MTAR Technologies IPO Review | Should I Subscribe?

Detailed Analysis of MTAR IPO

Introduction

• MTAR Technologies Limited was incorporated on November 11, 1999. The company is a leading precision engineering solutions company engaged in the manufacturing 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. Most of the customer base of company is from Clean Energy, Nuclear Energy, Space Sector, Defense Sector, Marine Sector. Let us do detailed analysis of the IPO in this blog.

MTAR Technologies IPO Review

IPO Details

• MTAR Technologies IPO is open for subscription from 3^rd March 2021 to 5^th March 2021.
• With the Initial Public Offering (IPO), Company plans to raise Rs. 597 crores from the market. Out of the total value of IPO, Rs. 124 crores are fresh issue and Offer for Share is worth Rs. 473 crores.
• The price Band of the IPO hover around Rs. 574- Rs. 575. The Face value is Rs. 10 per equity share and market lot is 26 shares.
• The issue breakup of the IPO is similar to previous other IPO’s. Of the Total Issue, 50% is reserved for Qualified Institutional Buyers (QIB), 15% for Non-Institutional Bidders (NIB) and 35% for Retail Investors.
• The Objectives of IPO are:
  • Debt Repayment
  • Working Capital Requirement
  • General Corporate Purposes
• MTAR has raised almost Rs. 179 crores from Anchor Investors via pre-IPO placement by mutual fund houses namely, SBI MF, Axis MF, ICICI, Aditya Birla, LIC, etc.
• The IPO will also bring change to the shareholding pattern of the company. Prior to the IPO, 62.24% of the stake was with the Promoters and rest 37.76% was with Public. But Post-IPO, the stake of Promoters & Promoter Group will reduce to 50.25% and Public Participation will increase to 49.75%.

Glimpse of business of MTAR Technologies

• MTAR manufactures high precision components, sub-systems, assemblies having components with close tolerances (5-10 microns) to serve projects in the clean energy, nuclear sector, space and defense in India, and abroad.
• Business is well placed and diversified. Company is having 7 Manufacturing Units in Hyderabad, India. Among these 7 units, company owns an export-import unit.
• Company operates in highly capital intensive sector.
• MTAR Technologies focuses heavily on Research & Development (R&D) of manufacturing processes as it allows it to evolve its own process technologies which enables it to achieve accuracy in their product designs.

Revenue Mix (%)

• MTAR Technologies serves various clients involved in the business of Clean Energy, Nuclear Energy, Space, Defence and Marine Sector.
• The Clean Energy segment of the business contributes the highest 49% to the company’s revenue. In clean energy, Bloom Energy is its biggest client.
• Then, with 27% contribution towards company’s revenue, Nuclear Energy is the second highest revenue generator. In this segment, its main client is Nuclear Power Corporation of India Ltd. (NPCIL).
• In its Space and Defense sector, client book has big names like Indian Space Research Organisation (ISRO) and Defense Research and Development Organisation (DRDO). Revenue from these accounts to 21% of the total revenue of the company.
• The Other business segment contributes mere 3% to the total revenue of the business.
• MTAR Technologies serves not only Indian clients but they have foreign contracts as well.
• Geography wise, India business or clients yield them 46% of their total revenue whereas the Foreign Contracts or Revenue from outside India accounts to 54% of the total revenue.

Order Book

• As of Q3FY21, the overall order book of the company was Rs. 336.19 crores.
• Of the total order book, Space and Defense Sector tops with 48% of the total order book worth Rs. 160.61 crores.
• Further, MTAR has an order book from Nuclear Sector worth Rs. 93.2 crore which accounts to 28% of the total order book.
• Also, in Clean Energy Segment it has an order book worth Rs. 80.2 crore contributing 24% of the total order book.

Valuation

• At upper price band of Rs. 575 and with the projected earnings of FY21 of Rs. 36 crores, MTAR is currently trading at PE ratio of 47x.
• Since, there are no listed peers in India which are engaged in similar business line, this company is likely to enjoy a premium valuation.
• Post Listing, MTAR may touch the PE ratio of 70-90x. Thus, there is a possibility of listing gains.

Key Ratios

• The Return on Equity ratio of a company is 15.2 % whereas Return on Capital Employed (ROCE) is currently at 18.9% for 9MFY21
• Debt-to-Equity Ratio of the company is 0.3, which is very low. One of the issues of raising funds through IPO is to repay debt and hence this ratio will also improve.
• MTAR is having a high Interest Coverage Ratio of 13.1.
• The EBITDA margin of the company is hovering around 30% and with increasing operating profit, the same may witness some improvements as well.

Pros

• Company is  having a wide range of product portfolio which is well diversified. 7 manufacturing units, one of the units is export-import oriented.
• Diversified supplier base and  has big names in their Client book like ISRO, DRDO, NPCIL, Bloom Energy, Israeli Defence Technology Company, etc.
• Strong financial track record. The total income of the firm has increased at a CAGR of 16.56% in last 3 financial years.
• MTAR technologies is having an experienced & qualified management team.
• In the Pre- IPO placement, Anchor Investors have purchased shares worth Rs. 179 crores. The Anchor Investors includes Mutual Fund houses like SBI, ICICI, LIC, Aditya Birla, etc. According to norms, once anchor investors make their allocation, they cannot make an exit for at least 12 months. Hence it shows confidence of institutional investors.
• Beneficiary of  Make in India Scheme. Clients base are- ISRO, DRDO, NPCIL, etc. May get advantage from these clients.
• In present scenario, there are no direct listed player in the market which are engaged in similar line of business. There may be presence of other players who participate minimal in similar business segments like L&T, Godrej & Boyce, etc.

Cons

• One of the major concerns in the IPO is the OFS (offer for sale) i.e., of Rs. 473 crores. Since OFS is more than the fresh issue, it always raises a question, why existing investors are exiting.
• PAT Growth has grown in last 3 financial years at CAGR rate of 140%. But here we have to look over the PAT pattern over the years. PAT of MTAR are as follows: FY 2018- Rs. 5 Cr., FY19- Rs. 39 cores, FY20- Rs. 31 crores and 9MFY21- Rs. 28 crores. PAT expected in FY21: Rs. 36 cr. In reality, there is no growth in PAT. It is not a bad sign, but should be carefully watched.
• MTAR Technologies faces high client concentration risk. They rely heavily on their Top-3 Clients, as 80% of the revenue is generated from top 3 clients.