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MTAR Technologies’ 2QFY24 results were sharply below estimates. PAT declined by 17%YoY to INR205mn (JMFe: INR 330mn) due to lower revenue/gross margins. Outlook for FY24 has been cut sharply due to deferment of supplies of c1200 units (25% cut) of hot boxes to FY25 and lower gross margins due to adverse revenue mix in 1H. This deferment is led by efforts to correct inventories by Bloom given reduced shipping times as also complete switch over to the 65kw Santacruz variant from 50kw Yuma variant. As a result, we downgrade FY24 EPS steeply by 34%. That said, Bloom has maintained its CY23 revenue and margin guidance and remains positive on CY24 outlook. MTAR is set to achieve greater diversification with likely addition of Fluence in clean energy and finalisation of +INR 5bn nuclear orders. We maintain our positive view on MTAR as the current set back appears temporary and estimate 36% EPS CAGR over FY23-26E. Maintain BUY with revised TP of INR2,575.

* Revenue deferment, adverse revenue mix impacts performance: Net sales grew 32% YoY to INR1.7bn driven by the nuclear segment (+204% YoY; INR152mn) and ramp up in the product segment to INR367mn vs INR43mn in 2Q23. Clean energy revenue declined 5% YoY to INR978mn due to deferment of supplies to Bloom, while ex-clean energy basis revenue grew 191% YoY to INR690mn. Gross margins contracted substantially by 610bps YoY (430bp QoQ) to 45.6% due to adverse revenue mix (some older nuclear orders and lower proportion of domestic sales). EBITDA grew 3% YoY to INR361mn with EBITDA margin at 21.6% vs 27.7% in 2Q23. PAT declined by 17%YoY to INR205mn. Order book declined 23% YoY to INR10bn with order inflow at INR 1.3bn in 1HFY24.

* FY24 guidance cut but growth outlook beyond remains intact: Revenue guidance for FY24 has been lowered to INR 6.7-7bn (INR 8.3-8.6bn earlier) with EBITDA margin at 26% +/- 100bp (28% +/- 100bp earlier). Cut in the guidance is due to deferment of supply of c1200 units of hot boxes to Bloom given inventory correction measures by Bloom due to reduced transit times and transition to Santacruz variant (65kw) from Yuma hot boxes (50kw). MTAR maintains that the volume reduction in FY24 is a deferment to FY25 and production schedules to become clearer in next 1-2 quarters. We also note that Bloom in its recent earnings commentary has maintained its CY23 guidance on all fronts.

* To achieve greater diversification in business mix: MTAR is in the final stages of negotiations for adding Fluence Energy as a customer in the clean energy business (INR 1.2-1.3bn business initially) and expects +INR 5bn orders for Kaiga 5 & 6 Nuclear reactors by Mar-24. These should lead to diversification of order book and customers. MTAR also continues to make progress in scaling up its import substitution products business like roller screws, water lubricated bearings, ball screws and electromechanical actuators.

* Maintain BUY with a revised TP of INR2,575: We like MTAR for its strong credentials in the precision engineering space. While the outlook for supplies to Bloom remains positive beyond the immediate disruption, addition of new customers and scale up in nuclear and import substitution products should increase diversification. We expect 36% EPS CAGR over FY23-26. Maintain BUY with revised TP of INR2,575, based on 35x Sept’25E EPS.

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