Risks looming on ideaForge flight path
From here on, the question is will competitive advantages for the company sustain?
In recent times, IPO listings have made fortunes for investors. The listing of ideaForge (93.45% premium), Cyient DLM(52.1% premium) and Senco Gold (35.6% premium) depicted why investors get attracted to the IPO market. However, since the listing ideaForge has witnessed some profit booking.
ideaForge’s issue price was Rs 672 and it got listed at Rs 1,300 per share. However, since then it has fallen 7.62% and is trading at around Rs 1196 per share. The listing was at a premium because the company belongs to the drone industry and it has competitive advantages. It has first mover advantage in a complex industry, the company has a significant focus on innovation (development expenses are 11.11% of revenues). It is vertically integrated, which provides complete infrastructure and less reliance on third party, while keeping its trade secrets safe. Also, the company has around 50% market share in Indian UAV. The share seems to have fallen due to profit booking.
From here on, the question is will competitive advantages sustain? Regarding that, there are a few concerns. The company mentioned in its prospectus that the share of logistics in the global drone market is expected to increase from almost negligible to 36% in CY 30 while that of defence will fall from 48% to 25%. The company doesn’t have a presence in the logistics sector yet. Also, defence occupies 70% revenue.
At the same time company stated that drone as a service will occupy a bigger share than hardware by CY27 in India so it needs to be seen how the company will prepare for that shift as right now sale of service accounts for less than 3% revenue.
At the same time, there might be entry barriers but players like Tata and Adani are already present. Given the attraction of industry, it won’t be surprising if more players enter the industry.
Also, their management is tech background as the company size will increase their managerial skills will also get tested. How will they adjust business strategy according to changing dynamics, how effectively they can execute it and how efficiently will they be able to allocate the capital? Answers to all these questions will determine the fundamental value of ideaForge from here on.