MTAR Technologies IPO: Opportunities, Risks and Should You Subscribe?

The ₹597cr ($81.4m) IPO of MTAR Technologies opened recently.

As at the day’s close on March 3rd, the Hyderabad-based firm’s issue was 3.01x subscribed at a price band of ₹574-575 ($7.43) per share. At the upper-end of the band, the company seeks a market cap of ₹1,768cr ($241.14m).

The IPO closes on March 5th, allotment expected on March 10th, and listing by March 16th.

What is MTAR Technologies?

A precision engineering solutions company, MTAR Technologies manufactures mission critical precision components with close tolerances (5-10 microns), for a variety of sectors including clean energy, semiconductors, nuclear, space, optics and defence.

FYI: “Precision engineering” is the engineering sub-discipline that deals with the design of machines with a level of accuracy that is many orders of magnitude smaller than the size of the machine or instrument itself.

MTAR began operations in 1970 and currently operates out of seven manufacturing facilities, including an export-oriented unit. Its clients include the likes of ISRO, NPCIL, DRDO, California-based Bloom Energy, Indira Gandhi Centre for Atomic Research, Bharat Dynamics, Hindustan Aeronautics, and Israel-based Rafael and Elbit.

Its major product portfolio includes three kinds of products in the clean energy sector, 14 kinds of products in the nuclear sector and six kinds of products in the space and defence sectors. As of the end of CY20, the manufacturing company’s order book stood at ₹336cr ($45.8m) (1.6x its FY20 revenue) of which the space and defence segment accounted for 48% share, followed by the nuclear sector (28%) and clean energy (24%). 

 

Fast Stats

Coming to MTAR’s IPO (link to RHP), here’s what you need to know:

• It includes a fresh issue of 21,48,149 equity shares worth ₹124cr ($16.9m) and an offer for sale of 82,24,270 shares worth ₹473cr ($64.5m) by its promoters and investors.
• An offer for sale is where a company’s promoters cut their holdings by selling their stakes in the market. Ergo, post-issue MTAR’s promoters will prune their stake to 50.25% from the current 62.24% while public shareholding in the company will increase to 49.75%.
• At the upper band of ₹575 ($7.43) per share, MTAR will trade at a P/E of 47.3x (annualised basis of FY21 EPS).
• Ahead of its public issue, MTAR raised ₹179cr ($24.4m) from anchor investors, selling 31,11,725 shares for ₹575 apiece.

 

Opportunities

MTAR boasts decent financials and healthy potential with the Government’s focus on boosting the manufacturing sector vis-a-vis Make in India and Atma Nirbhar Bharat.

• The space and defence sectors enjoy considerable growth prospects and here MTAR has no listed peers. Besides, these are sectors with high entry barriers, so new competition is not particularly a concern. (However, there are many large existing players including Mahindra Defence, Larsen & Toubro, Godrej & Boyce etc.).
• In the space sector, much activity awaits. ISRO plans no less than 321 satellite missions in the next two years, including manned missions and ventures to the sun. Private sector involvement in the country’s space programme is also expected to jump in the next five years, with 70% of all upcoming space mission orders going to India Inc.
• Then there’s the nuclear energy sector, which is slated for robust growth with the Government aiming to double its capacity and build seven new nuclear reactors in the coming five years. With bans on the import of equipment in place and a thrust towards indigenisation, MTAR stares at a lucrative opportunity in the near-term.
• Between FY18-20, the company’s order book, EBITDA, revenue and net profit clocked a CAGR of 31%, 34.9%, 15.7% and 140.3% respectively.
• Its debt to equity ratio was 0.27x as at 9MFY21.

 

Risks

• MTAR’s debt more than quadrupled to ₹67.2cr ($9.17m) during 9MFY21 when compared to 9MFY20. Consequently, its debt to equity ratio rose to 0.27x from 0.07x.
• The company has concentration risks. It relies on only three customers for 80% of its revenue, with 49% of revenue (in 9MFY21) coming from one client alone (Bloom Energy).
• Lack of long-term purchase agreements with any of the customers.
• Orders from NPCIL, ISRO and DRDO depend on Indian Budgetary allocations. A decline in the same could hit MTAR’s books.
• The liberalisation of defence equipment procurement and the entry of private players in the space sector may increase the level of competition the Hyderabad-based company faces.

Our broad take is that though MTAR appears like an attractive BUY considering its stable financials and strong growth potential, its lack of customer diversification needs to be kept into account while deciding the size of one’s exposure to it.

PS: Click to read our pieces of some previous high-profile IPOs: RailTel Corp., IRFC, Burger King India, Brookfield REIT, Gland Pharma, Ant Financial (and why it was abruptly suspended), Happiest Minds Technologies, CAMS and UTI AMC.

PPS: Better yet - how about a Quiz on IPOs?!

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