Equity Research: MTAR Technologies

Summary

MTAR technologies is a leading player in precision engineering industry with huge growth potential and looking attractive for an upside potential of 25% from its current market price.

MTAR Technologies Limited is a leading player in precision engineering industry engaged in the manufacture of mission critical precision components with close tolerances (5-10 microns), and in critical assemblies. The company has seven manufacturing facilities in Hyderabad including an Export Oriented Unit (EOU). Further the company recently commissioned a sheet metal fabrication facility in Adibatla in Hyderabad. MTAR currently operates in three main segments. In Clean Energy, the company is involved in the manufacturing of power units (hot boxes) and development of hydrogen boxes and electrolysers to serve Bloom Energy Inc. In FY22, MTAR also started fabrication of specialized components for the hydel power sector. The company manufactures and supplies specialized products like fuel machining head and coolant assemblies for pressurised heavy water nuclear reactors as well caters to refurbishment of the reactors for NPCIL. MTAR undertakes manufacturing and assembly of critical components like liquid propulsion engines, cryogenic engines, turbo pumps and electric modules to serve space launch vehicles as well as assembly of base shroud, SITVC and HFTC values for DRDO and actuators for light combat aircrafts.

Growth Led by Clean energy:

In Clean Energy (64% of revenue), the company manufactures power units (hot boxes) and develops hydrogen boxes and electrolysers to serve Bloom Energy Inc. In FY22, MTAR also started fabrication of specialized components for the hydel power sector. The company is currently focused on hot boxes for fuel cell technologies. However, over time we expect hydrogen electrolysers to be a larger part of the mix, with a US$1.8tn TAM (total addressable market) for both these technologies across various end-market applications. Fuel cell technology is primarily used in the conversion of chemical energy into electricity thus producing substantially lower CO2 emissions than current sources of power. The types of cells and electrolytes used in fuel cells are evolving still. As application and use of fuel cells increase overtime, the cost of production has been reducing thus making fuel cells a viable alternative. Over the past five years, the deployment of commercial fuel cells has grown from 30-40% pa to 1130 MW in 2019. With demand expanding from stationary applications to portable and transportation industries, we expect the industry to sustain robust growth over the coming years. In terms of end- markets, the US (44%) and South Korea (40%+) have been key end-markets accounting for most of these installations. However, with viability increasing, we expect incremental growth coming in from rest of Asia and Europe. 

Bloom Energy:

In the Clean Energy segment, MTAR primarily caters to Bloom Energy (nine-year relationship), a US-based manufacturer of solid oxide fuel cells (SOFC) producing electricity from natural gas with very low carbon emissions and option to be located close to the end consumer. Further, Bloom has now expanded its capabilities to hydrogen boxes and electrolysers (water to hydrogen) through a project in South Korea. MTAR supplies nearly 70–80% of the hot boxes required by Bloom Energy and has a very strong track record. 

Growth Drivers of MTAR:

Increasing content per hot box: MTAR is actively looking at manufacturing bellows and enclosures which are currently supplied by Bloom to MTAR thus helping it further increase its overall content contribution per hot box. Currently the value addition done by MTAR in Yuma hot boxes is 50% which we believe can go up by another 10% over the next couple of years. 

Diversifying portfolio: Further the company is increasing its participation in higher energy density boxes (Keeylocko) and has set up a new sheet metal fabrication facility which will be used to cater to Bloom as well. In addition, the company is working on hydrogen boxes and electrolysers(water to hydrogen). The company has already started supplying the batch round for these products and the commercial production is expected to commence in FY24, all of which should led to strong top line growth for the clean energy segment for MTAR. MTAR is one of the two suppliers to Bloom with another supplier from Taiwan. Overtime MTAR has been able to consistently deliver on its commitment to Bloom and hence has increased its market share to 70%+ from 50% few years ago. 

MTAR’s Nuclear Segment: MTAR’s nuclear segment (14% of revenue) primarily caters to NPCIL (Nuclear Power Corporation of India) with whom the company has been working for the past four decades. The company’s nuclear product portfolio comprises 14 highly critical products that are used in a wide range of range applications, i.e., in construction of new reactors and refurbishment of existing reactors. Contribution of nuclear power to India’s overall mix is miniscule (1.7% of installed capacity) with India currently having 22 reactors operational amounting to a total installed base of 6,780 MW (additional 700MW is connected to grid). This is significantly below that of advance nations like France, US, and China where the share of nuclear energy is 70.6%.19.4% and 4.6% respectively. It is expected that India’s nuclear power capacity to jump 1.5x over the next five years driven by eight under construction nuclear reactors (6GW) by NPCIL and a 2031 target of 22.6 GW. For this, the government has sanctioned commissioning of 14 pressurised heavy water reactors (PHWR) under fleet mode with a combined generation capacity of 10.5 GWe. The project cost of a typical PHWR reactor stands at Rs150mn/MW with MTAR catering to 20-25% of the equipment portion, i.e., Rs3bn per reactor-order opportunity for MTAR. 

