By Vivek Ananth
Hyderabad-based MTAR Technologies is a precision engineering solutions company that serves customers in strategic sectors like nuclear, space & defence and clean energy. The company’s initial public offering of up to Rs 596 crore consists of a fresh issue and an offer for sale by promoters and an investor. This issue will hit the markets on March 3, 2021.
With initial public offerings of shares, it helps to have a listed peer that an investor can compare with in terms of return ratios, margins and price-to-earnings multiple, and other financial metrics. In case a company does not have any listed peer - which is the case with MTAR Tech, then the price it is asking for its shares in the form of price-to-earnings multiple becomes a little difficult to analyze.
Based on its 2019-20 numbers, MTAR Tech is valued at nearly 52 times its earnings. If we annualise its earnings for the nine months ended December 2020, then it is valued at nearly 41 times its FY21 earnings. This makes it quite an expensive issue. Based on the trailing twelve months, the Nifty 50 is valued at 41 times earnings.
A company that is valued at such high levels must have a business moat that justifies it. Before we look at whether that is the case with MTAR Tech, let’s look at the issue details in brief.
Pre-IPO placement cuts issue size
The company has undertaken a pre-IPO placement of Rs 100 crore worth of shares to schemes run by Axis Mutual Fund and SBI Mutual Fund. These shares were issued at Rs 540 per share when the pre-IPO allotment of shares was done on February 16, 2021.
This means that the fresh issue of shares is worth up to Rs 123 crore and the offer for sale is of Rs 473 crore. A slew of promoter group individuals, Fabmohur Advisors LLP and P. Simhadri Reddy are selling shares in the offer for sale. The promoter group’s holding in the company will come down to 50.25% from 62.24% post the IPO.
Part of the proceeds from the fresh issue and the pre-IPO placement will go towards repaying debt worth Rs 63 crore and Rs 95 crore towards funding working capital needs. The rest will be used for general corporate purposes.
The IPO opens on March 3, 2021 and closes on March 5, 2021. The minimum bid lot is 26 shares and a minimum 35% of the issue is reserved for retail investors, up to 15% for non-institutional investors and the balance for qualified institutional buyers.
Niche business from fewer clients
The company makes high precision components, subsystems and assemblies in India for its nuclear space & defence and clean energy customers. In FY20, MTAR Tech earned 64% of its revenues from the clean energy segment, 18% from space and defence segment, 14% from nuclear segment and the rest from others. Around 85% of the company’s revenues came from its 39 top customers for the nine months ended December 2020.
This is how the company’s revenues from its major segments have moved over the past three years.
The fall in revenues from the clean energy segment for the nine month period was because revenues from the company’s biggest customer—clean energy firm Bloom Energy—dropped below 50%. Revenues from space & defence and nuclear energy segments helped MTAR Tech make up for this fall.
The company also counts Nuclear Power Corporation of India (NPCIL), Indian Space Research Organisation (ISRO) and Defence Research Development Organisation (DRDO) as customers. It also supplies components to French fighter jet maker Rafale.
This shows that the company has the engineering capability that makes it stand out in its space. Its relationship with ISRO and NPCIL has lasted more than a couple of decades now. For ISRO, the company makes the liquid propulsion engine for the space agency’s launch vehicles, and other components as well.
Future business prospects look good
If there are more rocket launches by ISRO and MTAR Tech makes the winning bid, there will be more revenues from the space & defence segment. As the government is pushing towards indigenisation of its defence purchases, it has banned around 100 or so imports and decided to give preference to Indian companies. This will also help increase its revenues from this segment if MTAR Tech makes successful bids
There are also many nuclear reactors that will be built by NPCIL over the next decade or so. By 2031, India’s nuclear capacity (to be built by NPCIL) will rise to 26.2 GW from 6.3 GW. In the next five years, NPCIL will build 7 more reactors and another 14 reactors are planned and tenders will be released.
What makes MTAR Tech tick, so to speak, is its niche capabilities in the precision manufacturing segments in these strategic sectors. There is a threat of competition in some sub segments from Larsen & Toubro and Godrej & Boyce. But these companies can’t be compared to its peers to make a comparison about its capabilities. The push for private participation in strategic sectors will lead to intense competition in the future and impact MTAR Tech’s revenues. It will be interesting to see how this pans out.
Financials steady despite COVID-19 pandemic
From FY18 to FY20, MTAR Tech’s net profit (PAT) grew at a compounded annual growth rate (CAGR) of 63% to Rs 45.5 crore, while PAT for the nine months ended December 2020 grew 21% YoY to Rs 39.6 crore.
During the same periods, the CAGR growth in revenues was 16% to Rs 213.8 crore. Revenues for the nine months ended December 2020 grew 16% YoY to Rs 177.3 crore. And this is despite the pandemic leading to a two-month shut down of operations in the beginning of FY21.
The company’s cash flows took a hit during 2020-21 because of a spike in trade receivables in the nine months ended December 31, 2020 compared to the same period a year ago. There was also a fall in trade payables in FY21. This is unusual for the company as it gets payments regularly, but COVID-19 has dented this efficiency a bit.
The company’s return ratios are also pretty impressive and have remained steady over the past few years.
Its earnings before interest, depreciation tax and amortisation has been hovering around the 30% mark for the past couple of years. For the nine months ended December 2020, the EBITDA margins were 30%.
The high margins that it earns from its business, and the possibility of revenue growth boosting its margins even more due to operating leverage playing out when its capacity is utilised, means that MTAR Tech is an appetising bet for investors. The revenue concentration risks however, make MTAR Tech a risky bet too.