MTAR Technologies IPO: Engineering Precisely

By: Tavaga Research

MTAR Technologies Limited, a leading national player in the precision engineering space, has launched its IPO at a price band of INR 574 to INR 575 per share with the issue closing on Mar 5, 2021. 

IPO SNAPSHOT

(Source: Tavaga Research)

* Out of 10,372,419 shares under the offer, 8,224,270 are being sold by the existing shareholders whereas 2,148,149 shares are fresh shares, hence a fresh issue of INR~124 crores for MTAR. Also, MTAR has done a Pre-IPO Placement of 1,851,851 Equity Shares raising further INR 100 crores.

About MTAR Technologies

MTAR Technologies Limited (or ‘MTAR’) is a leading precision engineering company incorporated in 1970 and is based in Hyderabad. MTAR manufactures mission critical components having close tolerances of around 5-10 microns, and also serves projects of high national importance, through its precision machining, testing, quality control, assembly, and fabrication capabilities.

Through its state-of-the art facilities it has contributed to the Nuclear Power program, Defence, Clean Energy, as well as Indian Space program and has catered to key projects such as Chandrayaan-2, India’s second Lunar Mission by providing Liquid propulsion engines to GSLV Mark III which was developed for the Launch by ISRO.

Objects of the issue

The funds from the offer for sale would go to the sellers whereas INR ~124 crores out of Fresh issue and INR 100 crores from Pre-IPO placement would be used by the company mainly for:

• Funding the working capital: MTAR would put INR 95 crores in its working capital.
• Repayment / prepayment in full or in part, of borrowings availed: MTAR would use further INR 63 crores to repay its debts.
• Funding general corporate expenses: Upto INR 56 crores would be utilized for general corporate expenses.

Industry Overview

The precision engineering industry’s turnover in India is has grown at a CAGR of  ~7% from FY 2016 and FY 2020 and is expected to grow at the same pace to achieve a level of INR ~ 6,00,000 crores by FY 2025.

Precision engineering industry is estimated to contribute 3-4% of overall national manufacturing output.

Government of India plans to increase the contribution of manufacturing sector to 25% of GDP by FY 2025 from the current levels of 17-18%. This could further aid the growth for precision engineering components in the form of supportive government policies, ease of doing business, increased investments in infrastructure and, increasing focus on strategic sectors such as defence and aerospace. 

Further with the great numbers reported by automobile manufacturers for Feb 2021, we could see further growth in this industry as auto components is one of the many applications of precision engineering.

Godrej & Boyce, Mahindra Defence Systems Limited, Tata group and Vem technologies are the major players in the defence, nuclear, space and aerospace equipment space in India apart from MTAR.

* FY 19 financials for Vem Technologies and FY 20 for others.

The Advantages and Pitfalls of MTAR

Before making any decision on whether to subscribe to the IPO or not, we must consider the following points:

POSITIVES

• Survived the Pandemic: Even in 2020 when most businesses had to face challenges, MTAR was able to perform pretty well. The Revenues which were INR~152 crores for the nine month period ended Dec 31, 2019 grew at ~16% to reach INR~177 crores for the nine month period ended Dec 31, 2020.
• Superior margins: As shown in the previous section, MTAR beats major competitors in terms of the margins.
• Government support: Going with the Make in India initiative of the Government, many defense companies like Bharat Dynamics Limited and Hindustan Aeronautics Limited have been looking for domestic procurements of components. Further Governments plan to increase share of manufacturing sector in the GDP could translate into favorable policies going forward.

NEGATIVES

• Increased Debts: The company has had debts in the range of INR 200 to 300 crores from FY 17-18 to FY 19-20, however this number more than doubled to INR ~ 673 crores  by December 2020. This is a major area where company would work post the issue and pay of debts ~ INR 63 crores by utilizing the IPO and Pre-IPO proceeds.
• Concentrated customer base: Substantial revenues for MTAR come from a single customer (Bloom Energy) with it contributing 49%, 61%, 65% and 49% to the Total Revenues for FY 17-18, FY 18-19, FY 19-20 and 9 month period ended Dec 31, 2020 respectively. Further the Top 3 customers have contributed more than 80% of the Total revenues for the same periods.
• Uncertainty with the regular customers: Since the business is primarily driven by purchase orders, and not on long term contracts, even the orders from existing concentrated base may fluctuate. Further the national budget and government policies can impact the amounts of purchase orders as the customers include government agencies like NPCIL, ISRO and DRDO.
• Significant Raw Material costs: Raw Materials costs are significantly high at ~40 percent of its revenues. Further due to the specialized materials involved, MTAR has limited suppliers with the top 5 suppliers making ~60% of the total raw material purchases.
• High Working Capital Requirements: Estimated to be INR ~ 310 crores for FY 2020-21, the working capital requirement seems to be high.

The customers have been loyal to MTAR with consistent order flows. This reputation that MTAR carries, the favorable government policies and superior margins make MTAR a strong player in the sector. Also, interest by global aircraft manufacturers like Boeing and Lockheed Martin, to set up production capabilities in India could open new doors for MTAR.

Disclaimer: The above analysis is not a recommendation

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