The government's focus on private sector participation in defence as well the offset policy is expected to be positive for Astra Microwave (AMPL). The company has been working on a larger number of R&D projects which is expected to increase the predictability of revenues.

Space revenues are expected to contribute significantly to FY08 revenues. We expect earnings to grow at 44% CAGR over FY08 and FY09.We rate the stock BUY with a price target of Rs 195.

Astra Microwave is one of the few private sector companies engaged in designing and manufacturing of RF (Radio Frequency) and microwave subsystems used in defence, space and telecom applications. 60% of the company's revenues are from the defence segment, 25% from the space segment and the remaining 15% from the telecom segment.

Defence industry outlook in India:

The Indian government has been focusing on increasing the share of the private sector in the defence segment. For this purpose, the Ministry of Defence has introduced the "Offset policy" for defence procurement.

 It stipulates that all contracts over Rs 3 billion awarded to foreign companies must have a minimum offset of 30% and the offset obligation should be discharged in India concurrently.

The ministry of defence is trying to identify large private sector companies that can become lead system integrators, and also take responsibility for serial production. These industries will be termed as Raksha Udyog Ratnas (RURs) and will be placed at par with Defence public sector undertakings (DPSU). The RUR concept will provide an opportunity for the big players to play a very major role in the production of defence systems.

 In addition, the ministry of industries has also certified more than 30 large size private sector companies for the production of certain specific defence systems. These companies have been provided licenses for the manufacture and production of items for the ministry of defence.

 In the current scenario, subsystem providers like Astra Microwave are potential beneficiaries as they can partner with foreign defence suppliers who have to discharge their offset obligations as well as become suppliers to the private sector companies participating in system integration.

Business segments

Defence

Within defence, AMPL provide subsystems for various purposes like missile application, radar application, electronic warfare (EW).

The company gets associated with the defence laboratories in the R&D phase of a particular project, where it provides certain subsystems for the product.

On commercial induction of a product, the technology gets transferred to a DPSU, which in turn places bulk orders on AMPL for the subsystem.

Under the segment of missile electronics, AMPL provides guidance subsystems for various missiles. The company is currently working on 5 missiles; Akash, Astra, Trishul, Brahmos and Pechora. Within radar applications, the company provides the Transmit/Receipt (T/R) module for several radars.

The Battle Field Surveillance Radar (BFSR) on which the company did R&D got inducted in 2004. Over FY05 and FY06, the company executed an order of Rs 750 million for 1,000 subsystems.

 In FY06, the L Band/S Band radar got inducted for which the company has been providing a subsystem. The company received an order of Rs 236.8 million from the Defence Research Laboratory in March 2007 for the supply of the subsystem. This order is likely to get executed by March 2008.

The company has been doing R&D work on several other radars likes the Rajendra radar and CAR1100 from which it receives steady R&D revenues. Induction of any of these radars would prove to be potential upsides for the company's business.

AMPL supplies a subsystem to BEL, Hyderabad which is undertaking the production of Electronic Warfare Applications. This EW applica