MTAR Technologies coming with an IPO to raise upto Rs 596 crore

MTAR Technologies

• MTAR Technologies is coming out with a 100% book building; initial public offering (IPO) of 1,03,72,419 shares of Rs 10 each in a price band Rs 574-575 per equity share. 
• Not more than 50% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not less than 15% of the issue will be available for the non-institutional bidders and the remaining 35% for the retail investors.
• The issue will open for subscription on March 03, 2021 and will close on March 05, 2021.
• The shares will be listed on BSE as well as NSE.
• The face value of the share is Rs 10 and is priced 57.40 times of its face value on the lower side and 57.50 times on the higher side.
• Book running lead manager to the issue are JM Financial and IIFL Securities.
• Compliance Officer for the issue is Shubham Sunil Bagadia.

Profile of the company

The company is a leading precision engineering solutions company engaged in the manufacture of mission critical precision components with close tolerances (5-10 microns), and in critical assemblies, to serve projects of high national importance, through its precision machining, assembly, testing, quality control, and specialized fabrication competencies, some of which have been indigenously developed and manufactured. It primarily serves customers in the clean energy, nuclear and space and defence, sectors. Since inception, it has strived to grow continually, contributing to the Indian civilian nuclear power programme, Indian space programme, Indian defence and aerospace sector, as well as to the global clean energy sector and the global defence and aerospace sector. Over the years, it has also developed import substitutes such as ball screws and water lubricated bearings that are specialized and used in the sectors it caters to. The engineering capability of the company, evolved over decades, has enabled it to consistently offer quality complex precision manufactured components and assemblies, within stipulated timelines and at reasonable cost in most cases, allowing it to forge a robust relationship with its customers.

The company currently operates through seven manufacturing facilities, including an export-oriented unit (EOU). These manufacturing facilities, each of which is situated in Hyderabad, Telangana, employ advanced equipment to undertake precision machining, assembly, testing and quality control, specialized fabrication, brazing and heat treatment, and other specialized processes, leading to the company being a one-stop solutions company for its customers. Over the years, it has made investments in processes, infrastructure and systems, and in specialized training to its technical team to become a leading player in nuclear and space and defence sectors. It has also implemented various information technology solutions including for assisting in its designing and manufacturing operations, and enterprise resource planning (ERP) solutions to integrate key areas of its operations.

Proceed is being used for:

• Repayment / prepayment in full or in part, of borrowings availed by the company.
• Funding working capital requirements.
• General corporate purposes.

Industry overview

India’s engineering sector is divided into two segments: heavy and light engineering. The classification is based on the nature of the product and the technology used for processing. Heavy engineering includes manufacturing and assembly of industrial machinery and plant equipment for various end-use sectors. Equipment are designed and manufactured to suit end-use applications for process industries such as fertiliser, textile, chemical, refinery, petrochemical, and oil & gas, as well as for the thermal and nuclear power sector. On the other hand, light engineering includes sub-sectors, manufacturing everything from basic to sophisticated equipment. Light engineering products (components, parts and small equipment) find application in automobiles, industrial machinery, power, oil and gas, fertilisers, steel, refineries, petrochemicals, cement, and railways sectors; and also serve as inputs for the heavy engineering and capital goods sectors.

The domestic precision engineering industry’s turnover is estimated at Rs 4,415 billion for fiscal 2019, clocking a CAGR of 7.1% between fiscals 2016 and 2020. India’s manufacturing GVA constitutes 17-18% of the total GVA; it increased from 17.4% in fiscal 2012 to 18.1% in fiscal 2020. Within manufacturing GVA, machinery and equipment (capital goods and engineering) GVA has grown faster than other segments. GVA at basic current prices from the manufacturing sector in India logged a CAGR of 9.8% (current prices) and 6.5% (constant fiscal 2012 prices) during fiscals 2016-2020. This growth was supported by the Make in India initiative and sector specific initiatives to boost manufacturing.

