarters.
Margin Volatility: A Persistent Challenge
Historical Pattern: Data Patterns has exhibited significant margin volatility across quarters, with operating margins ranging from a low of 22.27% (Sep'25) to a high of 51.03% (Mar'24) over the past seven quarters. This 2,876 basis points range underscores the lumpy nature of defence order execution and the challenge of maintaining consistent profitability.
Annual Trend: On an annual basis, operating margins have declined from 42.6% in FY24 to 38.8% in FY25, suggesting potential structural pressures beyond quarterly volatility. Investors should monitor whether FY26 margins stabilise or continue this downward trajectory.
The gross profit margin trajectory provides additional context. At 23.42% in Q2 FY26, it declined from 39.71% in Q1 FY26 and 47.80% in Q2 FY25, indicating that the margin pressure originates at the gross level—suggesting either product mix shifts towards lower-margin offerings or increased direct costs of execution. PAT margins of 16.00% in Q2 FY26 versus 25.67% in Q1 FY26 and 33.27% in Q2 FY25 demonstrate that the gross margin compression flowed through to the bottom line.
Looking at annual trends, FY25 delivered operating margins of 38.8% compared to 42.6% in FY24, whilst PAT margins declined to 31.2% from 34.9%. This suggests the Q2 FY26 margin compression may reflect broader competitive dynamics or cost inflation rather than purely project-specific factors. The company's ability to restore margins to historical levels of 35-40% will prove critical for sustaining its premium valuation.
Order Book Dynamics: The Missing Piece
Whilst the provided financial data demonstrates strong revenue execution, a critical gap emerges in the absence of order book and order inflow information—typically the most important forward-looking indicator for defence companies. The lumpy revenue pattern, with Q2 FY26 at ₹307.46 crores following Q1 FY26's ₹99.33 crores and Q4 FY25's ₹396.21 crores, underscores the importance of understanding the pipeline of secured orders that will drive future quarters.
Defence sector investors typically evaluate companies based on order book-to-sales ratios, with healthy ratios above 2-3x providing revenue visibility for 2-3 years. Without this data, assessing the sustainability of Data Patterns' growth trajectory becomes challenging. The company's five-year sales CAGR of 27.19% and EBIT CAGR of 22.56% provide historical context, but forward visibility remains limited based solely on the available financial metrics.
| Company | P/E Ratio (TTM) | P/BV Ratio | ROE (%) | Debt to Equity | Dividend Yield |
|---|---|---|---|---|---|
| Data Patterns | 78.37 | 11.15 | 13.02% | -0.30 | 0.26% |
| Bharat Electronics | 53.88 | 14.23 | 23.15% | -0.37 | 0.57% |
| Mazagon Dock | 47.26 | 12.38 | 24.55% | -1.46 | 0.43% |
| Bharat Dynamics | 99.26 | 13.88 | 13.76% | -1.05 | 0.31% |
| Cochin Shipyard | 59.14 | 8.05 | 12.83% | -0.46 | 0.44% |
| Garden Reach Shipbuilders | 51.09 | 13.72 | 20.10% | -1.36 | 0.71% |
Data Patterns trades at a significant premium to most defence sector peers, with a P/E ratio of 78.37x compared to the peer average of approximately 62x. This premium appears difficult to justify given the company's ROE of 13.02% trails peers like Bharat Electronics (23.15%), Mazagon Dock (24.55%), and Garden Reach Shipbuilders (20.10%). Only Bharat Dynamics, with a P/E of 99.26x and ROE of 13.76%, trades at a higher multiple with similar return characteristics.
The P/BV ratio of 11.15x sits below the peer average of approximately 12.5x, suggesting the market assigns relatively lower asset value multiples despite the elevated earnings multiple. This divergence may reflect concerns about the sustainability of current profitability levels given the observed margin compression. Data Patterns' minimal dividend yield of 0.26% compares unfavourably to peers like Garden Reach Shipbuilders (0.71%) and Bharat Electronics (0.57%), offering limited income appeal for conservative investors.
Valuation Analysis: Premium Pricing Despite Growth Concerns
Data Patterns commands a valuation that reflects significant growth expectations, yet several metrics suggest the current pricing may have run ahead of fundamentals. At ₹3,088.00 per share as of November 14, 2025, the stock trades at 78.37x trailing twelve-month earnings—nearly triple the aerospace and defence industry average P/E of 28x. This 180% premium to sector multiples demands exceptional growth and margin expansion to justify, neither of which appears assured given recent quarterly performance.
