The December 2025 quarter showcased the inherent volatility of defence contract execution, with net sales declining 43.69% sequentially from ₹307.46 crores in Q2 FY26 to ₹173.13 crores in Q3 FY26. This sharp contraction underscores the lumpy nature of revenue recognition in the aerospace and defence sector, where project milestones and delivery schedules dictate quarterly performance rather than linear progression. Despite the sequential revenue decline, the year-on-year comparison remained positive at 47.92% growth, demonstrating the company's expanding order book execution over a longer timeframe.
What stands out remarkably is the company's ability to maintain exceptional operating margins even during periods of lower revenue. The operating profit margin (excluding other income) expanded to 46.55% in Q3 FY26, matching the previous year's December quarter performance and representing the highest quarterly margin in recent periods. This margin resilience suggests strong pricing power, favourable product mix, and disciplined cost management—critical attributes in a sector where technological sophistication commands premium valuations.
| Quarter | Revenue (₹ Cr) | QoQ Change | Net Profit (₹ Cr) | QoQ Change | Op. Margin % |
|---|---|---|---|---|---|
| Dec'25 | 173.13 | -43.69% | 58.30 | +18.52% | 46.55% |
| Sep'25 | 307.46 | +209.53% | 49.19 | +92.90% | 22.27% |
| Jun'25 | 99.33 | -74.93% | 25.50 | -77.65% | 32.30% |
| Mar'25 | 396.21 | +238.53% | 114.08 | +155.47% | 37.73% |
| Dec'24 | 117.04 | +28.59% | 44.66 | +47.49% | 46.16% |
| Sep'24 | 91.02 | -12.55% | 30.28 | -7.65% | 37.68% |
| Jun'24 | 104.08 | — | 32.79 | — | 35.72% |
Financial Performance: Margin Excellence Amidst Revenue Fluctuations
The quarterly performance reveals a company navigating the complexities of project-based revenue recognition with commendable profitability metrics. Net sales of ₹173.13 crores in Q3 FY26, whilst down 43.69% sequentially, represented substantial 47.92% year-on-year growth from ₹117.04 crores in Q3 FY25. This divergence between sequential decline and annual growth illustrates the challenge of evaluating defence contractors on quarterly metrics alone—the business model inherently produces uneven quarterly results.
Operating profit before depreciation, interest, tax, and other income (PBDIT excluding OI) stood at ₹80.59 crores, translating to a robust 46.55% margin. This margin expansion from Q2 FY26's 22.27% demonstrates the operating leverage embedded in the business model. The PAT margin of 33.67% in Q3 FY26 significantly exceeded the 16.00% achieved in the previous quarter, showcasing how margin performance can remain resilient even when absolute revenue contracts.
Employee costs rose modestly to ₹39.28 crores from ₹37.88 crores in Q2 FY26, reflecting controlled headcount expansion and stable wage inflation. The tax rate of 22.55% in Q3 FY26 remained within the company's historical range of 22-26%, indicating no material changes to the effective tax structure. Other income contribution of ₹5.81 crores, whilst lower than the ₹10.55 crores in Q1 FY26, remained consistent with Q2 FY26's ₹5.94 crores, suggesting normalised treasury income on cash balances.
On a nine-month basis for FY26 (April-December 2025), the company generated revenue of ₹579.92 crores and net profit of ₹132.99 crores, representing year-on-year growth of 86.78% and 23.66% respectively compared to the corresponding nine-month period of FY25. This broader perspective smoothens quarterly volatility and reveals the underlying growth trajectory driven by India's defence modernisation initiatives and the company's expanding participation in critical electronics programmes.
Operational Excellence: Capital Efficiency Despite Modest Return Metrics
Data Patterns demonstrates operational discipline through its debt-free balance sheet and prudent capital allocation. The company's net debt-to-equity ratio of -0.30 indicates a net cash position, eliminating financial leverage risks and providing substantial flexibility for organic expansion and working capital management. With total shareholder funds of ₹1,508.22 crores as of March 2025, the company maintains a fortress balance sheet unusual for a rapidly growing defence contractor.
