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|Wednesday, 3 March 2021||
Niche engineering player
MTAR Technologies (MTAR) originally promoted by Late P. Ravinder Reddy, Late K. Satyanarayana Reddy and P. Jayaprakash Reddy, is a leading precision engineering solutions company engaged in the manufacture of mission critical precision components with close tolerances (5-10 microns), and in critical assemblies, to serve projects of high national importance, through their precision machining, assembly, testing, quality control, and specialized fabrication competencies, some of which have been indigenously developed and manufactured.
Precision engineering is a sub-discipline of engineering and is concerned with manufacturing and assembling items that have 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, defence and nuclear power plants, control equipment for process plants, where errors can cause greater damage. Typical tolerance in dimension for various engineering products ranges from millimeters (10-3 meter) to microns (10-6 meter). Precision engineering products have tolerance in the range of less than 10 microns. Low tolerance is important for precise fit, accuracy and efficiency in performance along with consistency over several repeat cycles.
The company primarily serve customers in the nuclear, space & defence, and clean energy sectors. Since inception, they have strived to grow continually, contributing to the Indian civilian nuclear power programme, Indian space programme, Indian defence and aerospace sector, global defence and aerospace sector, as well as to the global clean energy sector.
Over the years, the company have also developed import substitutes such as ball screws and water lubricated bearings that are specialized and used in the sectors the company caters to. The engineering capability of the company, evolved over decades, has enabled them to consistently offer quality complex precision manufactured components and assemblies, within stipulated timelines and at reasonable cost in most cases, allowing them to forge a robust relationship with their customers.
The company focus on clean energy as one of its key customer sectors and are accordingly, involved in the manufacture of power units, specifically hot boxes, and in the development and manufacture of hydrogen boxes and electrolyzers, to serve Bloom Energy Inc., United States ("Bloom Energy") with which, it have been associated with for over nine years.
The company have been serving customers in the nuclear sector for over 35 years, and have 16 years of established relationships with the Nuclear Power Corporation of India ("NPCIL"). It manufacture and supply specialized products such as fuel machining head, drive mechanisms, bridge and column and coolant channel assemblies, among others, not just for the new pressurised heavy water nuclear reactors, but also for refurbishment of the existing reactors. It have also supplied critical products such as grid plate, control plug and inclined fuel transfer machine for the prototype fast breeder reactor.
The Company has a long-standing relationship of over three and four decades with customers such as the Indian Space Research Organisation (ISRO) and the Defence Research and Development Organisation (DRDO) and has supplied a variety of mission critical products to them. In space its offerings comprise a wide variety of mission critical components and critical assemblies such as liquid propulsion engines, components and assemblies for cryogenic engines, specifically turbo pumps, booster pumps, gas generators and injector heads for such engines, and electro-pneumatic modules for ISRO to serve its space launch vehicles. Within the defence sector, it undertook complex assemblies for the Defence Research Development organisation (DRDO), including 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, the company have also supplied critical defence products such as aluminium weldments and other machined components to its international customers including, an Israeli defense technology company.
MTAR has also consistently supplied products like hot boxes, hydrogen boxes and electrolyzers to Bloom Energy, a USA based Company and has also supplied critical defence products to an Israeli defence technology company.
MTAR has seven manufacturing units including an export-oriented unit with state-of-the-art facilities each based in Hyderabad, Telangana. The company is in the process of establishing an additional manufacturing facility at Adibatla in Hyderabad which is expected to become operational in Fiscal 2022. The company has consistently undertaken expansion of its manufacturing facilities through internal accruals, in the past with a view to capture increasing demand in the future.
MTAR Technologies lays special emphasis on research and development ("R&D") of their manufacturing processes as it allows them to evolve their own process technologies thereby enabling them to achieve design specifications with accuracy irrespective of the size of the products.
Over the years, MTAR has made investments in its processes, infrastructure and systems to develop sophisticated and modern manufacturing technology and become a leading player in the nuclear and space and defence sectors. It has also designed and built, with in house expertise, certain sophisticated special purpose machines instead of importing comparable machines.
The initial public issues comprise both fresh issue of shares as well as offer for sales from promters as well as investors. The fresh issue component comprise issue of upto 21,48,149 equity shares of Rs 10 face value and that of offer for sales comprise sales of upto 8,224,270 equity shares. Of the net proceeds from fresh issue, the company propose to utilize repayments of borrowings by the company, funding working capital requirements and for general corporate purposes.
Promoter selling shareholders are P Leelavathi will be selling 4,50,000 equity shares through offer for sale, Parvat Srinivas Reddy (300000 shares), Kalpana Reddy (1,49,970 shares), SaranyaLoka Reddy (300000 shares), C Usha Reddy (200000 shares), G Kavitha Reddy (300000 shares), D Anitha Reddy (125000 shares), K Shalini (225000 shares) and A Manogna (300000 shares).
On expanded equity post IPO, the share-holding of selling promoter shareholder will be P Leelavathi (5.59%); Parvat Srinivas Reddy (4.53%), Kalpana Reddy (3.33%), SaranyaLoka Reddy (3.04%), C Usha Reddy (3.26%), G Kavitha Reddy (2.94%), D Anitha Reddy (3.51%), K Shalini (6.8%) and A Manogna (2.42% shares). The non promoter selling shareholder Fabmohur Advisors LLP and P Simhadri Reddy will have an equity stake of 8.41% and 0% respectively.
