Should you subscribe to IPO of MTAR Technologies ?

MTAR Technologies, a precision engineering solutions company has approached the primary market to raise about ₹600 crore.

The IPO is open for subscription during March 3-5 at a price band of ₹574 -575 a share. It is a combination of fresh issue of shares (21.48 lakh shares) and offer for sale (82.24 lakh shares). Post-IPO, the promoter holding will drop to about 50 per cent from 62 per cent. The market capitalisation of the company would be ₹1,768 crore (at ₹575 a share).

Founded in 1970, the company manufactures mission critical precision components with close tolerances (5-10 microns) and critical assemblies. The company primarily serves customers in the clean energy, nuclear and space and defence sectors. The growth drivers of the industries that the company operates in look decent with government’s push on Atmanirbhar Bharat and global focus on clean energy. With capacity utilisation at 40 per cent ( as per the management), the company is also well placed to cater to any increase in demand, going ahead.

However, the company’s dependence on few clients makes customer concentration a key risk to the business. This becomes more relevant in the competitive environment that the company operates in, both domestically and globally.

Further, the valuations for the stock appear steep. At the upper end of the price, the stock is valued at 56.4 times its FY20 earnings. It trades at 47.2 times FY21 EPS (annualised earnings based on earnings for 9 months up Dec 20). This is not cheap.

Thus, long-term investors can avoid subscribing to the IPO for now.

Risky bet

In FY20, the revenue mix of MTAR Technologies comprised clean energy (64 per cent), space and defence (18 per cent). nuclear (14 per cent) and others (3 per cent).

A significant proportion of company’s revenues (about 64 per cent in FY 20) have historically been derived from Bloom Energy – a US-based entity. Note that Bloom Energy, one of the prominent players in the fuel cell segment, is a loss-making company (though improving lately) with high debt. It has also had to restate its prior 4 year financials up to FY19 after overstating revenue and profits. As the growth in MTAR’s sales is directly linked to Bloom’s business hence a close watch on the operational performance of the latter is also necessary.

The other important customers include Nuclear Power Corporation of India (buys nuclear reactor products), ISRO that takes care of procurement and assembly of satellites and launch vehicles, and DRDO, which focuses on military technology.

Though the company currently caters to 39 customers, the contribution of top three - Bloom Energy (64.53 per cent in FY20), NPCIL (10.95 per cent), Liquid Propulsion Systems Centre, ISRO (8.07 per cent in FY20) account for 84 per cent of the company’s revenue for the FY-2020.

The company has a long-standing relationship with these organisations – 9 years with Bloom and more than two decades with NPCIL and ISRO. But the absence of long-term agreements by virtue of nature of the projects makes it vulnerable to any change in the supply chain strategies of customers - especially Bloom with respect to which external factors such as protectionist measures by the US, if any, can play a spoilsport too.

The management believes that the competition threat to its products is minimal. But the projects from nuclear, and defence and space sectors (where entry barriers are liberalised to an extent for the private players) follow a competitive bidding process. There is a possibility of MTAR losing new business from existing customers or pressure on profitability due to stiff pricing.

As per a Crisil report, company’s competitors in nuclear sector are L&T Heavy Engineering and Godrej & Boyce. In the space and defence sectors, the peers are L & T, Godrej & Boyce, Hindustan Aeronautics, and Walchandnagar Industries.

Further, lower budgetary allocation by the government towards the said sectors may also directly impact the company’s prospects.

Decent financials

MTAR’s revenue and profits have been growing steadily while profit margins are fairly healthy. Between FY18 and FY20, total revenue grew at a CAGR of 16 per cent to ₹214 crore for FY20. Operating profit margin also grew to 30 per cent in FY20 from 20 per cent in FY18 significantly on the back of lower raw material cost. Consequently, net profit of the company shot up from a low base of ₹5.4 crore in FY18 to ₹31.3 crore in FY20.

During the Covid-19 pandemic, MTAR too shut down its operations for a while but managed well to be on track with revenues and operating profit margin for the nine month period ending December 2020 at ₹177 crore (up 16 per cent y-o-y) and 30 per cent respectively. The net profit too grew at a healthy rate of 25 per cent y-o-y to about ₹28 crore during the period.

The aggregate order book of the company as on December 31, 2020 was ₹336 crore. It works out to 1.6x of revenue from operations (FY20).

In leverage terms, the company looks comfortable with debt to equity ratio at 0.27 times as on December 2020.