IPO #6 : MTAR Technologies

  
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The IPO frenzy doesn't seem to be slowing down, with 3 IPOs already hitting the markets in the past week. A dozen more IPOs are in the beeline to get listed on the markets in the next two months. 

MTAR Technologies is a precision engineering company which was incorporated in 1999. At the time of recording, the issue was oversubscribed by around 10 times & has attracted a lot of pre-IPO interest from anchor & institutional investors.

Parameter #1 : Growth of the Industry

The precision engineering industry is characterized by high levels of capital expenditure, high level of expertise and intricacy. As at 31 March 2020, it's estimated to be a INR 4,098 Billion industry - out of which 50% pertains to the automobile sector.

MTAR operates in the Clean energy, Nuclear energy, Defense and Space sectors which are niches in the precision engineering industry. Nuclear, Defense and Space are going to witness good growth going forward, owing to Government's plan to set up 10 new fleets of nuclear reactors, banning defense imports and also growing private partnerships undertaken by ISRO for satellite launches.

Parameter #2 : Competition

What came as a real surprise to us, was that the Company doesn't really have a pure play competitor. Yes, it does have competition in the form of L&T, Godrej & Boyce and Mahindra Defense - but these companies are large conglomerates. And, for the components that MTAR manufacturers - there's no direct competition.

Parameter #3 : Advantages of the Company

The Company operates in a virtual monopoly, and has long standing partnerships with government companies like ISRO, DRDO, NPCIL. It also caters to Bloom Energy from which it derives 64% of it's revenue.

Any growth in the Clean energy, Nuclear, Defense and Space sectors - could indirectly benefit MTAR. For eg. the GoI recently banned import of 101 Defense items which would now require domestic production. If MTAR can capture a significant portion of those Defense orders, it will be a big win for the Company.

One of the most interesting statistics, was the employee turnover ratio. The average employee duration in MTAR is 15 years - which shows that the Company has been successful in retaining top talent for long periods of time, which is really important if you're working in the precision engineering industry.

Parameter #4 : Disadvantages of the Company

For the Fiscal 2020, the Company derived 84% of it's revenues from just 3 customers. Out of which 64% of the revenues came from Bloom Energy.

Such heavy customer concentration could pose a risk to the Company going forward, if those 3 customers don't perform well. For eg. if things don't work out for Bloom Energy - which makes hydrogen fuel cells - a concept which is still very new - it would directly impact MTAR.

Another factor is the Order book size. The Company has an order book of around INR 340 crores, which is just 1.6 times FY20 revenue. This indicates that they don't really have long standing orders from customers and in event of any downturn, they don't have a robust order pipeline to support revenue growth.

Parameter #5 : Financials

The Financials look pretty good. Even after being in a capital intensive industry, they have managed to keep the Debt to Equity at just 0.1 times. For FY20, the revenue growth was 17% YoY with a net profit margin of around 14%. The return on capital for FY20 was 19% - very impressive given the industry it operates in.

Parameter #6 : Valuations

From a valuations point of view, the Company looks pretty expensive. At a FY20 EPS of 11, and at the issue price of 575 - the Company is priced at a P/E of 52 times. Now, this is an engineering company that we're talking about. It's not going to double it's revenues every year.


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