The precision engineering industry will benefit from supportive government policies for manufacturing and engineering sectors. It will also gain from growth in the machinery and equipment industry and rise in penetration of high technology machinery for manufacturing. Precision engineering is expected to log 6-7% CAGR between fiscals 2020 and 2025 to reach Rs 5,550-6,550 billion by fiscal 2025. The growth in the industry will be driven by growth in auto-components domestic as well as export demand, and indigenous manufacturing in defence segment.

Pros and strengths

Precision engineering expertise with complex product manufacturing capability: The company develops and manufactures a wide range of mission critical assemblies and precision components with close tolerances (5-10 microns), through its precision machining, assembly, and specialized fabrication facilities, for onward usage by its customers in the clean energy, nuclear, and space and defence sectors in India, and abroad. These capabilities are further supported by an extensive and stringent testing and quality control mechanism undertaken at each stage of the production process to ensure that its finished product conforms to the exact requirement of its customers and successfully passes all validations and quality checks. Towards this end, the company use high precision quality inspection equipment such as 3D co-ordinate measuring machines (CMM), laser measuring, optical alignment instruments, non-contact measuring, and other such non-destructive testing equipment to ensure ideal quality, as requested by its customers.

Wide product portfolio leading to long-standing relationships with its customers: The company has, over the years, developed a wide product portfolio catering to customers in diverse segments as a result of which, it has been able to establish trusted and long-standing relationships with these customers. As on December 31, 2020, its major product portfolio includes three kinds of products in the clean energy sector, 14 kinds of products in the nuclear sector and six kinds of products in the space and defence sectors. It strives to understand its customers’ specific business needs and provide products to meet their requirements and its ability to provide quality products as per the customer specification, and its consistent customer servicing standards, have enabled it to increase its customers’ dependence on it. For instance, it caters to customers in the clean energy sector through its supply of power units, specifically, hot boxes to Bloom Energy.

Modern technology at company’s state-of-the-art manufacturing facilities: The company operates through its seven state-of-the-art manufacturing facilities, including one EOU, each of which, is situated in Hyderabad, Telangana. Hyderabad, Telangana, is one of the key centres for defence research and development in the country. The presence of major defense organizations in Hyderabad not only provides company access to the critical R&D and high-volume projects, but also allows for ease of coordination, specifically in terms of its collaborative R&D efforts, as well as for subsequent close monitoring of manufacture and quality control processes, thereby giving it an advantage over the other players located in other regions. It has consistently undertaken expansion of its manufacturing facilities through internal accruals, in the past with a view to capture increasing demand in the future.

Strong and diversified supplier base for sourcing of raw materials: The company has, over the years, developed a robust supply chain for the sourcing of a wide variety of specialized raw materials used in the manufacture of mission critical precision products. The essential raw materials used in its manufacturing facilities are various kinds of alloys steels and bought out items. The raw materials used for manufacture of products catered to customers in the clean energy sector are inconel sheets of various grades, to customers in the nuclear sector are specialised steels such as 17-4 PH, SS 410, 13-8 MO PH and to customers in the space and defence sectors are alloy steels and aluminium including bearing and seals. While the company source materials from third party suppliers depending upon the requirement of a project that it undertake, in certain instances, especially involving the critical and sensitive raw material and bought its items for the manufacture of certain products are directly procured and supplied by its customers, mostly belonging to the space and defence sectors.

Risks and concerns

Depend on Bloom Energy, a limited number of other customers for a significant portion of revenue: A significant proportion of company’s revenues have historically been derived from Bloom Energy, its top customer in terms of contribution to its revenue from operations. The contribution of Bloom Energy as a percentage of the revenue from operations of the company for the Fiscals ended March 31, 2018, March 31, 2019 and March 31, 2020, and the nine months ended December 31, 2019 and December 31, 2020 is 49.14%, 61.43%, 64.53%, 71.01% and 49.33% respectively. There is no guarantee that it shall retain the business of Bloom Energy or maintain its current levels of business with them in the future. In the event there is an adverse change in the supply chain strategies of Bloom Energy, or a reduction in their outsourcing of the products it offers, or if they choose its competitors over it, its revenues shall be impacted adversely, which may lead to a significant impact on its financial condition and cash flows.

