Verdict: Niche & Nice
MTAR Technologies is launching a Rs. 596 crore IPO between Wed 3rd Mar to Fri 5th Mar 2021, 80% of which is OFS by PE investor and promoter, and 20% is fresh issue, in the price band of Rs. 574-575 per share. Issue represents 34% of post-issue capital, with listing on 16th Mar.
On 16th Feb 2021, Rs. 100 cr pre-IPO placement was undertaken at Rs. 540 per share, while current IPO price, announced 10 days hence, is at a 6.5% premium which cannot be justified. While one may argue on materiality, it doesn’t cast a good first impression, as not much of this ‘premium’ is flowing into the company, as 80% comprises OFS.
Precision Engineering Company
Company supplies mission-critical components to customers in niche sectors enjoying decade-old relationships with the likes of ISRO, DRDO, Hindustan Aeronautics, Nuclear Power Corp of India, and US based 5 billion USD green energy company Bloom Energy. 85% revenue comes from repeat orders providing stability in earnings. Between Apr 2018 to Dec 2020, order book grew at 20% CAGR to Rs. 336 crore, representing 1.6x FY20 revenue, while additional Rs. 200 crore orders are expected in Q4FY21.
Serving customers in clean energy, nuclear energy and space and defence, with FY20 revenue growing 16% YoY to Rs. 214 crore. Company operates on healthy margins, with EBITDA at 29% and PAT at 15%. On FY20 EPS of Rs. 11, dividend of Rs. 5 per share was paid. Despite the pandemic, 9MFY21 revenue grew 17% YoY to Rs. 177 crore split 70:7:20 between clean energy, nuclear energy and space and defence respectively, with margins also strengthened to 30% EBITDA and 16% PAT. 9MFY21 EPS of Rs. 10.5 is just a tad below FY20’s Rs. 11, and dividend of Rs. 3 per share has already been paid for FY21. Rs. 63 crore debt repayment from fresh issue will make company debt free, while Rs. 95 crore will fund working capital. 62% promoter shareholding will shrink to 50% post issue.
Healthy Growth Outlook
Current capacity utilization of 50% and upcoming sheet metal and specialized fabrication unit in FY22 are near term positives. ISRO planning 32 launches and 3 special missions (chandrayan, mangalyaan, gaganyaan) over next 3-4 years and new energy products based on hydrogen, indigenization in space sector and customer wins in clean energy are medium term triggers.
At Rs. 575 per share, company’s market cap will be Rs. 1,770 crore, translating into FY22E PE of 30x. While there are no peers, bearing makers SKF and Schaeffler and engineering major Carborundum Universal clock 10-11% net margins and trade at FY22E PE multiples of 28-30x, making MTAR’s pricing attractive, considering its superior margin profile of 15-16% net margin, steady revenue growth rates of 15-20% coupled with extremely high entry barriers. Company’s typical order book execution period of 1.5 years fortifies this optimism.
Niche presence serving growing industries supported by strong financial performance, makes this company an attractive bet in the small cap space.
Grey Market Premium (GMP) of MTAR Technologies: Grey Market Premium of MTAR Technologies is an unofficial figure, against guidelines of SEBI and we are strongly against it. To know how it operates, read our article ‘grey market premium’.
Disclosure: No Interest.