Diversifying portfolio: Further the company is increasing its participation in higher energy density boxes (Keeylocko) and has set up a new sheet metal fabrication facility which will be used to cater to Bloom as well. In addition, the company is working on hydrogen boxes and electrolysers(water to hydrogen). The company has already started supplying the batch round for these products and the commercial production is expected to commence in FY24, all of which should led to strong top line growth for the clean energy segment for MTAR. 

Competitive intensity: MTAR is one of the two suppliers to Bloom with another supplier from Taiwan. Overtime MTAR has been able to consistently deliver on its commitment to Bloom and hence has increased its market share to 70%+ from 50% few years ago. 

After market opportunity for MTAR: MTAR also caters to maintenance and refurbishment market in the nuclear sector which includes 1) regular maintenance & site orders given on an annual basis, and 2) overhaul of parts & assemblies that have completed their usefulness. NPCIL generally rolls out contracts of reactors that have completed 17–18 years once in every two years. As a result, the combined maintenance and refurbishment market of nuclear power in India was Rs6bn in 2015-19, and management expects this to rise to rise 1.6–1.7x over the next five years as more reactors complete the lifespan of 18 years. We expect refurbishment orders to provide additional upside, with MTAR having an opportunity of Rs900mn per reactor. 

Diversifying Growth in Space and Defence:

MTAR’s space and defence segment (18% of revenue) is primarily focused on manufacturing and assembly of critical components like liquid propulsion engines (vikas engines), cryogenic engines, turbo pumps and electric modules to serve space launch vehicles as well as assembly of base shroud, SITVC and HFTC values for DRDO and actuators for light combat aircrafts. In the space segment, ISRO is the main client, while the defence business caters to companies like DRDO and HAL as well as international companies primarily from Israel like Rafael, Elbit, IAI, and Bental. In the space segment, ISRO launch pipeline and the government expenditure on the space segment are the major drivers for MTAR. 

MTAR’s defence revenue has largely been linked to the Indian defence spending with the DRDO being the key customer for MTAR along with HAL. It has been a key supplier for Tejas Light Combat aircraft and Prithvi programs. However, MTAR recently started diversifying its presence and has started supply of first articles to Israel based defence companies like Rafael, Elbit, IAI, and Bental. MTAR is also focused on capturing the benefits from the defence indigenization theme of the Indian government. India has released three lists of defence articles which it wants to indigenize (310 items) over a period of time and MTAR is looking at both direct and indirect opportunities in that. MTAR also incorporated a subsidiary Magnatar Aero Systems Private Limited and recently entered into acquisition of ‘ M/S Gee Pee Aerospace & Defence Private Limited’ both with a focus on capturing opportunities as part of the defence offset clause in which foreign firms who win defence contracts have to undertake part of the contract value in India. 

New space India and Space Policy 2020 

Further, government initiatives such as the NewSpace India limited and spacecom policy 2020 is aimed at enhancing the share of private players in the Indian space program with government looking to outsource end-to-end production of PSLVs and SSLVs to private players which could provide MTAR additional opportunities beyond ISRO and its entities with MTAR management, indicating the company focus to be an active participant in the SSLV program. 

Competitive intensity 

There are four key players that supply ISRO other than MTAR are 1) L&T’s space division, 2) Godrej and Boyce Aerospace Engineering, 3) HAL’s aerospace division and 4) Walchandnagar industries. However most of these companies have a niche in particular areas and the direct competition between these firms is relatively low. 

MTAR has a superior margin profile compared to most of its capital goods peers due to the higher complexity of work undertaken and the niche areas that the company is focused on. Further, MTAR has lower raw-material risk compared to peers which we believe is a key positive in an inflationary environment. 

• Within the space and defence segments given the sensitive and complex nature of the work undertaken. Raw material is generally pre issued and supplied by the end customers in most cases insulating MTAR from price variation impacts. This also ensure that this segment enjoys a slightly better margins as compared to other segments. 
• In clean energy, the key customers Bloom as tie ups with specialized mills in Europe which supply key raw material at a negotiated price. Further given the short cycle nature of these products prices are generally negotiated on a regular basis. 
• Lastly for the nuclear segment, the company has a 20% price variation clause across most projects which help it insulate itself from raw-material variation. 
• While FY22 saw a minor margin compression due to increase in employee and other costs due to ongoing expansion undertaken by the company, over the medium term we expect EBITDA margins to move closer to 35% levels and see 550bps margin expansion over FY22-FY25E largely driven operating leverage and cost control initiatives.

Historical Financials:

Estimated Financials:

Valuation:

MTAR Technologies looks attractive for a target price of Rs. 2080 implying 25% upside potential. It is valued at 35x FY24E EPS. While there is no exact like for like peers for MTAR technologies due to unique business model spread across diverse verticals.