The PEG ratio of 5.71x provides a more nuanced valuation perspective, comparing the P/E multiple to earnings growth. A PEG above 2.0x typically suggests overvaluation, and Data Patterns' 5.71x reading indicates the market is pricing in growth expectations that significantly exceed the company's five-year EBIT CAGR of 22.56%. For the valuation to appear reasonable at current levels, the company would need to sustain earnings growth of approximately 14-15% annually—a challenging proposition given the margin pressures and lumpy revenue recognition inherent to the defence sector.
The EV/EBITDA multiple of 60.63x and EV/EBIT of 64.54x further underscore the premium valuation, trading significantly above typical defence sector multiples of 15-25x EV/EBITDA. The EV/Sales ratio of 23.26x indicates investors are paying ₹23.26 for every rupee of sales, a level typically reserved for high-growth technology companies rather than project-based defence manufacturers. The company's market capitalisation of ₹17,287.85 crores against FY25 sales of ₹708 crores yields this elevated multiple.
The stock's technical positioning provides additional context. Trading at ₹3,088.00, it sits just 5.48% below its 52-week high of ₹3,267.20 but 128.66% above its 52-week low of ₹1,350.50, indicating substantial appreciation over the past year. The one-year return of 42.04% significantly outpaced the Sensex's 8.46% gain, delivering alpha of 33.58%. However, this strong performance has pushed valuation metrics to stretched levels that may limit near-term upside potential.
"At 78x earnings and 60x EBITDA, Data Patterns trades at a valuation that assumes flawless execution and sustained margin expansion—a challenging proposition given the inherent volatility of defence sector order flows and the recent margin compression."
Shareholding Pattern: Institutional Caution Emerges
The shareholding pattern reveals subtle but significant shifts in institutional sentiment towards Data Patterns over recent quarters. Promoter holding remains rock-solid at 42.41% across the past five quarters, demonstrating unwavering confidence from the founding team led by Rangarajan S (22.8%) and Rekha Murthy Rangarajan (19.02%). The absence of any promoter pledging further reinforces this commitment and eliminates a key governance risk factor.
| Category | Sep'25 | Jun'25 | Mar'25 | Dec'24 | Sep'24 | QoQ Change |
|---|---|---|---|---|---|---|
| Promoter | 42.41% | 42.41% | 42.41% | 42.41% | 42.41% | 0.00% |
| FII | 11.40% | 12.78% | 12.75% | 14.05% | 14.39% | -1.38% |
| Mutual Funds | 7.42% | 6.72% | 5.73% | 6.48% | 6.48% | +0.70% |
| Insurance | 1.88% | 0.97% | 1.12% | 1.96% | 2.00% | +0.91% |
| Other DII | 0.50% | 0.39% | 0.52% | 0.41% | 0.24% | +0.11% |
| Non-Institutional | 36.40% | 36.73% | 37.48% | 34.70% | 34.48% | -0.33% |
Foreign Institutional Investors (FIIs) have been consistent sellers, reducing their stake from 14.39% in September 2024 to 11.40% in September 2025—a cumulative decline of 299 basis points over four quarters. The most recent quarter saw FII holdings drop by 138 basis points from 12.78% to 11.40%, suggesting growing concerns about valuation or growth sustainability among sophisticated foreign investors. This selling pressure from FIIs, who typically take long-term positions based on fundamental analysis, serves as a cautionary signal.
Conversely, domestic institutional investors have increased their exposure, albeit modestly. Mutual fund holdings rose to 7.42% in September 2025 from 6.48% a year earlier, with a notable 70 basis points increase in the most recent quarter. Insurance company holdings jumped 91 basis points to 1.88% in Q2 FY26, suggesting renewed interest from domestic long-term investors. The combined domestic institutional holding (mutual funds, insurance, and other DIIs) now stands at 9.80%, up from 8.72% a year ago.
The divergence between FII selling and domestic institutional buying presents an interesting dynamic. Domestic investors may be taking a more optimistic view on India's defence indigenisation theme and Data Patterns' role within it, whilst foreign investors appear more cautious about the premium valuation and execution risks. The presence of 105 FIIs and 22 mutual funds in the shareholder base indicates broad institutional coverage, suggesting the selling pressure reflects considered portfolio rebalancing rather than complete loss of confidence.
