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.
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