MTAR Technologies Limited IPO

About the Company – MTAR Technologies Limited

MTAR Technologies Limited is a precision engineering solutions company. It is primarily into the manufacture of mission-critical precision components with close tolerances and in critical assemblies to serve projects of high national importance.

To fulfill its role, it uses its precision machining, assembly, testing, quality control, and specialized fabrication competencies, some of which have been indigenously developed and manufactured.

The primary sectors services by MTAR Technologies are Clean Energy, Nuclear, Space, and Defense.

Since its inception, MTAR has constantly contributed to the Indian civilian nuclear power program, Indian space program, Indian defense and aerospace sector, as well as to the global clean energy sector and the global defense and aerospace sector.

Further, the company has developed import substitutes like ball screws and water-lubricated bearings used in the above mentioned sectors.

While the bids for the projects in the nuclear, space, and defense sectors are invited by issuing tender inquiries, the qualification process for securing such tenders is extremely stringent as there is no scope for faults in such sectors. 

1. Growth Story of MTAR Technologies Limited

MTAR Technologies Limited started operations in 1970 as a partnership firm and was incorporated into a company in 1999. In 1970, MTAR established its first Unit for orders from Bharat Heavy Electricals Limited (BHEL).

Two years later, the company received its first order for Hindustan Machine Tools (HMT) Limited. By 1980, MTAR had started a Unit for Rough Machining Operations, a Heat and Surface Treatment Plant, and started supplying components to the Indian Space Research Organization (ISRO).

By 1985, MTAR started manufacturing ball screws too. Over the next few years, MTAR managed to enter the Defense sector by making the Defense Research and Development Organization (DRDO), Hindustan Aeronautics Limited (HAL), Gas Turbine Research Establishment (GTRE), and Aeronautical Development Agency (ADA) its clients.

In 1989, MTAR supplied the first Vikas Engine – a liquid-fuelled rocket engine.

After incorporating a company in 1999, MTAR started manufacturing base shroud, Fin assembly, and pneumatic components for use in Agni programs. Its Defense and Space portfolio grew and by 2002, the company established an additional Unit for boosting its manufacturing capacity.

In 2008, MTAR commenced manufacturing grid plates for a 500 Megawatt reactor and established an export-oriented Unit by 2010. This was followed by the commencement of the manufacture of power units for Bloom Energy, Defense-related exports, and the development of roller screws as an import substitute.

2. Financials of MTAR Technologies Limited

Here is a quick look at the financial performance of MTAR Technologies Limited over the last three years:

All amounts in INR Crore

A quick glance at the financial performance of MTAR Technologies over the last three years highlights significant growth. During this period, the total income of the company showed growth at a CAGR of 16.57%. Further, between 2018 and 2020, the profit after tax grew at a staggering CAGR of 14.39%. Also, the company’s total assets grew at a CAGR of 11%. 

SWOT Analysis

The Engineering sector in India is divided into two segments – heavy and light engineering. The classification is based on the nature of the product and technology used for processing. Heavy engineering includes manufacturing and assembly of industrial machinery and plant equipment for various end-use sectors. On the other hand, light engineering includes sub-sectors, manufacturing everything from basic to sophisticated equipment.

Precision engineering is a sub-discipline of engineering and is concerned with manufacturing and assembling items that have an exceptionally low tolerance and are required to perform consistently over longer repeat cycles. Precision engineering products and components are especially important for critical applications such as aviation, aerospace, space, defense, and nuclear power plants, control equipment for process plants, where errors can cause greater damage.

Precision engineering players cater to select end-use sectors and have developed expertise in that space. The value chain comprises three broad segments of suppliers – automotive, industrial, and niche applications (defense, nuclear, aviation, and marine). Of these, sectors like defense, aerospace, nuclear, aviation, and marine have requirements of high material performance and special material properties are serviced by suppliers who have developed expertise for these niche applications.

The Indian Precision Engineering Industry is pegged at Rs.4,098 Billion and is expected to grow at a CAGR of 7.1% between 2016 and 2020 and a CAGR of 6-7% between 2020 and 2025. While Auto components have the largest share in the precision engineering market, Defense, Aerospace, and Aviation sectors follow close behind. 

1. Strengths of MTAR Technologies Limited

• MTAR Technologies Limited has precision engineering expertise with complex product manufacturing capabilities. These capabilities are further supported by extensive and stringent testing and quality control mechanisms undertaken at each stage of the production process to ensure that the finished product conforms to the exact requirement of its customers and successfully passes all validations and quality checks.
• Over the years, MTAR has developed a wide product portfolio catering to customers in diverse segments. Currently, it has 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 Defense sectors.
• The company operates through seven state-of-the-art manufacturing facilities, including one Export-Oriented Unit (EOU). Each facility has significant end-to-end capabilities.
• MTAR has also developed a robust supply chain for the sourcing of a wide variety of specialized raw materials used in the manufacture of mission-critical precision products.
• MTAR Technologies has an experienced and qualified management team enabling it to capture market opportunities, formulate and execute business strategies, manage client expectations as well as proactively respond to changes in the market conditions.

2. Weaknesses of MTAR Technologies Limited

• While MTAR Technologies has some big names as clients like DRDO, ISRO, NPCIL, etc., it has a high dependency on these clients.
• The precision engineering industry has strict quality requirements and ensuring adherence to the same can be costly. Also, errors can cause a lot of damage.
• Any disruption in supply can negatively affect business revenues.

