The ₹550 crore IPO of what is arguably India’s biggest dronemaker opens on Monday (26th of June) and in today’s Finshots, we dive into what drives the company.

Also, before we get into it, we also need to address the many queries we've received regarding Indian Energy Exchange - a monopoly stock that has lost nearly 20% of its market value in the past few weeks. You can find a detailed coverage on the stock on our YouTube channel. Link here!

The Story

On 26th November 2008, terrorists attacked India’s financial capital i.e. Mumbai.

A few students of IIT Bombay watched the events unfold. They read reports on the incident detailing how the Indian special forces were attempting to use helicopters to peek into rooms on the higher floors of the Taj Hotel. And these kids figured that unmanned drones could do a much better job — they were smaller, more agile, and could be commandeered at ease with a joystick.

They realized that their humble college project of building drones could become a full-fledged company that helped with the nation’s security and defence.

ideaForge was born.

Or at least, that’s the popular narrative surrounding the company.

And when you’re going in for an IPO that values your company at ₹2,500 crores, that’s a pretty strong narrative to lure people in, right? It’s sort of a subtle nudge to get investors to support a company that took its inspiration from one of the worst terrorist attacks on Indian soil. And they are now hell bent on averting such situations in the future.

So let’s fly with this story because ideaForge has pretty much become a defence play anyway.

The army is paying attention to the use of drones and snapping them up. Especially after a drone attack on Indian soil in 2021. And while any terror attack is a horrendous affair, it does aid companies in the defence space. Because shortly after this incident, the Indian army actually ramped up their orders for drones with ideaForge. They wanted more drones to help patrol the borders. And as things stand, 75% of ideaForge’s revenues come from defence projects.

But of course, ideaForge’s drones can be used for other things too.  Such as mapping land in 660,000 villages to give its inhabitants clear titles to their land. Or in monitoring religious congregations such as the 40-day Amarnath pilgrimage. It has been used by forest officers in Uttarakhand to track a tiger that had attacked humans. It was even used by the National Disaster Response Force to locate and save people caught in flash floods in the mountains.

But if you’re wondering why we’re primarily pointing out its association with government-related projects so far, that’s because even though 25% of its revenues are classified as ‘civil’, it is primarily driven by the requirements from the police force and local administrative bodies. So it’s not like all those wedding photographers and travel influencers are buying ideaForge’s drones for their needs.

And by virtue of being around for 15 years, ideaForge pretty much controls 50% of the unmanned aircraft systems (UAS) segment in India. In fact, the company says that an ideaForge drone takes off every 5 minutes in the country to do its mapping and surveillance job.

The past few years have been good for the company too. Orders have ramped up. And the ecosystem has become more conducive too.

We had the official Drone Rules coming up in 2021. And when there was pushback due to a lot of really silly rules, the government was quick to correct it. Then it also announced the production-linked incentive (PLI) scheme for making drones. It allocated ₹120 crores spread over three financial years — FY22 to FY25. And ideaForge is already reaping its benefits.

So, why are they tapping the public markets now?

Well, the simple answer is that the company needs some more money to grow. Out of the ₹550 crores ideaForge is expected to raise, nearly half of it will go back towards paying debt, developing new products, and meeting the needs of running their daily operations.

But also, it could be a case where they believe that it’s time to simply expanded their investor base. Because as per folks that the Economic Times spoke to, drone manufacturers have not found it quite easy to get funding from venture capital (VC) funds in India. People think there’s too much reliance on government-aided projects which is a big risk. Governments aren’t known to be timely with their payments either.

Sure, ideaForge has raised money from investors such as Infosys and Qualcomm but they aren’t your run of the mill VC investors. So maybe the IPO is also a case of reducing dependence on VC-type of funds and reaching out to the public market investors. After all, in the words of ideaForge’s CEO, “Unfortunately, in the drone sector, funding often follows results and not the other way around, but given the capital-intensive nature of the business, it becomes a bit of a chicken and egg problem.”

And while ideaForge seems to have the wind beneath its wings right now, there could be some turbulence along the way.

See, ideaForge definitely has the first-mover advantage. They have been around for over 15 years and have been able to fine-tune their products to grow  the nascent drone ecosystem. But maybe they were too far ahead of the curve? Because it is only recently that drones have taken off in a big way. And plenty of competitors have emerged quickly too.

They’ve realized that the lucrative opportunity is there for the taking. And if you look at the list of drone-related companies that have also qualified for the PLI scheme, you’ll see a long one made up of 23 entities. Including a behemoth — the Adani Group which has a joint venture with a premier Israeli drone company.

And let’s just say that Israel’s a pioneer in this space. Apparently, it’s the first country to use a drone in a war. This was way back in 1973. So they’ve got the expertise. And seeing Adani as a potential rival will send the jitters up anyone’s spine, no? This group is everywhere!

Now sure, you might argue that India has banned the import of drones to protect and promote domestic manufacturing. But that doesn’t include drone imports for defence purposes. And since a huge chunk of revenue for ideaForge comes from the defence sector, they really don’t have any protection in this regard.

In fact, India’s planning to spend a gargantuan sum of $4 billion to buy Predator drones from the US. These unmanned aircraft will not only help with surveillance but can even drop missiles when needed. And that’s just not something ideaForge’s drones can do. Yet.

Also, ideaForge says that doesn’t seem to have any long-term contracts either. Most of their deals are based on relationships they’ve built over the years. That could be a little tricky to navigate with rivals snapping at its heels.

So the question is — can ideaForge replicate the stock market listing success of drone company DroneAcharya (quite a brilliant name that) which popped nearly 100% when it IPO’d in December 2022?

We’ll have to wait and see.

Until then…

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