Rationale

 MTAR Technologies Limited (MTL) has recently concluded its initial public offering of Rs. 596.41 crore, which comprised Rs. 123.51 crore of fresh issue and the balance offer for sale (OFS). The company has also undertaken a pre-IPO placement for the sum aggregating to Rs. 100.00 crore. The rating upgrade considers the above equity infusion, along with the company's repayment of its outstanding working capital borrowings, which will improve the capital structure and debt coverage metrics. The rating action also factors in the robust revenue growth in 9MFY2021, backed by healthy improvement in the order book and timely execution of orders. The revenue growth is expected to remain at healthy levels going forward, given its unexecuted order book of Rs. 336.19 crore as of December 2020 and pending large incremental orders from domestic and international clients in the near to medium term. The ratings also consider the comfortable financial profile, with healthy operating profit margins (~30% for 9MFY2021), strong net worth base and healthy debt protection metrics post IPO. The ratings continue to draw comfort from the extensive experience of the promoters and the company's track record in precision engineering industry, which caters to various segments including power, nuclear, space and defence. Also, the established relationships with renowned clients including the Indian Space Research Organisation (ISRO), Bloom Energy Corporation (Bloom), Nuclear Power Corporation of India (NPCIL), Defence Research and Development Laboratory (DRDL) has ensured repeat orders from its customers over the years. Further, the company is adding new products in its portfolio and acquiring new clients in its aerospace segment, both of which are expected to augment the revenues. Moreover, as MTL has a strong technical capability and is the sole supplier for several products, it faces restricted competition. The ratings, however, is constrained by the moderate scale of operations—revenue was Rs. 214.2 crore in FY2020 and Rs.178.0 crore in 9MFY2021—though the scale improved significantly over the past few years. The ratings are further constrained by the high customer concentration as the company derives a major share of its revenues from one client ie., Bloom Energy Corporation. Though the proportion of revenue from Bloom declined in 9MFY2021 (from 66% in FY2020), it was still high at 50%. Further, the ratings consider the company's working capital-intensive operations owing to the long production and receivables cycle inherent to the industry. The ratings also consider the vulnerability of its margins to fluctuations in forex rates to the extent of unhedged position and the margins vary depending on the segment and customer mix.