Rationale

The rating upgrade factors in the continued improvement in MTAR Technologies Limited's (MTL) financial risk profile, led by healthy revenue growth and profit margins along with a comfortable liquidity position. The company's revenue grew 19% in H1 FY2022 and the growth momentum is expected to continue in H2 FY2022 and FY2023 as well, supported by a pending order book of around Rs. 500 crore as of November 2021 and new incremental orders in the pipeline from domestic and international clients in the near to medium term. Further, the ongoing debt-funded capex of Rs. 105 crore to set up a new sheet metal fabrication plant, which will be operational from Q1 FY2023, will enhance the company's overall execution capability, expand the order book and boost sales growth. This capex is to be funded through a mix of internal accruals and term debt (Rs. 80 crore already sanctioned). Notwithstanding the higher debt levels in the near term, MTAR's debt protection metrics are expected to remain comfortable. The ratings continue to draw comfort from the extensive experience of the promoters and the company's track record in the precision engineering industry, which caters to various segments, including clean energy, nuclear, space, aerospace and defence. Also, the established relationship with renowned clients, including the Indian Space Research Organisation (ISRO), Bloom Energy Corporation (Bloom), Nuclear Power Corporation of India (NPCIL) and Defence Research and Development Laboratory (DRDL) has ensured repeat orders from its customers over the years. Further, the company is adding new products to its portfolio and adding new clients in all the segments, 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, are constrained by the moderate scale of operations—the revenue was Rs. 246.4 crore in FY2021 and Rs.145.0 crore in H1 FY2021—though the scale has improved significantly over the past few years. The ratings are further constrained by high customer concentration as the company derives a major share of its revenues from one client i.e., Bloom Energy Corporation. 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 the fluctuations in forex rates to the extent of the unhedged position and the margins vary depending on the segment and customer mix.