It has been a season of IPOs in the last few months and the response to most of the recent IPOs including the recent RailTel, Nureca, and even Heranba Industries has been extremely robust. In fact, the demand book has been strong across the retail, HNI, and QIB categories. It is in this light that the latest forthcoming IPO of MTAR Technologies is to be seen. Before getting into the fundamentals, let us take a quick look at the highlights of the MTAR IPO.
Key terms of the MTAR IPO
The Rs.600 crore IPO of MTAR Technologies opens for subscription during the current week. Here are key terms and facts about the IPO.
Data Source: IPO Filings
The total size of the overall issue including the fresh issue portion and the offer for sale portion will be Rs.596.41 crore. The size of the issue is quite small and even the market cap of the company post the IPO will still be at a fairly modest level of less than Rs.1800 crore. In terms of allocation of shares to specific segments, MTAR has opted for the traditional model of 50% for QIBs, 35% for retail, and 15% for the non-institutional segment consisting of corporates and HNIs.
Knowing MTAR better in terms of fundamentals
Let us encapsulate the key features of the company’s business and products as well as its client profile as under.
- MTAR Technologies operates in the precision engineering industry and is actively engaged in the manufacturing of mission-critical precision components with close tolerance and in critical assemblies. As per the company, this managed through its precision machining, assembly, specialized fabrication, testing, and quality controls.
- MTAR was incorporated in the year 1999, so it has a legacy of performance and performance as well as a delivery track record to look back upon. MTAR Technologies’ product portfolio includes 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.
- That would give you a good and quick idea of the possible client base of the company. MTAR caters to a list of marquee clients like the Indian nuclear establishment, Department of Defence and Space research. Some of its principal clients in India include ISRO Bengaluru, Nuclear Power Corporation or NPCIL, DRDO Bengaluru, Bloom Energy, Rafael, and many more.
- The company is based out of Hyderabad, the capital city of the state of Telangana. Hyderabad already has the best ecosystem to cater to such high-end research and development activities. MTAR has 7 state-of-the-art manufacturing facilities located Hyderabad focusing on precision machining, assembly, specialized fabrication, brazing and heat treatment, testing, quality control and other such processes.
What are the strengths and how will the money be used?
Let us first turn to how the money will be utilized by the company. Of course, we are only referring to the much smaller new issue portion because the OFS will not result in any fresh funds coming into the business. The funds will be largely used to defray some of its loans in the books and also to meet some of its working capital and general corporate expense purposes. The company is looking at the IPO more to given an exit to the early-stage investors and not so much as to raise capital for future expansion of the business.
Let us now turn to the strengths. The company enjoys a very diversified portfolio of products and solutions combined with a spread-out supplier and client base. Most of its manufacturing units are modern and the business is supported by a competent management team.
Is there a financial and valuation case in the IPO?
That is the bottom line. Do the financial justify the IPO and the pricing? The company has a top line of less than Rs.200 crore and the net profit margins have been around 15%. That is a good number, to begin with but valuations may look steep. Obviously, annualizing quarterly results is not a good idea so we look at the 2020 FY, which values the IPO at P/BV of 6.3 times and a P/E ratio of 63X post issue of the IPO.
However, it must be remembered that it is a very niche play and entry barriers are high. Also, government contracts take a long time to build and nurture. The company could also benefit from the Atma Nirbhar program and the big focus on indigenizing defense. In short, the IPO is interestingly poised. Despite aggressive pricing, investors with a larger risk appetite can surely look at investing in the MTAR IPO.
One should take note of their risk-taking capability and investment span before investing in it.