This small-cap defence stock surged 2,147% in 3 years: What makes it different?

Source: Trading View

From August 1 to September 4, the small-cap stock surged 84%, outperforming defence stocks like Hindustan Aeronautics (HAL), Bharat Dynamics (BDL), and Paras Defence. Rising from a price-to-earnings ratio (P/E) of 78x to 146x in 34 days, Apollo is one of the most expensive defence stocks.

But the rapid rise raises questions. Why did this stock emerge as a late bloomer in the defence rally? Is there more upside for the stock, or is it too late to catch the growth? To answer that, we need to go back to where it all began.

2018: The year of India’s defence reform

In 2018, retail investors got the opportunity to invest in defence technology after the government disinvested a minority stake in a few defence PSUs while retaining the management control.

Public ownership increased PSUs’ accountability for optimum utilisation of funds, and from there began the defence rally.

Fig 2: Defence IPOs between 2017 and 2021

Source: Screener.in

Defence PSUs took the lead and private defence stocks followed suit in April 2022 when the government allocated 25% of its domestic capital procurement budget for private industry.

The beginning of Apollo Micro Systems’ journey

AMS began its journey in 1985, offering build-to-specifications (BTS) and build-to-print (BTP) electronics and electromechanical solutions for aerospace, defence, space, automotive, railways, and homeland security. It worked alongside the Defence Research and Development Organisation (DRDO) to develop projects such as torpedo-homing systems and underwater mines. Today, AMS is handling 63% of the electronics and electromechanical activities of all DRDO missile programmes and naval warfare programmes.

Every mission has a different requirement and ASM provides customised solutions from research, design, development, testing and manufacturing to maintenance, support, and system integration. These high-value, high-complexity defence programmes reduce competition and bring in superior profit margins.

Given the complex nature of the defence programmes, AMS aims to offer end-to-end solutions across the munitions and weapons value chain — from high-energy materials to full-system integration. It is building capability through

• Innovation
• Technology transfer memorandum of understanding (MoU), and
• Strategic acquisitions

AMS spends 7-8% of its revenue on research and development (R&D) for DRDO programmes. This spending has helped it build aerial bombs, underwater acoustic sensors, critical actuation systems, secured data links, and more in FY25. It has allocated Rs 100 crore in R&D for FY26.

The products and platforms that mature enter large-scale production and drive revenue. Some of its products, such as underwater mines and anti-submarine warfare rockets, are already in production.

AMS has two units, Unit 1 for R&D and Unit 2 for manufacturing. It is investing Rs 149 crore on a third unit that will be used for manufacturing, streamlining and integrating operations.

Fig 3: Matured Products of Apollo Micro Systems Entering Production

Source: Apollo Micro Systems Investor Presentation July 2025

What drove Apolo Micro Systems’ share price?

Orderbook guidance: On 28 July, AMS released its Q1 FY26 earnings, where the management stated that it expects its order book to triple by March 2026. ASM is anticipating one order for the Quick Reaction Surface-to-Air Missile (QRSAM) from Bharat Dynamics before December.

Export order: In the first quarter, ASM received its first Rs 113.8 crore export order for avionic systems. Why is this a big deal? Exporting defence technology is not easy. A company needs to get a license from DRDO before making an export proposal.

Another challenge is that one must export a full-fledged product, not just parts. Moreover, the competition is high in the export market. AMS entry in the export market marks a milestone and can pave the way for the export of mature products.

The upcoming tenders from MOD and AMS’ entry in the export market drove its share price in August.

Building capability through technology transfer MoUs

AMS also enters into MoUs with other defence companies to build technology capability for orders. MoUs can drive ASM’s share price, but the rally may not sustain because of uncertainty around the timing of technology transfer.

ASM share price surged 5.6% on September 11 as the company entered an MoU with US-based Dynamic Engineering and Design Incorporation to produce Rocket Motors for BM-21 Grad ER and Non-ER Rockets, which have a strong demand in the global defence market. This will involve the transfer of technology (ToT) and help Apollo build a fully developed rocket system in-house for export.

Meanwhile, the January 2025 MoU between AMS and Garden Reach Shipbuilders & Engineers Ltd (GSRE) to supply advanced weapons and electronic systems could see a faster implementation.

Apollo’s acquisition of IDL Explosives

Building on its capability, Apollo Micro Systems has acquired IDL Explosives from Hindujas Group’s GOCL Corporation for Rs 107 crore. This vertical integration will help the company in its pursuit to become a Tier 1 supplier that sells directly to the Indian Army and defence companies.

Is the Apollo Micro Systems stock overvalued?

Strong order inflow, MoUs, acquisitions and the company’s forecast to grow revenue at a compounded annual growth rate (CAGR) of 45-50% over the next two years drove AMS’ share price up 147% year-to-date.

Fig 4: Apollo Micro Systems Sales from FY15-FY17 and FY22-Y25

Source: Screener.in

AMS’ 50% revenue outlook comes on the back of its past ventures, where it grew revenue at a 43% CAGR from FY15-17 and 22% from FY22-24. This explains its 16.4x price-to-sales (P/S) ratio, which is higher than the industry median of 10.72x, but in line with peers with similar revenue growth.

Fig 5: Apollo Micro Systems’ P/S and P/E Ratio Comparison with Peers

Source: Screener.in

Is the 146x price-to-earnings (P/E) ratio justified?

To answer this, you need to understand the flow of cash throughout the defence order.

High working capital increases cash flow risks

High complexity defence contracts have a longer turnaround time. While public companies get an advanced payment, private defence companies don’t, increasing their working capital needs. Longer turnaround time leads to higher inventory and working capital days.

Fig 6: Apollo Micro Systems Working Capital Days FY18-FY25 (excluding pandemic years)

Source: Screener.in

In the case of AMS, a significant amount of capital is stuck in receivables, which has even led to negative operating cash flow in a few years. AMS funded its working capital needs through:

• Long-term borrowings, which jumped to Rs 38 crore in FY25 from Rs 9 crore a year ago
• Promoters pledging 48% of their holdings from 20% a year ago
• Raising Rs 416 crore via a preferential allotment to LIC Mutual Fund

The company aims to reduce the working capital to 100-120 days from FY27 when production begins at full scale. If the company meets this target, its return on capital employed (ROCE) could grow significantly as revenue improves and the company repays working capital loans. That explains a 146x PE valuation.

Does Apollo Micro Systems have an upside?

JM Financial downgraded the defence sector, citing that tax cuts in the FY25-26 Union Budget and the next phase of the GST reforms will reduce tax revenue and impact the government’s capital expenditure.

However, GST 2.0 could give a boost to defence stocks. Until now, 12% of the defence procurement budget has gone into paying GST and customs. The reforms will remove or reduce GST to 5% for specific helicopters, drones, C-130 and C-295 aircraft, tanks, missiles and rockets, armoured vehicles, artillery spares and more.

For the Ministry of Defence, procuring defence goods at a lower cost will free up funds for bigger orders. For defence companies, lower input costs will help them price their products competitively in export markets and spend more on R&D.

Apollo Micro Systems’ growth prospects hinge on its ability to secure export orders and enhance its capabilities across diverse defence projects. Yet, like all defence stocks, its fortunes remain closely tied to government spending. As long as defence policies stay supportive and procurement budgets continue to rise, AMS is well-positioned to capture long-term upside.

Note: We have relied on data from http://www.Screener.in throughout this article. Only in cases where the data was not available, have we used an alternate, but widely used and accepted source of information.

 Puja Tayal is a financial writer with over 17 years of experience in the field of fundamental research.

Disclosure: The writer and his dependents do not hold the stocks discussed in this article.

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