3. Peer Comparison

According to the Red Herring Prospectus, there are no listed companies that engage in a business similar to that of MTAR Technologies Limited. Hence, it is not possible to provide any industry comparison.

4. Opportunity to investors – valuation of the IPO

Since there are no peers to compare the valuation of the MTAR IPO with the peer benchmark, investors will need to look at the intrinsic value of the company and compare it with its proposed share price.

We will use the intrinsic value formula provided by the founder of value investing – Benjamin Graham:

Intrinsic Value = Current Earnings x (8.5 + [2 x expected annual growth rate])

In FY 2020, MTAR booked profits of Rs.31.32 crores. Also, let’s take the estimated annual growth rate at 6.5% (based on the estimated growth rate of the precision engineering industry for 2020-2025). Therefore,

Intrinsic Value of MTAR = 31.32 x (8.5 + [2 x 6.5]) = Rs.673.38 crores

Even if we deduct a margin of safety of 10%, the intrinsic value of MTAR = Rs.606.04 crores

As per the IPO structure, the company has a market cap of Rs.1538.65 crores. 

5. Risk Factors

• MTAR Technologies depends on Bloom Energy Inc. and a limited number of other customers for a significant portion of its revenue. The loss of one or more of its top three customers or a significant reduction in demand for its products from such top three customers, its failure to succeed in tendering for projects for them in the future despite its previous track record, or a decline in their business performance may adversely affect its business, financial condition, results of operations, and cash flows.
• The company also depends on orders from the NPCIL, ISRO, and DRDO. A decline or reprioritization of funding in the Indian budget towards the respective departments of the Government of India under which these customers operate or delays in the budget process could adversely affect its ability to grow or maintain its sales, earnings, and cash flow. Further, the liberalization of the defense or space sectors to allow the entry of private and foreign companies may increase the level of competition it faces, and there is no assurance that it shall be able to compete effectively.
• MTAR primarily relies on purchase orders to govern the volume and other terms of the sales of its products. It does not have long-term supply agreements with its customers. If its customers choose not to source their requirements from MTAR or manufacture such products in-house, its business and results of operations may be adversely affected.
• MTAR is subject to strict quality standards. Any failure to comply with such quality standards may lead to the cancellation of existing and future orders which may adversely affect its reputation, financial conditions, cash flows, and results of operations.
• The COVID-19 pandemic and resulting impact on general economic conditions have impacted MTAR’s business and results of operations in the past and the extent to which it will impact its future business and results of operations will depend on future developments, which are difficult to predict.
• Volatility in the supply of its raw materials may have an adverse effect on its business, financial condition, and results of operations. Its raw material suppliers could fail to meet their obligations, which may have a material adverse effect on its business, results of operations, and financial condition.
• Pricing pressure from customers may adversely affect its gross margin, profitability, and ability to increase our prices, which in turn may materially adversely affect its business, results of operations, and financial condition.
• MTAR Technologies owns a large range of equipment, resulting in increased fixed costs. If it is unable to generate adequate cash flows it may have a material adverse impact on its operations.
• The company is dependent on a number of key management personnel, senior management personnel, and persons with technical expertise, and the loss of such persons, or its inability to attract and retain key management personnel and senior management personnel in the future, could adversely affect its business, growth prospects, results of operations, and cash flows.

6. Objects of the Offer

MTAR Technologies Limited proposes to utilize the net proceeds from the fresh issue for the following object:

• Repayment of prepayment in full or in part of the borrowing availed by it
• Funding the working capital requirements
• General corporate purposes

7. Promoters of MTAR Technologies Limited IPO

1. Parvat Srinivas Reddy
2. P. Leelavathi
3. K. Shalini
4. D. Anitha Reddy
5. C. Usha Reddy
6. G. Kavitha Reddy
7. Anushman Reddy
8. P. Kalpana Reddy
9. Saranya Loka Reddy
10. A. Manogna
11. M. Madhavi.

Things to Keep in Mind Before Investing in the MTAR Technologies IPO

Here are some things that you need to keep in mind before investing in the MTAR Technologies IPO:

1. MTAR Technologies is a leading player in the precision engineering industry having seven advanced facilities.
2. It has renowned clients like DRDO, HAL, ISRO, etc.
3. The company depends on a few customers for the bulk of its revenue. Any change in government policies can impact its revenue.

FAQs

Q1. What is the MTAR Technologies Limited IPO?

The MTAR Technologies Limited IPO is a Main Board IPO for the issue of 10,372,419 equity shares having the face value of Rs.10 totaling up to Rs.596.41 crores. The registrar for the IPO is KFintech Private Limited and the shares are proposed to be listed on the BSE and NSE.

Q2. What are the open and close dates of the MTAR Technologies Limited IPO?

The MTAR Technologies Limited IPO opens on March 03, 2021, and closes on March 05, 2021.

Q3. What are the lot size and minimum order quantity of the MTAR Technologies Limited IPO?

The lot size of the MTAR Technologies IPO is 26 shares. Also, the minimum order quantity is 26 shares.

Q4. What are the allotment and listing dates of the MTAR Technologies Limited IPO?

According to the RHP, the basis of allotment will be finalized by March 10, 2021. Further, investors can expect to receive the credits in their Demat account by March 15, 2021.

Happy Investing!