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MTAR Technologies Ltd

the maker of nuclear, defence & aerospace equipment, fabrication facilities and fuel cells is planning to raise up to Rs. 5,950mn through an IPO, which opens on 3rd Mar. and closes on 5th Mar. 2021. The price band is Rs. 574 - 575 per share. • On 16th Feb. 2021, MTAR has undertook a pre-IPO placement of 1.85mn equity shares at Rs. 540 each, aggregating to Rs. 1,000mn. • The issue is a combination of fresh and OFS issue. The company will not receive any fund from the OFS portion. Of the net proceeds from the fresh issue and from the pre-IPO placement, Rs. 630mn will be utilized for repayment/prepayment of the borrowings availed by it. Additional, Rs. 950mn will be used to fund the working capital requirement of the company. Residual amount will be used for general corporate purposes.

Key competitive strengths:

* Precision engineering expertise with complex product manufacturing capability

* Wide product portfolio leading to long-standing relationships with the customers

* Modern technology at the state-of-the-art manufacturing facilities

* Strong and diversified supplier base for sourcing of raw materials

* Track record of growth in financial performance

* Experienced and qualified management team

Risk and concerns:

* Subdued macro economic environment

* Revenue concentration risk

* Unfavorable raw material prices

* Working capital intensive business

* Unfavorable forex movements

* Intense competition

Peer comparison and valuation:

There are no listed peers, having similar operating model. At higher price band of Rs. 575, MTAR is demanding a TTM P/E multiple of 56.5x (to its restated TTM EPS of Rs. 10.2).

Below are few key observations of the issue:

* The domestic precision engineering industry’s turnover is estimated at Rs. 4,098bn in FY20, clocking a 7.1% CAGR between FY16-20. On the back of supportive government policies for manufacturing & engineering sectors, growth in the industrials and rise in penetration of high technology machinery for manufacturing, precision engineering is expected to log a growth of 6-7% CAGR over FY20-25 to reach a turnover of Rs. 5,550-6,550bn by FY25.

* The engineering manufacturing industry is very fragmented, but established players with developed technological expertise create entry barriers for new players, especially in precision engineering sectors such as defence, aerospace nuclear, space and aviation.

* MTAR, which supplies to companies such as Bharat Heavy Electricals Ltd., Hindustan Aeronautics Ltd., Advance System Laboratory (DRDO), Godrej and Boyce, ISRO and Nuclear Power Corporation of India (NPCIL); is engaged in the manufacturing and assembly of critical precision components with close tolerances of 5-10 microns through their competencies in precision machining, assembly, testing, quality control, and specialized fabrication.

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