The return on equity (ROE) of 15.48% for the latest fiscal year, whilst improved from the five-year average of 13.02%, remains the Achilles' heel relative to industry benchmarks. Higher ROE indicates superior capital efficiency and profitability—in this context, Data Patterns' ROE lags behind defence sector leaders such as Hindustan Aeronautics (24.71%) and Mazagon Dock (24.55%). This underperformance stems partly from the company's substantial cash holdings and conservative capital structure, which dilute equity returns despite strong operational profitability.
Capital Efficiency Concern
Whilst the company's ROCE of 24.60% demonstrates reasonable returns on deployed capital, the ROE of 15.48% suggests room for improvement in shareholder value creation. The substantial cash balance (net cash company status) and conservative leverage indicate potential for enhanced capital deployment strategies. Management's ability to scale operations whilst maintaining margin discipline will be critical to improving return metrics and justifying the premium valuation.
Fixed assets expanded to ₹217.32 crores in FY25 from ₹122.40 crores in FY24, representing a 77.58% increase that signals capacity expansion to support the growing order book. Current assets of ₹1,451.36 crores, marginally higher than the previous year's ₹1,400.87 crores, include substantial cash and working capital tied to project execution cycles. The company's current liabilities declined to ₹276.72 crores from ₹350.21 crores, improving the current ratio and suggesting efficient working capital management.
The Revenue Lumpiness Challenge: Understanding Project-Based Execution
The aerospace and defence sector operates fundamentally differently from consumer-facing industries, with revenue recognition tied to project milestones, inspection protocols, and customer acceptance procedures. Data Patterns' quarterly revenue volatility—ranging from ₹99.33 crores in Q1 FY26 to ₹307.46 crores in Q2 FY26, then declining to ₹173.13 crores in Q3 FY26—exemplifies this characteristic lumpiness. Such fluctuations do not necessarily indicate business deterioration but rather reflect the timing of deliverables across multi-quarter contracts.
The company's financial trend status of "POSITIVE" as of December 2025, despite the sequential revenue decline, acknowledges this reality. The key positive factors identified include nine-month revenue growth of 130.99% and nine-month PAT growth of 46.55%, demonstrating strong execution over a meaningful timeframe. The single negative factor—quarterly revenue decline of 24.70% versus the previous four-quarter average—must be contextualised within the project delivery cycle rather than viewed as a concerning trend.
Understanding Defence Sector Revenue Patterns
Defence electronics projects typically span 12-24 months from order to delivery, with revenue recognised upon milestone completion or product delivery. A single large contract's delivery schedule can swing quarterly revenue by 50-100%, making year-on-year and trailing twelve-month metrics more relevant than sequential quarterly comparisons. Investors must evaluate order book size, execution pipeline, and annual revenue trends rather than fixating on quarterly variations.
| Metric | 9M FY26 | 9M FY25 | YoY Growth |
|---|---|---|---|
| Net Sales | ₹579.92 Cr | ₹312.14 Cr | +85.78% |
| Net Profit | ₹132.99 Cr | ₹107.73 Cr | +23.45% |
| Operating Margin | 33.71% | 39.85% | -614 bps |
| PAT Margin | 22.94% | 34.51% | -1,157 bps |
Peer Comparison: Premium Valuation Amidst Sector Underperformance
Data Patterns trades at a price-to-earnings ratio of 60.57x on a trailing twelve-month basis, representing a substantial premium to the aerospace and defence sector average of approximately 26x. This valuation multiple exceeds peers such as Hindustan Aeronautics (31.86x), Mazagon Dock (41.44x), and Garden Reach Shipbuilders (40.56x), though it remains below Bharat Dynamics' 80.45x multiple. The premium valuation reflects market expectations of sustained growth and technological differentiation in niche defence electronics.
