Updated: Dec 2, 2021
Company Name – MTAR Technologies Limited (MTAR)
Current Share Price – INR 1,887 (November 23, 2021)
Market Cap – INR 5,786 cr
1. What is interesting about the stock?
The company inception was in 1970. Five decades later it seems poised to be one of the largest beneficiaries of India’s journey towards self-reliance in defence and space sector manufacturing. The Ministry of Defence (MoD) started partnering with the private sector in 2001 with permission to have 26% foreign direct investment (FDI) in manufacturing companies. Over the years, various iterations to the Defence Procurement Procedure (DPP) have taken place. In 2020, further revisions were evaluated. The revised draft policy has laid out the markers for ‘Make in India’ initiative in the defence sector. The policy’s focus is to develop homegrown capability and encourage greater involvement of Indian private companies through reforms. In the space sector, the government approved creation of Indian National Space promotion and Authorization Centre (IN-SPACE) in 2020. The institution (IN-SPACE) will guide private companies in the space sector through supportive policies and active engagement with ISRO.
It is clear that the government wants to promote self-reliance and hence global OEMs would need to either establish manufacturing facilities in India or partner with domestic players. Through its myriad product portfolio, MTAR is well poised to take advantage of the aforementioned developments as it is engaged in precision engineering requirements of Indian nuclear, defense and space sectors.
Company Product Offerings:
Clean Energy Sector: Power Units.
Nuclear Sector: Fuel machining head, Bridge and column, Grid plate, Sealing plug, shielding plug, liner tubes and end fittings, Drive Mechanisms, Top hatch cover beams and deck plate assembly, CHAS, Ball screws and water lubricated bearings.
Space and Defense Sectors: Base shroud assembly and air Frames, Actuator assembly Components, Components for LCA, Various missile parts, Valves, Electro-pneumatic modules, Liquid propulsion engines, Cryogenic engines, Ball screws and water lubricated bearings.
Surface treatment, Heat treatment and Special processes facilities: Various surface treatment activities such as nitriding, anodization, hard chrome plating, nickel plating, induction hardening, electro polishing, pickling, passivation, zinc plating and painting, among others and Heat treatment such as gas carbonizing, through their various furnaces.
The company has in the past worked with Indian Space Research Organization (“ISRO”) and the Defense Research and Development Organization (“DRDO”) to supply specialized products to the Indian space program and the Indian missile program, respectively. Within the defense sector, company has supplied complex assemblies to DRDO, such as the base shroud assembly (for Agni missiles), and the assembly of secondary injection thrust vector control (“SITVC”) valves and hydraulic fin tip control (“HFTC”) valves. In addition, MTAR also exports defense components to Rafale and Elbit.
MTAR’s clientele includes ISRO, NPCIL, DRDO, Bloom Energy, Rafale, Elbit etc. The key product portfolio of the company includes critical assemblies such as Liquid propulsion engines to GSLV Mark III, Base Shroud Assembly & Airframes for Agni programs, Actuators for LCA, power units for fuel cells, Fuel machining head, Bridge & Column, Thimble Package, Drive Mechanisms etc. to the core of the nuclear reactor.
MTAR operates seven manufacturing facilities, including an export-oriented unit, all of which are located in Hyderabad, Telangana.
Key competitive advantages of the Company are:
Ability to manufacture complex engineering products with high degree of precision
Elaborate product portfolio that allows the company to cater to multiple requirements of the same customer
High barrier to entry for competitors due to stringent pre-qualification requirements of clients
2. Key Historical Financials
MTAR’s revenues have been growing at an average of 16% per annum which is a healthy growth rate. In FY21, nuclear power, space & defense, and clean energy contributed to 26%, 21% and 50% of the company’s revenues respectively
EBITDA margins have been close to 30%, which reflects the company’s ability to have created a niche for itself
Net debt for the company is negative and hence there are no leverage concerns. The company had used capital raised from the IPO (March 2021) to retire debt
However, it is worrisome to note that cash flow from operations has reduced significantly due to a 75% jump in working capital days between FY20 and FY21. Company has said this is due to increase in average inventory as a result of procuring raw materials in advance and delays in receivables amidst COVID 19 pandemic. We should watch out for this
As of 30 Sept 2021, the company had an order book of INR 535 cr
In Sept 2021, the company received it single largest order of USD 29.82 Mn (~INR 220 cr) from Bloom Energy for export of Yuma Hot Boxes and associated components, to be delivered over the four quarters of the calendar year 2022. Hence FY23 could see a huge jump in revenues
3. What is my view on company valuation?
MTAR’s IPO issue price in March 2021 was INR 575 and was subscribed 201 times. Whoa! Currently the stock is trading at ~3.3x of issue price. That’s a 228% return over 8.5 months! This has my attention.
Such a rally is indicative of the fact that the company is in a unique position to enjoy growth of clean energy, nuclear, defense and space sectors. But does that justify a P/E (TTM) ratio of c. 105x? In comparison HAL is trading at a P/E (TTM) ratio of c. 13.3x.
Clearly the company must grow at a rapid rate to justify current valuations. But as mentioned earlier, the company has grown by about 16% per annum between FY2019 to FY2021. H1 FY2022 net profit growth over H1 FY 2021 is c. 47%. Given the current order book of INR 535 cr of which the Bloom Energy order is to be delivered in 2022, net profit for the company could jump to a significantly higher level for FY23. Considering TTM net profit is INR 55 cr, FY23 growth could be 60%+. However, maintaining this high growth rate in the long run, when historically it has been 16%, seems far-fetched and thus the valuations seem steep.
4. What are the risks to the investment analysis?
Risks to the analysis are:
50-60% of the company’s revenues are from clean energy where Bloom Energy is the key client. In other segments too the customers are primarily NPCIL, ISRO and DRDO. Hence there is high dependency on few clients
Working capital for the company has increased to over 6 months. Lack of a reversal to previous levels or worse a further increase could adversely affect operations and financial health of the company
About the Author
I have over 14 years of experience in investment banking and wealth management. I am an engineer by background and MBA from a premier institute in India.
I have no stock, option or similar derivative position in any of the companies mentioned since last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.
I am not a SEBI registered advisor. This article is purely for educational purpose and not to be construed as an investment advice. Please consult your financial advisor before acting on it.
I have used publicly available information while writing this article.