Healthy diverse order book spread across, space & defence, nuclear and clean energy. Aggregate Order Book as on December 31, 2020 was Rs 336.191 crore and of which that from clean energy sector was Rs 80.186 crore, nuclear sector was Rs 93.186 crore and from space & defence was Rs 160.61 crore.
Established client base comprising Nuclear Power Corporation of India, DRDO, ISRO, Bloom Energy.
The company has strong track record of engineering capabilities and to develop import substitute products. It manufacture critical and differentiated engineered products with a healthy mix of developmental and volume-based production, customized to meet the specific requirements of its customers for industries such as clean energy, nuclear and space and defence sectors. The company has, over the years, developed a wide product portfolio catering to customers in diverse segments as a result of which, it have been able to establish trusted and long-standing relationships with these customers. As on December 31, 2020, 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. Currently the company have also invested in the development of roller screws, which is an import substitute, and are involved in developing the associated technology. Once this development has been completed, the company will be the first manufacturer of roller screws. Roller screws shall be used for a wide variety of applications in the nuclear, space and defence sectors. While its developmental based production has in the past, and shall in the future be focused towards customers in the nuclear and space and defence sectors whereas its volume based production typically caters to its customers in the clean energy, nuclear, space and defence sectors.
Successful track record in winning orders through competitive bidding route in nuclear and space and defence sectors which requires stringent qualifications and quality norms.
Strong mix of domestic and export business. For the year ended March 31, 2020 and 9mFY21, the revenue from customers located in India was 32.42% and 46.18% and that from customers located outside India was 67.58% and 53.82%. Moreover of FY20 revenue about 64.34% from clean energy, 14.27% from nuclear sector, 18.4% from Space & defence sector. For 9mFY21 the clean energy, nuclear and space & Defence sector accounted for 49.33%, 27.13% and 20.59% respectively.
As government push for indigenous manufacturing especially in defence the company with strong engineering capability has strong opportunity for growth. Further with countrys huge defence import of worth USD 250 billion in next decade, the offsets figures could well be above USD 30 billion even though it is difficult to reach a clear estimate on the value of offsets which will be involved with this huge Defence Import and this throws strong growth opportunity for players in defence sector.
Presence in high margin niche product enable the company to have strong operating margin of over 25% and mid teen net profit margin. With current capacity utilisation at around 50%, the margin will get a boost with operating leverage in case of volume production.
While ISRO & defence contracts involves supply of material and nuclear contracts comes with cost escalation linked with CPI minimises the impact of material cost volatility.
High client concentration: The company as at December 31, 2020, though catered to 39 customers, majority of the revenue come from three customers. For FY20 and 9mFY19 about 83.55% and 80.03% of the revenue came top 3 customers but offlate it has come down from about 85.21% in FY2018. While Bloom Energy account for 64.53% and 49.33% of the revenue in FY20 and 9mFY21, NPCIL accounted for 10.95% and 23.07% respectively and LPSC of ISRO accounted for 8.07% and 7.63%.
The company competes with Larsen & Toubro Heavy Engineering and Godrej & Boyce Manufacturing Company Limited in nuclear sector and Larsen & Toubro, Godrej & Boyce Manufacturing Company Limited, Hindustan Aeronautics Limited, and Walchandnagar Industries in the space and defence sectors, who are with deep financial and marketing resources.
The company intend to undertake sheet metal jobs and penetrate further into specialised fabrication jobs, and are attempting to manufacture electrolysers to produce methane free hydrogen in the clean energy sector and roller screws with applications in sectors such as nuclear and space and defence. The company have limited experience and knowledge of carrying out such operations, and its foray into the same may be subject to high barriers to entry, including existing competition and market dynamics. This may strain the resources of the company going forward.
P. Jayaprakash Reddy, a member of the Promoter Group, has filed an application for the transmission of Equity Shares held in demat account of his deceased wife, which is currently pending.
Revenues of the company for the fiscal ended March 2020 was up by 16% to Rs 213.77 crore. But with operating profit margin stand contract by 210 bps to 27.1%, the growth at operating profit was restricted at 8% to Rs 57.97 crore. The PBT was up by 13% to Rs 45.53 crore gained largely by 95% jump in other income to Rs 4.37 crore. Taxation on low base was up 503% to Rs 14.22 crore and thus the PAT was down by 20% to Rs 31.32 crore.
On TTM basis, the sales was Rs 238.87 crore and the PAT was Rs 36.93 crore.
On post issue equity, the EPS for FY2020 stood at Rs10.2 and TTM EPS was Rs 12. The upper price of Rs575, discounts the FY20 and TTM EPS by about 56.4 times and 47.9 times respectively. The price to book-value stands at 4.8 times.
The company has no comparable peers with exact product/business profile. But Hi-energy Batteries that cater to aerospace and defence and Sika Interplant that supplies to defence quotes at a PE of 30.4 times and 21.5 times of their FY20 EPS. Both Hi-energy Batteries and Sika Interplant quotes at a PE of 13.1 times and 16.2 times respectively of their TTM EPS