Apollo Micro Systems Ltd (BOM:540879) (Q1 2027) Earnings Call Highlights: Record Margins and ...

Negative Points

• Apollo Micro Systems Ltd ( BOM:540879 ) acknowledged that quarterly revenue recognition can be uneven due to long procurement cycles and milestone-based execution in the defense industry, making quarter-to-quarter performance less meaningful.

• The subsidiary Ideal Explosives Limited continues to report losses, with management indicating that full profitability is not expected until the next financial year after a restructuring process spanning three to four quarters.

• The company currently has no export revenue, with export opportunities still in early stages and expected to materialize only after the new Unit 3 facility becomes fully operational.

• The timeline for the Premier Explosives acquisition completion remains uncertain as it is subject to regulatory approvals, with management unable to provide a definitive date.

• Promoter pledge reduction is expected to take another year to fully resolve, with management targeting completion by Q1 FY28 rather than the current fiscal year.

• The company's R&D spending as a percentage of revenue was clarified to be around 9.5% (Rs 72.53 crores on Rs 764 crores revenue), which was initially misstated during the call, indicating potential communication inconsistencies.

• Several key programs, including the anti-drone system and autonomous underwater capabilities, are still in trial or development stages, with meaningful order inflows not expected until late 2028 or beyond.

Q & A Highlights

Q: What is the strategic rationale behind the acquisition of a 41.33% promoter stake in Premier Explosives Limited, and what synergies are expected? Additionally, what is the status of the QRSAM order? A: CFO Sudarshan Chiluveru explained that the Premier acquisition is a key step in backward and forward integration, enabling Apollo to build a complete weapon system in-house without dependency on third parties for propulsion systems. This positions the company as an integrated defense platform company for weapons, arms, and ammunition. Regarding QRSAM, MD Baddam Karunakar Reddy stated that Bharat Electronics is expected to place the order imminently, with an estimated order value of INR 11,000-12,000 crores for BDL. The initial release is for 1,000 missiles, with Apollo supplying over INR 1 crore worth of components per missile, including the complete guidance system, onboard computer, and front and rear activation systems.

Q: What is the timeline and expected order value for the MIGM (Medium-Range Anti-Ship Missile) program following the DAC approval? A: MD Baddam Karunakar Reddy stated that Apollo expects a call from the Indian Navy next month for discussions before an enquiry is floated, likely by the end of next month. The purchase order is expected by December or January. The total program budget is around INR 3,500 crores, with Apollo expecting to secure approximately 70% of the order. The order includes a favorable 20% advance payment term, and execution is expected to begin in the next financial year.

Q: Can you provide guidance on revenue growth and the expected order book trajectory for the next three years, including the impact of new orders like QRSAM and Pinaka? A: CFO Sudarshan Chiluveru reaffirmed the company's guidance of 40-45% continued growth. He stated that the current consolidated order book is around INR 1,700 crores, and by the end of this financial year, they expect a single order of more than INR 2,500-3,000 crores, bringing the total order book to INR 3,500-4,000 crores. MD Baddam Karunakar Reddy added that they expect orders for QRSAM, MIGM, and Pinaka this financial year. For Pinaka, negotiations are complete for 2,000 units, with Apollo supplying components worth approximately INR 85 lakhs per unit. For Akash-NG, each missile also has over INR 1 crore worth of Apollo components.

Q: What is the current status of the Ideal Explosives (IDL) turnaround, and when is it expected to become fully profitable? A: CFO Sudarshan Chiluveru stated that IDL was EBITDA positive in Q4 of the last financial year and PAT positive in Q1 of FY27, though profitability was low. The company is being selective in Coal India circles to focus on margin sustainability. The manufacturing of accessories previously sourced from GOCL will start in the next couple of quarters, which should improve margins. The restructuring is expected to take three to four quarters, with the company expected to be fully positive from the next financial year.

Q: What is the strategy for autonomous systems, including the SAVIER ASW system and the IPREC smart bomb program, and what is the expected timeline for these programs? A: CFO Sudarshan Chiluveru stated that the company is heavily investing in autonomy across land, air, and sea. The SAVIER semi-submersible vessel is a next-generation ISR requirement, and the company is also building a swarm of autonomous USVs. The PSOs for these programs are expected to be completed within 18 months, with orders expected in the next financial year. Regarding IPREC, MD Baddam Karunakar Reddy noted that the company is working on converting dumb bombs into precision-guided bombs with range extension, a technology they are familiar with from their work on Pinaka. The Indian Air Force has a large inventory of bombs that could be modernized, representing a significant opportunity.

Q: What is the status of the export business, and what is the expected timeline for securing export orders? A: CFO Sudarshan Chiluveru stated that current export revenue is nil, but the company has started submitting offers for various matured product lines to different customers. The company has been going slow until Unit 3 is fully commissioned, which is expected in the next couple of quarters. They expect some meaningful breakthrough orders this financial year, with a sizable order expected next financial year. MD Baddam Karunakar Reddy added that export orders will be accepted once Unit 3 is operationally ready.

Q: What is the status of the anti-drone system under the Make-II category, and what is the potential opportunity size? A: CFO Sudarshan Chiluveru stated that the anti-drone system is yet to go for trials, and the company is getting ready for them. There is no pre-commitment for orders, but once trials are complete, orders will flow in. The opportunity size is very high, and the company will be able to provide guidance on the potential size around the December-ending quarter.

Q: What is the status of the 155mm artillery shells opportunity, and how will Apollo and Premier work together on this? A: MD Baddam Karunakar Reddy stated that Premier has already provided samples of filled 155mm shells to the Indian Army for testing, and continuous orders are expected. Once orders are received, Apollo will handle the fuse and other electronic components, while Premier will handle the ammunition portion.

Q: What is the status of the promoter pledge, and when is it expected to be fully cleared? A: MD Baddam Karunakar Reddy stated that the promoter pledge is expected to be reduced over the next year, with a target to close all pledges by Q1 of FY28.

Q: What is the status of the Moored Mine and Limpet Mine programs? A: MD Baddam Karunakar Reddy stated that the Moored Mine comeback trials have been completed, and the system is expected to be handed over to the Indian Navy this month. Orders for Moored Mines are expected next financial year after technical trials are complete. The Limpet Mine has been completed, and orders are expected to start flowing in the fourth quarter of this financial year.

For the complete transcript of the earnings call, please refer to the full earnings call transcript .