However, the company's ROE of 13.02% significantly trails the peer group average of approximately 19%, with Hindustan Aeronautics and Mazagon Dock both exceeding 24% ROE. This disparity suggests that whilst the market values Data Patterns' growth potential and strategic positioning, the company must improve capital efficiency to justify its valuation premium on fundamental metrics. The price-to-book ratio of 9.37x, whilst lower than Bharat Dynamics (11.06x) and Garden Reach (12.17x), remains elevated relative to the sector median.
| Company | P/E (TTM) | P/BV | ROE % | Div Yield % | Debt/Equity |
|---|---|---|---|---|---|
| Data Patterns | 60.57 | 9.37 | 13.02 | 0.31 | -0.30 |
| Hindustan Aeronautics | 31.86 | 7.27 | 24.71 | 0.99 | -1.20 |
| Mazagon Dock | 41.44 | 10.85 | 24.55 | 0.49 | -1.46 |
| Bharat Dynamics | 80.45 | 11.06 | 15.00 | 0.37 | -0.99 |
| Cochin Shipyard | 53.64 | 6.85 | 13.02 | 0.74 | -0.27 |
| Garden Reach Ship. | 40.56 | 12.17 | 20.10 | 1.09 | -1.36 |
The dividend yield of 0.31% remains amongst the lowest in the peer group, with most defence PSUs offering yields between 0.50-1.10%. The modest payout reflects the company's growth phase and capital retention strategy, though it provides limited income attraction for yield-seeking investors. All peer companies maintain net cash positions (negative debt-to-equity ratios), indicating the sector's strong cash generation characteristics and limited need for leverage.
Valuation Analysis: Expensive Multiples Test Growth Faith
Data Patterns' valuation metrics uniformly signal "VERY EXPENSIVE" territory, with the P/E ratio of 60.57x representing more than double the sector average of 26x. The PEG ratio of 2.32 suggests the market is pricing in growth expectations that exceed the company's five-year sales CAGR of 35.13%, indicating potential for disappointment if execution falters or growth moderates. The EV/EBITDA multiple of 45.03x and EV/Sales ratio of 14.88x further underscore the premium valuation.
The price-to-book ratio of 9.37x implies the market values the company's intangible assets—technological capabilities, customer relationships, order pipeline, and strategic positioning—at nearly 8.4 times the book value of tangible assets. Whilst such premiums are justifiable for businesses with sustainable competitive advantages and high return profiles, Data Patterns' current ROE of 15.48% suggests the return profile has not yet caught up to the valuation multiple.
The stock's current price of ₹2,525.60 sits 22.70% below its 52-week high of ₹3,267.20, though it remains 87.01% above the 52-week low of ₹1,350.50. This wide trading range reflects the market's struggle to assign a stable valuation to a company experiencing rapid growth but also significant quarterly volatility. The recent correction from peak levels may present a more reasonable entry point, though the absolute valuation remains stretched by traditional metrics.
Shareholding Pattern: Institutional Confidence Building Gradually
The shareholding structure reveals a stable promoter base holding 42.41% across the last five quarters, with no dilution or pledging—a positive indicator of founder confidence and alignment with minority shareholders. Foreign institutional investors (FIIs) hold 11.55% as of December 2025, marginally increasing from 11.40% in September 2025 after declining from 14.05% in December 2024. This recent stabilisation suggests FIIs may be finding value at current levels after earlier profit-booking.
Mutual fund holdings have shown consistent sequential increases, rising from 5.73% in March 2025 to 7.61% in December 2025. This 188 basis point expansion over three quarters indicates growing domestic institutional conviction, with 25 mutual fund schemes now holding positions. Insurance company holdings jumped to 2.23% in December 2025 from 1.88% in September 2025, reflecting renewed interest from long-term institutional investors.
| Category | Dec'25 | Sep'25 | Jun'25 | QoQ Change |
|---|---|---|---|---|
| Promoter | 42.41% | 42.41% | 42.41% | — |
| FII | 11.55% | 11.40% | 12.78% | +0.15% |
| Mutual Funds | 7.61% | 7.42% | 6.72% | +0.19% |
| Insurance | 2.23% | 1.88% | 0.97% | +0.35% |
| Other DII | 0.43% | 0.50% | 0.39% | -0.07% |
| Non-Institutional | 35.77% | 36.40% | 36.73% | -0.63% |
The total institutional holding of 21.82% (combining FIIs, mutual funds, insurance, and other DIIs) provides a reasonable institutional anchor, though it remains lower than many large-cap defence stocks. The gradual increase in domestic institutional participation suggests growing recognition of the company's capabilities, though the relatively modest overall institutional presence indicates room for further discovery by large investors.
