Company Name – MTAR Technologies Limited (MTAR) Current Share Price – INR 1,891 (May 23, 2023) Market Cap – INR 5,815 cr |
1. What is interesting about the stock?
I would like to express my apprehensions regarding the positioning of this particular piece of information on the initial page of the investor presentation. Implies a high focus of the Promoter on the share price.
MTAR Technologies Limited has established itself as a key player in India's defense and space sector manufacturing since its inception in 1970. The Ministry of Defense (MoD) allowing 26% foreign direct investment (FDI) in manufacturing companies in 2001 has enabled the private sector to collaborate with the MoD. The Defense Procurement Procedure (DPP) has undergone several revisions over the years, with the latest update in 2020 emphasizing the 'Make in India' initiative in the defense sector. This policy aims to encourage Indian private companies' involvement and promote homegrown capability through necessary reforms.
In the space sector, the government has approved the establishment of the Indian National Space Promotion and Authorization Centre (IN-SPACE) to guide private companies in the field. This institution will provide supportive policies and active engagement with ISRO, further promoting the growth of the sector. MTAR has signed an MoU with IN-SPACE that shall remain in force for 3 years for the design and development of a two-stage to low-earth orbit all-liquid small satellite launch vehicle powered by semi-cryogenic technology with a payload capacity of 500 kilograms.
The Indian government is taking steps to promote self-reliance by encouraging global original equipment manufacturers (OEMs) to establish manufacturing plants in the country or collaborate with local firms. MTAR, with its extensive product range, is poised to benefit greatly from these initiatives as it addresses the precise engineering needs of India's 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, 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, electropolishing, pickling, passivation, zinc plating, and painting, among others, and Heat treatment such as gas carbonizing, through their various furnaces.
Revenue break-up by end-customer industry in FY23 was:
Clean Energy - Fuel Cells, Hydel, etc.: 77%
Space: 9%
Clean Energy - Civil Nuclear Power: 8%
Defense: 3%
Others: 4%
Exports contributed to 79% of revenue in FY23.
The Company has in the past worked with the 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, the 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 detailed client list is:
Company has a very high customer concentration — it derived more than 60% of its revenues from a single customer (Bloom Energy Corporation) from FY19 to 9MFY23.
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 a high degree of precision
The elaborate product portfolio 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
Company had an order book of ~ INR 1,175 cr as of March 31, 2023, which is ~2x of FY23 revenue.
2. Key Historical Financials
MTAR’s revenue has grown by 78% in FY23 on a YoY basis
EBITDA margins have come down to 27% in FY23 and 25% in Q4FY23
Cash flow convertibility (CFO/EBITDA) deteriorated in FY21, FY22, and FY23 due to higher working capital (receivables and inventory). Company has a CFO of INR 9 cr when the EBITDA was INR 154 cr in FY23!!
Company may need to raise capital in FY24 to fund the working capital required for growth
ROCE and ROE improved to 23% and 18% respectively in FY23
3. What is my view on company valuation?
Were you aware that MTAR's IPO issue price in March 2021 was INR 575 and it was subscribed to a staggering 201 times? That's quite impressive! Nowadays, the stock is trading at around 3.3 times the issue price, yielding a remarkable 230% return over a few years!
Such remarkable performance after the IPO indicates that the company has a unique opportunity to benefit from the growth of clean energy, nuclear, defense, and space sectors. However, some investors may have concerns regarding the current P/E (TTM) ratio of roughly 56x.
For MTAR to justify the current high valuations, the company must maintain a rapid pace of growth, which it has been achieving with a CAGR of around 30% over the last five years. However, due to poor cash flow convertibility, the valuation does seem to be somewhat stretched.
4. What are the risks to the investment analysis?
Risks to the analysis are:
It is imperative to recognize the inherent hazards that come with operating a tender-based business
More than 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 a high dependency on a few clients
Working capital for the company is very high
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.
Disclosure
I have no stock, option, or similar derivative position in any of the companies mentioned in the 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 purposes and is not to be construed as investment advice. Please consult your financial advisor before acting on it.
I have used publicly available information while writing this article.