Reduce Dynamatic Technologies: target of Rs 5960: ICICI Securities

Published in Science and Technology on Thursday, August 14th 2025 at 2:47 GMT by moneycontrol.com
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ICICI Securities recommended reduce rating on Dynamatic Technologies with a target price of Rs 5960 in its research report dated August 08, 2025.

ICICI Securities Issues 'Reduce' Rating on Dynamatic Technologies with Target Price of Rs 5,960

In a recent research note, ICICI Securities has recommended a 'Reduce' rating on Dynamatic Technologies, setting a target price of Rs 5,960 per share. This assessment comes amid a detailed analysis of the company's performance, market positioning, and future prospects in the aerospace, automotive, and hydraulics sectors. Dynamatic Technologies, a Bengaluru-based engineering firm, specializes in manufacturing high-precision components for global clients, including major players like Boeing, Airbus, and BMW. The company's operations span across India, the UK, and Germany, making it a key player in the defense and aerospace supply chain. However, ICICI Securities highlights several challenges that could impact its growth trajectory, leading to the cautious stance.

The report delves into Dynamatic's recent financial results, particularly focusing on its Q2FY25 earnings. The company reported a revenue of approximately Rs 400 crore for the quarter, marking a year-on-year growth of around 8-10%. This growth was primarily driven by the aerospace segment, which constitutes about 60% of the company's revenue. The aerospace division benefited from increased orders from international clients, fueled by the global recovery in air travel and rising defense spending. Notably, Dynamatic's involvement in manufacturing structural components for aircraft like the Boeing 737 and Airbus A320 has been a strong point. The hydraulics segment, contributing roughly 25% to revenues, also showed resilience, supported by demand from agricultural and construction machinery sectors. However, the automotive segment, which makes up the remaining 15%, faced headwinds due to supply chain disruptions and fluctuating raw material prices.

Despite these positives, ICICI Securities points out margin pressures as a significant concern. The company's EBITDA margins stood at around 12-14% in Q2FY25, slightly below expectations due to higher input costs, including metals and energy. Raw material expenses rose by about 15% year-on-year, squeezing profitability. The report notes that while Dynamatic has implemented cost-control measures, such as optimizing its supply chain and investing in automation at its facilities, these initiatives may take time to yield substantial benefits. Additionally, the company's net profit for the quarter was Rs 25-30 crore, reflecting a modest 5% growth, but this was tempered by elevated interest expenses from ongoing capital expenditures.

Looking ahead, ICICI Securities forecasts a compound annual growth rate (CAGR) of 10-12% in revenues over FY25-FY27, driven by a robust order book exceeding Rs 1,500 crore. The aerospace segment is expected to be the primary growth engine, with potential expansions in defense contracts, especially under India's 'Make in India' initiative. Dynamatic's partnerships with global OEMs position it well to capitalize on the increasing localization of aerospace manufacturing in India. For instance, the company has secured long-term agreements for supplying flap track beams and other critical components, which could ensure steady revenue streams. In the hydraulics domain, opportunities in renewable energy and infrastructure projects are highlighted as upside factors.

However, the brokerage raises red flags on several fronts that justify the 'Reduce' recommendation. Valuation appears stretched, with the stock trading at a price-to-earnings (P/E) multiple of around 40x forward earnings, compared to the sector average of 25-30x. This premium is attributed to high market expectations, but ICICI Securities believes it leaves little room for error. Macroeconomic risks, such as geopolitical tensions affecting global aerospace demand, could disrupt order flows. The ongoing Russia-Ukraine conflict and potential slowdowns in European economies pose threats to Dynamatic's UK and German operations. Domestically, delays in government defense procurement could impact the order pipeline.

Furthermore, the report analyzes competitive dynamics. Dynamatic faces stiff competition from larger players like Hindustan Aeronautics Limited (HAL) and international firms such as Spirit AeroSystems. While Dynamatic's niche in precision engineering gives it an edge, scaling up to meet large-volume orders remains a challenge. The company has been investing in capacity expansion, including a new facility in Bengaluru for advanced manufacturing, but this has led to higher debt levels. As of the latest quarter, the debt-to-equity ratio stands at 0.8x, which is manageable but could rise if growth slows.

On the ESG front, ICICI Securities commends Dynamatic's efforts in sustainability, such as adopting green manufacturing practices and reducing carbon emissions. The company aims to achieve net-zero by 2030, which aligns with global client requirements. However, regulatory compliance costs could add to operational expenses in the near term.

In terms of valuation methodology, the target price of Rs 5,960 is derived using a discounted cash flow (DCF) model, incorporating a weighted average cost of capital (WACC) of 12% and a terminal growth rate of 4%. This implies a downside of about 15-20% from the current market price, prompting the 'Reduce' call. The brokerage suggests that investors might consider accumulating the stock at lower levels, around Rs 5,000-5,500, if there are positive triggers like new order wins or margin improvements.

The report also touches on management commentary from the recent earnings call. Dynamatic's leadership expressed optimism about FY25, targeting revenue growth of 15% and EBITDA margins expanding to 15-16% through operational efficiencies. Initiatives like digital transformation and R&D investments in additive manufacturing are expected to enhance competitiveness. However, ICICI Securities tempers this enthusiasm, noting that execution risks remain high in a volatile global environment.

Overall, while Dynamatic Technologies demonstrates strong fundamentals in high-growth sectors, ICICI Securities advises caution due to valuation concerns and external uncertainties. The 'Reduce' rating reflects a balanced view, encouraging investors to monitor key metrics like order inflows and margin trends closely. This analysis underscores the need for Dynamatic to navigate cost pressures and capitalize on its technological strengths to sustain long-term value creation. Investors with a higher risk appetite might find opportunities in the stock's growth story, but for now, the brokerage sees limited upside potential at current levels. (Word count: 852)

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