Stock Performance: Sector Outperformance Masks Recent Weakness
Data Patterns has delivered a one-year return of 24.47%, substantially outperforming the Sensex's 6.44% gain and generating positive alpha of 18.03 percentage points. More impressively, the stock has outpaced its aerospace and defence sector peers by 43.19 percentage points, as the broader sector declined 18.72% over the same period. This relative outperformance reflects the company's differentiated positioning in defence electronics and radar systems.
However, recent performance has weakened considerably. The stock has declined 7.68% over the past month versus the Sensex's 2.49% decline, underperforming by 5.19 percentage points. The three-month and six-month returns of -6.48% and -5.17% respectively contrast sharply with the Sensex's relative stability, indicating profit-booking after the strong multi-year run. Year-to-date, the stock is down 3.74%, marginally worse than the Sensex's 2.24% decline.
| Period | Stock Return | Sensex Return | Alpha |
|---|---|---|---|
| 1 Day | -3.47% | -0.60% | -2.87% |
| 1 Week | -1.41% | +0.91% | -2.32% |
| 1 Month | -7.68% | -2.49% | -5.19% |
| 3 Months | -6.48% | -0.17% | -6.31% |
| 6 Months | -5.17% | +3.23% | -8.40% |
| YTD | -3.74% | -2.24% | -1.50% |
| 1 Year | +24.47% | +6.44% | +18.03% |
| 2 Years | +33.63% | +16.15% | +17.48% |
| 3 Years | +74.55% | +36.94% | +37.61% |
The stock's beta of 1.61 classifies it as a high-beta security, exhibiting 61% more volatility than the broader market. The annualised volatility of 54.06% over the past year significantly exceeds the Sensex's 11.52%, placing Data Patterns firmly in the "HIGH RISK HIGH RETURN" category. Risk-adjusted returns of 0.45 trail the Sensex's 0.56, indicating that whilst absolute returns have been strong, the heightened volatility has eroded risk-adjusted performance.
Technical Analysis: Mildly Bearish Trend Amidst Multiple Resistance Levels
The technical picture has deteriorated, with the overall trend classification shifting to "MILDLY BEARISH" as of February 4, 2026. The stock trades below all major moving averages—5-day (₹2,584.37), 20-day (₹2,511.22), 50-day (₹2,625.67), 100-day (₹2,710.38), and 200-day (₹2,695.11)—a concerning configuration indicating loss of momentum across multiple timeframes. The MACD indicator shows bearish signals on both weekly and monthly charts, whilst RSI remains neutral, suggesting neither oversold nor overbought conditions.
Immediate support rests at the 52-week low of ₹1,350.50, representing a substantial 46.5% downside from current levels—a gap that underscores the stock's volatile nature. Immediate resistance appears around the 20-day moving average of ₹2,511.22, followed by the 50-day MA at ₹2,625.67. The stock's distance of 22.70% below its 52-week high of ₹3,267.20 indicates meaningful correction from peak levels, though technical momentum has not yet turned decisively positive.
Investment Thesis: Quality Business Handicapped by Valuation
Data Patterns earns a "GOOD" quality grade based on its debt-free balance sheet, healthy five-year sales CAGR of 35.13%, strong ROCE of 28.56%, and zero promoter pledging. The company operates in a strategically important sector with substantial tailwinds from India's defence modernisation programmes and the government's emphasis on indigenisation under the Atmanirbhar Bharat initiative. The technological moat in radar systems, electronic warfare, and avionics provides sustainable competitive advantages.
However, the overall Mojo Score of 48/100 and "SELL" advisory rating reflect the challenging valuation landscape. The "VERY EXPENSIVE" valuation grade, combined with "MILDLY BEARISH" technical trends, creates headwinds that offset the "GOOD" quality assessment and "POSITIVE" financial trend. The proprietary scoring system weighs these factors to arrive at a cautious stance, prioritising valuation discipline over growth optimism.