Stock Performance: Outperformance Amid High Volatility
Data Patterns has delivered exceptional returns across most timeframes, significantly outpacing both the Sensex and its aerospace and defence sector peers. Over the past year, the stock generated returns of 42.04% compared to the Sensex's 8.46% gain, producing alpha of 33.58%. This outperformance extended across shorter periods as well, with the stock up 18.06% over one week (versus Sensex's 1.11%), 11.96% over one month (versus 2.58%), and 22.67% over three months (versus 4.40%).
| Period | Stock Return | Sensex Return | Alpha | Sector Return |
|---|---|---|---|---|
| 1 Week | 18.06% | 1.11% | +16.95% | — |
| 1 Month | 11.96% | 2.58% | +9.38% | — |
| 3 Months | 22.67% | 4.40% | +18.27% | — |
| 6 Months | 20.77% | 3.46% | +17.31% | — |
| YTD | 25.05% | 7.68% | +17.37% | — |
| 1 Year | 42.04% | 8.46% | +33.58% | -17.47% |
| 2 Years | 65.16% | 29.58% | +35.58% | — |
| 3 Years | 124.07% | 36.54% | +87.53% | — |
Particularly noteworthy is the stock's 59.51% outperformance versus its aerospace and defence sector over the past year, with Data Patterns gaining 42.04% whilst the sector declined 17.47%. This dramatic divergence suggests investors view the company as a structural winner within the defence space, potentially benefiting from niche capabilities in defence electronics and radar systems that differentiate it from shipbuilders and ordnance manufacturers.
However, this strong performance comes with elevated volatility. The stock exhibits a beta of 1.35, indicating it moves 35% more than the broader market in both directions. Annual volatility of 52.55% places it firmly in the "high risk, high return" category—substantially above the Sensex's 12.26% volatility. The risk-adjusted return of 0.80 over one year, whilst positive, suggests investors are taking on significant volatility for the returns generated.
Technical indicators paint a broadly bullish picture. The stock trades above all key moving averages—5-day (₹2,763.05), 20-day (₹2,756.66), 50-day (₹2,720.11), 100-day (₹2,722.23), and 200-day (₹2,427.37)—indicating strong momentum. The overall technical trend classification of "Bullish" as of November 12, 2025, supported by bullish signals from MACD, Bollinger Bands, KST, and On-Balance Volume indicators, suggests continued near-term strength. However, the stock's proximity to its 52-week high of ₹3,267.20 (just 5.48% away) may limit immediate upside potential.
Investment Thesis: Quality Company, Stretched Valuation
Data Patterns presents a compelling long-term investment case grounded in India's defence modernisation imperative and the company's specialised capabilities in defence electronics. The quality grade of "Good" reflects strong fundamentals including zero debt, healthy ROCE of 24.60%, consistent revenue growth (27.19% five-year CAGR), and robust institutional participation (21.19% holding). The company's position as a beneficiary of the Atmanirbhar Bharat initiative in defence provides structural tailwinds that should support sustained order inflows over the medium term.
However, the valuation grade of "Very Expensive" represents a significant constraint on investment appeal at current levels. Trading at 78x earnings, 60x EBITDA, and 11x book value with a PEG ratio of 5.71x, the stock prices in near-perfect execution and substantial margin expansion—neither of which appears assured given recent quarterly performance. The margin compression in Q2 FY26, with operating margins declining to 22.27% from historical levels of 35-40%, raises questions about the sustainability of the profitability that justifies the premium valuation.
The financial trend classification of "Positive" acknowledges the strong revenue momentum, with Q2 FY26 sales growing 237.79% year-on-year. Yet this positive assessment must be tempered by the recognition that defence sector revenues are inherently lumpy, and quarter-to-quarter comparisons can be misleading. The absence of order book data prevents a comprehensive assessment of revenue visibility beyond the current quarter.