Depend significantly on orders from the NPCIL, ISRO and DRDO: The company presently derive and expect to continue to derive a significant amount of its revenue from work performed for the NPCIL, ISRO and DRDO. However, their orders to it depend upon the continuing availability of budgets extended to the respective departments of the Government of India under which these customers operate. Its future revenues are reliant on the continuing availability of such budgetary appropriations and any disruptions or reductions to the availability of such appropriations or unavailability of funds to such departments, could have an adverse impact on the funding of these orders and consequently, adversely affect its revenues. While the company generally procure orders through participation in open tenders, going forward and with the liberalisation of defence sector to allow private and foreign companies to participate in defence contracts, it will be required to participate in a more competitive bidding process.

Invested significant amount in R&D in recent years: The company has invested a significant amount in research and development (R&D) in recent years. It expects to continue to dedicate significant financial and other resources to its research and development efforts in order to maintain its competitive position. However, investing in research and development, developing new products and enhancing existing processes is expensive and time consuming, and there is no assurance that such activities will result in significant new marketable products or enhancements to its products, design improvements, cost savings, revenues or other expected benefits. If it spend significant time and effort on research and development, but are unable to generate an adequate return on its investment, its business and results of operations may be materially and adversely affected.

Primarily rely on purchase orders to govern the volume: The company does not have long-term supply agreements with its customers and instead rely on short term purchase orders to govern the volume and other terms of its sales of products. The purchase orders it receive from its customers specify the price per unit, delivery schedule, and the quantities to be delivered. However, while such orders have not been amended or cancelled previously, they may, in future, be amended or cancelled. While the company generally procure raw materials only upon receipt of purchase orders from its customers, should there be an amendment or cancellation of such purchase orders, its revenue and production schedules may be adversely impacted.

Outlook

Incorporated in 1999, MTAR Technologies is a leading national player in the precision engineering industry. The company is primarily engaged in the manufacturing of mission-critical precision components with close tolerance and in critical assemblies through its precision machining, assembly, specialized fabrication, testing, and quality control processes. Since its inception, MTAR Technologies has significantly expanded its product portfolio including critical assemblies i.e. Liquid propulsion engines to GSLV Mark III, Base Shroud Assembly & Airframes for Agni Programs, Actuators for LCA, power units for fuel cells, Fuel machining head, Bridge & Column, Drive Mechanisms, Thimble Package, etc. The company’s technical and corporate management team has substantial experience in the sectors which it serves, which enables it to capture market opportunities, formulate and execute business strategies, manage client expectations as well as proactively respond to changes in the market conditions. On the concern side, the company requires working capital to finance the purchase of materials and for manufacture and other related work before payment is received from customers. The company dependence on contract labour may result in significant risks for its operations, relating to the availability and skill of such contract labourers, as well as contingencies affecting availability of such contract labour during peak periods in labour intensive sectors such as its.

The issue has been offered in a price band of Rs 574-575 per equity share. The aggregate size of the offer is around Rs 595.37 crore to Rs 596.41 crore based on lower and upper price band respectively. On the performance front, Despite the effects of the ongoing COVID 19 pandemic, the company’s total income increased by Rs 246.72 million, or 16.09% to Rs 1,779.91 million in the nine months ended December 31, 2020 from Rs 1,533.19 million in the nine months ended December 31, 2019. The company’s restated profit for the period increased by Rs 56.16 million, or 25.01%, from Rs 224.53 million in the nine months ended December 31, 2019, to Rs 280.69 million in the nine months ended December 31, 2020. The company intends to take up specialized fabrication jobs for multi-national companies and other leading Indian organizations. In addition to this, it is also in the process of developing roller screws as well as the associated technology. Besides, the company intends to take up specialized fabrication jobs for multi-national companies and other leading Indian organizations. In addition to this, it is also in the process of developing roller screws as well as the associated technology.