Key Strengths & Risk Factors
KEY STRENGTHS ✓
- Debt-Free Balance Sheet: Net cash position of -0.30 debt-to-equity provides financial flexibility and eliminates solvency risks during execution cycles
- Exceptional Margins: Operating margin of 46.55% in Q3 FY26 demonstrates pricing power and operational excellence in niche defence electronics
- Strong Long-Term Growth: Five-year sales CAGR of 35.13% reflects successful order execution and market share gains in defence electronics
- Strategic Positioning: Specialisation in radar systems, electronic warfare, and avionics aligns with India's defence modernisation priorities
- Institutional Confidence: Growing mutual fund and insurance holdings indicate increasing institutional recognition and conviction
- Zero Promoter Pledging: Clean governance with stable 42.41% promoter holding demonstrates founder alignment with shareholders
- Sector Outperformance: One-year alpha of 18.03% versus Sensex and 43.19% outperformance versus defence sector peers
KEY CONCERNS ⚠
- Extreme Valuation: P/E of 60.57x and PEG of 2.32 price in aggressive growth that may not materialise, creating downside risk
- Revenue Lumpiness: Quarterly revenue volatility of 43.69% QoQ decline in Q3 FY26 complicates earnings predictability and investor confidence
- Weak ROE: Return on equity of 15.48% significantly trails defence sector leaders (24%+), indicating suboptimal capital efficiency
- High Volatility: Beta of 1.61 and annualised volatility of 54.06% create substantial price risk unsuitable for conservative investors
- Technical Weakness: Stock trading below all major moving averages with bearish MACD signals indicates negative momentum
- Low Dividend Yield: 0.31% yield provides minimal income support, offering no cushion during market corrections
- Execution Risk: Project-based business model exposes company to milestone delays, scope changes, and customer acceptance uncertainties
Outlook: What Lies Ahead
POSITIVE CATALYSTS
- Defence budget allocation increases and indigenisation mandates drive order pipeline expansion
- Consistent nine-month revenue growth of 85.78% YoY demonstrates strong execution capabilities
- Margin resilience at 46.55% even during lower revenue quarters protects profitability
- Growing institutional participation (21.82% total) provides support and discovery potential
- Technology leadership in radar and electronic warfare creates barriers to competition
RED FLAGS TO MONITOR
- Sustained quarterly revenue volatility could erode investor confidence and valuation premium
- Failure to improve ROE towards 20%+ levels would challenge current valuation multiples
- Technical breakdown below ₹2,400 could trigger momentum-based selling pressure
- Any order book disappointments or execution delays would severely impact growth narrative
- Margin compression below 35% would signal competitive pressures or unfavourable product mix
The Verdict: Quality Business, Expensive Entry Point
Score: 48/100
For Fresh Investors: Avoid initiating positions at current valuation levels. The P/E of 60.57x and PEG of 2.32 price in aggressive growth expectations that leave minimal margin of safety. Wait for meaningful correction towards ₹2,000-2,200 levels (30-35x P/E) or evidence of sustained ROE improvement above 20% before considering entry. The business quality is sound, but valuation discipline must take precedence.
For Existing Holders: Consider partial profit-booking to reduce position size by 30-50%, particularly if your cost basis is below ₹2,000. The recent correction from ₹3,267 to ₹2,526 (22.70% decline) may extend further given weak technical momentum and expensive valuation. Retain core holdings given the company's quality fundamentals and sector tailwinds, but reduce exposure to manage downside risk. Re-evaluate holding upon next quarterly results and order book updates.
Fair Value Estimate: ₹2,100-2,300 (40-45x P/E on FY26E EPS), representing 16.85% downside from current levels. Current price offers poor risk-reward with limited upside and meaningful downside vulnerability.
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 aerospace and defence sector involves significant execution risks, regulatory uncertainties, and geopolitical factors that can materially impact company performance and stock valuations.