✓ KEY STRENGTHS
- Zero-Debt Balance Sheet: Net cash position of -0.30 debt-to-equity provides financial flexibility for growth investments and insulates from interest rate risk
- Strong Capital Efficiency: ROCE of 24.60% demonstrates superior returns on deployed capital, well above manufacturing sector averages
- Robust Revenue Growth: Five-year sales CAGR of 27.19% reflects sustained order execution and market share gains in defence electronics
- Promoter Commitment: Stable 42.41% promoter holding with zero pledging indicates strong alignment with minority shareholders
- Institutional Participation: 21.19% institutional holding with 105 FIIs and 22 mutual funds provides liquidity and validates investment case
- Structural Tailwinds: Beneficiary of India's defence indigenisation push under Atmanirbhar Bharat initiative
- Technical Strength: Bullish trend with stock trading above all key moving averages, supported by positive momentum indicators
⚠ KEY CONCERNS
- Severe Margin Compression: Operating margins declined to 22.27% in Q2 FY26 from 37.68% year-ago, raising questions about project profitability
- Extreme Valuation: P/E of 78x (vs industry 28x) and PEG of 5.71x price in perfection, leaving little room for execution missteps
- Weak ROE: 13.02% average ROE significantly trails defence peers like Bharat Electronics (23.15%) and Mazagon Dock (24.55%)
- Revenue Lumpiness: Quarterly sales volatility (₹99 crores to ₹307 crores to ₹396 crores) creates earnings unpredictability
- FII Selling: Foreign institutional investors reduced holdings from 14.39% to 11.40% over past year, indicating valuation concerns
- High Volatility: Beta of 1.35 and annual volatility of 52.55% make the stock unsuitable for risk-averse investors
- Limited Dividend Yield: 0.26% yield provides negligible income, with 19.94% payout ratio suggesting limited near-term improvement
Outlook: What to Watch
The investment case for Data Patterns hinges on several critical factors that will determine whether the current premium valuation proves justified or excessive. Investors should closely monitor the following developments over coming quarters to assess the trajectory of this high-growth defence play.
POSITIVE CATALYSTS
- ✓ Margin Recovery: Operating margins returning to 35-40% range would validate premium valuation and demonstrate project mix improvement
- ✓ Order Book Growth: Sustained order inflows maintaining book-to-sales ratio above 3x would provide multi-year revenue visibility
- ✓ Defence Budget Allocation: Increased capital expenditure allocation to electronics and radar systems in Union Budget FY27
- ✓ Export Success: Penetration of international defence markets would diversify revenue base and validate technology capabilities
- ✓ ROE Improvement: Initiatives to enhance return on equity towards 18-20% would narrow gap with quality peers
RED FLAGS
- ⚠ Persistent Margin Pressure: Operating margins remaining below 25% for consecutive quarters would signal structural profitability challenges
- ⚠ Order Inflow Slowdown: Declining order book or extended periods without major order wins would threaten growth sustainability
- ⚠ Increased Competition: Entry of larger defence players or global OEMs into electronics segment could pressure margins and market share
- ⚠ Valuation Correction: Stock falling below 200-day moving average (₹2,427) would signal technical breakdown and potential re-rating
- ⚠ Continued FII Selling: Foreign institutional holdings declining below 10% would indicate sustained concerns about fundamentals or valuation
The Verdict: Quality Company at Stretched Valuation
Score: 71/100
For Fresh Investors: Consider building positions in tranches on any corrections towards ₹2,600-2,700 levels (15-20% below current price), targeting the 200-day moving average zone. The current valuation of 78x earnings leaves limited margin of safety for execution missteps. Investors with high risk tolerance and 3-5 year investment horizon may initiate small positions (not exceeding 2-3% of portfolio) at current levels, given the structural tailwinds from defence indigenisation.
For Existing Holders: Book partial profits (30-40% of holdings) at current levels to de-risk the position, given the premium valuation and recent margin compression. Retain core holdings with a 3-5 year view, supported by the company's quality fundamentals, zero-debt balance sheet, and strong ROCE. Consider re-evaluating if operating margins fail to recover above 30% over the next two quarters or if FII holdings decline below 10%.
Fair Value Estimate: ₹2,400-2,600 (22-16% downside from current levels), based on a more reasonable P/E multiple of 50-55x applied to normalised earnings with 30-32% operating margins. The current price of ₹3,088 discounts significant growth and margin expansion that may prove challenging to achieve given the lumpy nature of defence order execution.
Note- ROCE= (EBIT - Other income)/(Capital Employed - Cash - Current Investments)
⚠️ Investment Disclaimer
This article is for educational and informational purposes only and should not be construed as financial advice. Investors should conduct their own due diligence, consider their risk tolerance and investment objectives, and consult with a qualified financial advisor before making any investment decisions. Past performance does not guarantee future results. The defence sector involves significant execution risks, regulatory dependencies, and revenue volatility that may impact investment outcomes.
