MTAR Technologies, a precision engineering solutions company, opens its initial public offering (IPO) for subscription on March 3 with a price band of Rs 574-575 per share.
The public issue consists of a fresh issue of Rs 124 crore by the company and an offer for sale of Rs 473 crore by promoters and investors. The net fresh issue proceeds will be used for debt repayment, working capital requirements and general corporate purposes, while the offer for sale money will go to the shareholders who offload their stake.
All the brokerages and analysts Moneycontrol spoke to advised subscribing to the issue for listing gains, short term as well as for long-term investment citing decent financials, government's focus on manufacturing sector, positive sentiment in the space & defence sectors with no listed peers.
"At the upper band of the issue price, MTAR will trade at a Price/EPS multiple of 23.3x of its annualized 9MFY21 revenue, which is at a discount to its listed peer like Schaeffler India (55.5x), SKF India (41.1x), Timken India (33.9) and L&T (40.2x)," said KR Choksey, which believes that current price band is undervalued.
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Looking at the growth potential of the company, the brokerage anticipated listing gains and assigned a 'subscribe' rating to MTAR Technologies IPO.
The revenue and profits have grown at a CAGR of 15.7 percent and 140.3 percent, respectively, during FY18-FY20. During the first 9 months of FY21, the company reported PAT of Rs 28.1 crore (up 25 percent YoY) with NPM of 15.8 percent (up 108bps YoY). Return on equity (RoE) and return on capital employed (RoCE) for 9MFY20 and 9MFY21 was 11.6 percent and 12.4 percent, respectively.
Overall, the company has a good financial track record with a debt to equity ratio of 0.13 in FY20, but during 9MFY21, the company has increased its debt to Rs 65.5 crore as compared to Rs 16 crore in 9MFY20 which has resulted in increase in debt to equity ratio to 0.3x from 0.1x for the same period in the last fiscal.
"Taking cognisance of the huge growth opportunity for MTAR and a high margin business that would aid flow of profitability to the bottomline, we recommend subscribe rating on the issue," said ICICI Direct.
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Given the nature of the industry, the company enjoys very high margins on its products. Gross margins have been consistently over 60 percent in the last three years whereas the company registered EBIDTA margin of 20 percent, 30 percent and 29 percent in FY18, FY19 and FY20, respectively.
MTAR is provided an annual forecast of demand from customers and, hence, ties up for raw material for the year based on that. Hence, margins are insulated from raw material price fluctuations over the year.
MTAR Technologies is a leading precision engineering solutions company & has offerings in the clean energy, nuclear and space and defence sectors where company manufacture critical and differentiated engineered products with a healthy mix of developmental and volume-based production, customized to meet the specific requirements of customers.
"The company has wide product portfolio along with marquee customer base & robust order book which gives strong revenue visibility going forward. Hence we recommend investor to subscribe the issue for short & long term," said Hem Securities.
LKP Securities also recommended investors to subscribe the issue as it commands premium considering its healthy order book, visibility of topline growth, competitive edge, superior profitability as compared to peers, return ratios, wide clientele spread across the globe, sound R&D base and technological progress.
MTAR not being a typical defense or capital goods company, still has a healthy order book at 1.7x FY20 revenues and superior profitability ratios as compared to its peers. The company's aggregate order book as on December 2020 was Rs 336.19 crore, comprising order book in the clean energy sector, the nuclear sector and the space and defence sectors of Rs 80.18 crore, Rs 93.18 crore and Rs 160.61 crore, respectively. Historically, company's order book was Rs 201.86 crore, Rs 243.74 crore and Rs 345.13 crore, as on March 2018, March 2019 and March 2020, respectively.
Its customers include some of India's leading organizations in the nuclear, and space and defence sectors such as the NPCIL, Indira Gandhi Centre for Atomic Research, ISRO, and the DRDO, among others. In addition, the company also supply its products to international companies such as Bloom Energy and an Israeli defense technology company, among others.
However, the dependency on top three customers for 80 percent of revenue and lack of long term contracts with clients are some of risks pointed by the brokerages and analysts, also some feels the issue is overpriced, but they still advised subscribing the issue.
"Backed by growing demand and rising investment in these sectors, the demand for precision engineering products is expected to rise steadily in the upcoming years. Also government's efforts to boost manufacturing sector and make in India campaign will drive growth," Nirali Shah, Head of Equity Research at Samco Securities said.
"On the risks front, the company derives over 80 percent of its revenue from its top 3 customers and 49 percent of revenue from Bloom Energy leading to concentration risk. Besides it does not have any long term contracts with its clients. Overall MTAR is overpriced at a FY20 P/E of 57.5 times. But it has been commanding a good grey market premium, indicating the offer will sail through. Keeping the risks in mind, we recommend to subscribe to this IPO for listing gains only," she added.
At the upper price band of Rs 575, MTAR is available at a P/E of 47.3x (annualized basis on FY21 EPS of Rs 12.2) which is aggressively priced, said Geojit Financial Services.
"With no listed peers and a positive sentiment in the space & defence sectors due to Make in India and Atmanirbhar Bharat with limited competition for the products they manufacture, we assign a subscribe rating, with a long term perspective," the brokerage added.
Currently, the company has seven manufacturing units in Hyderabad with more than 400 machines, 891 permanent employees and 248 contractual workmen. MTAR Technologies operates in three segments viz. nuclear, space & defence and clean energy and manufactures 14 products in the nuclear sector, six in space & defence and three in the clean energy sector.
The company is in the process of establishing a new manufacturing facility at Adibatla in Hyderabad that will enable it to take sheet metal jobs for Bloom Energy, Isro and certain other customers.
India has 22 operational nuclear reactors with a capacity of 6.3 GW. The country plans to double its nuclear capacity to 11.5 GW. Hence, seven new reactors are expected to come into operation in the next five years. "This will create a huge opportunity for MTAR in the large refurbishment and maintenance market that is also expected to increase 1.6x. The recent ban on 101 defence based items, thrust towards indigenisation and policy initiatives towards making India an export hub for defence products will further widen the scope and addressable opportunity for MTAR," ICICI Direct said.Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.