Drone maker ideaForge Technology on Monday, June 26, said it commands the margins as the entire technology stack is largely designed by the company.

In an exclusive interview with Nigel D’Souza and Prashant Nair ofCNBC-TV18, Ankit Mehta CEO, and Vipul Joshi, CFO of ideaForge Technology, said the company's revenues mainly come from defence and it is looking to increase the share of civil.

ideaForge Technology’s Rs 570-crore initial public offering (IPO) has opened today (June 26) for subscription. Of this Rs 570 crore, Rs 240 crore is a fresh issue while Rs 330 crore is an offer for sale (OFS). Their promoter stake will decline to around 30 percent post the IPO. The company is looking at a post-issue implied market cap of up to Rs 2,800 crore.

Below are the edited excerpts of the interview:

D’Souza: It's been quite a journey, from building one of the first quadcopter drones to entering a college first. And now you are looking at a Rs 2,800-crore market cap. But you are demanding top-dollar valuations. So, I want a couple of numbers from you. First up, your working capital days — seem a bit elevated at around 300 days — maybe most of your business is with the government so that could be one of the reasons. But could you tell us what this number is likely to look like going ahead?

Joshi: Right now, it's 300 days, but going ahead, on average, we are expecting it to be around 200 days. Yes, we deal with defence as a prime customer, plus there is an impact on the overall inventory days as well, which is also because of the timing of when we took the numbers. In March, we were sitting with finished goods, which then subsequently got delivered, etc. So sometimes some of these timings do matter when you are taking and closing these numbers.

D’Souza: There is tremendous potential – that is the buzzword for the drone industry that you are into. Give us a couple of more details. You cannot give us guidance about the growth for this year, but when you list we will want that number. But what is the total revenue potential? You are doing a little under Rs 200 crore odd with the money you are getting, with the investments you have made. What is the peak revenue potential the company can deliver?

Mehta: Post the pandemic, the opportunity has started to shift from being a good-to-have technology to a must-have technology, what with the amount of impetus that both the government and the policy are doing for the industry. At this point in time, the potential is looking very exciting. To give you examples, one of the schemes that the Government of India has is SVAMITVA (Survey of Villages and Mapping with Improvised Technology in Village Areas), where the government is mapping all the 660,000 villages in the country, and creating property cards for villagers who have lived in their houses for generations, but have not had formal ownership them — they will for the first time have that formal ownership of those houses. This scheme and also several states are getting into full large-scale re-survey of their lands. We are also getting into the mandatory use of drones for national highway mapping, mandatory use of drones for use in mining, and of course, we have the defence side of the house where we are looking at a very large potential and an urgent need to induct the technology given what we have seen over the last many episodes.

D’Souza: The potential is massive and a note stated that currently the industry is around $43 million in FY22, and the potential is that it is going to go up to around $800 million. So the potential is big. My question to you what is your revenue potential – with the current investments that you have made, you are building a great business with big potential, but what is the revenue potential that you can reach if demand picks up and you get your orders etc?

Mehta: The way we need to look at ideaForge’s potential is that we are obviously not going to be in each and every segment of what the drone industry is going to comprise. We are going to look at particular segments that complement our market size, and market scale or complement our approach in terms of the industry. So, today we are looking at most of the potential come from the surveillance and mapping sides of the house which are the two large scaled opportunities as far as this industry is concerned currently. And there are many other sectors which we will not be a part of.

Nair: What is the revenue potential according to you — the two that you are focused on right now. Is there a number in mind?

Mehta: We have to look at the potential from multiple aspects. So, there is one in terms of the total market potential, the total addressable market — (the potential) for our country runs into a few billion dollars for both segments put together.

Nair: Just a quick run-through — defence and mapping are two areas that you are focused on. Could you tell us a few simple things? What is the replacement cycle for the drones that you manufacture? Is there a single product dependence that you have? On what parameters does profitability depend on because many more companies are getting in. And since this is a not very new technology, but emerging technology, I am assuming prices will go down? So, what is the margin profile going to be?

Joshi: We have distributed the product line today from as low as a 25-minute system to as high as about a two-hour system — the various segments that we are delivering. Our revenues distributed between a defence and civil is how we are in the market today. A large part of the past few years’ revenues has been defence. We see that the share will slowly increase and that is the reason we are also looking to further our efforts in the drone as a service side of things. While there is not a single dependence on one product line, continued efforts are on to develop the technologies for drones going ahead. Also how we continue to be differentiated in the market, both domestic and international, would help maintain the margins. Further, the revenue-mix or product-mix on how customers are looking at the particular drone is the usage. Every use-case will have its own margin segments… wherever our top of the line, marquee products are there, we would continue to enjoy healthy margins.

Mehta: When we look at the margin structure, for ideaForge, it is pertinent to note that the entire technology stack that we have is largely designed by ourselves. So, our ability to command margins has been good because of the fact that for the same technology product, if let's say for example, somebody else was to buy 100 percent of a subsystem, we will only buy the bill of materials of that, and we will be adding the technology layer on top.

Nair: So, you have more control over margins basically...

Mehta: Absolutely.

Nair: There is this note which has been circulating claiming all kinds of things. It doesn't have a name in terms of who the author is. But it does allege a lot of things – it talks about fraud, embezzlement, FIRs. I'm sure you guys have gone through it as well. You have decent sort of anchor investors who've come in and shown faith in the IPO. So that's a vote of confidence. But how do you respond to the note which I'm sure both of you have gone through in detail?

Joshi: ideaForge is not a four- or five-year-old company. It is a 16-year-old company with 62 patents filed and 25 of them granted the world over. ideaForge’s drones have done about 350,000 flights in the hands of the users. And we have been developing technology in-house since the day we started. That has been our forte. We are today also present in the international market, our subsidiary in the US has been open since last September. We have also launched a product which is world class.

Nair: The question is will you respond to the allegations in this note? Because the note says they have also sent this to SEBI, etc.

D’Souza: Have you received any formal communication? We want to clear the air on that front. It's been doing the rounds on WhatsApp. So we want to understand that and have you responded to it?

Mehta: We have already disclosed anything which was material and relevant, we've already disclosed it in the RHP. And in terms of responses to the regulators, we have already placed most of our responses to the regulators as well.

Nair: After this note circulated, did you reach out to the regulator and provide facts or have they reached out to you?

Mehta: We have reached out proactively.

Prashant: And you've kind of given a sort of response… will you make that public as well?

Mehta: We will have the regulator's guidance on that.

Prashant: Okay but you've not heard back from the regulator?

Mehta: Nothing at all.

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(Edited by : Shoma Bhattacharjee)

First Published:Jun 26, 2023 6:54 PM IST