MTAR Technologies - A wager on innovation meeting economies of scale

Stock Opportunities Not-so-Hidden Gems
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This is a great question @Rational_Investor !

At first glance, H2 is very much just another battery (and an inefficient one at that). However, when it comes to the production of H2, there is the potential to bring costs down drastically, and unlike the materials used for battery packs these days, access to hydrogen is effectively infinite.

There’s also the fact that (in general) H2 powered cars have longer ranges and can be refueled faster than fully electric cars.

In addition, do bear in mind that H2 is not just a battery. It is also a used as a feedstock/input for the steel and chemicals industry.

Finally, the oil and gas industry has a track record of creating, handling and distributing combustible fluids. The distribution network is comprised of pipelines, tankers, depots, petrol pumps/gas stations, and linkages to chemical/petrochemical plants. The increased use of H2 (another combustible fluid) will get the oil and gas industry to repurpose or augment its existing infrastructure for it, making it easier to “flow” through the economy, versus batteries.

So the battle/competition between battery packs and H2 has just begun, and I do not think I can say that we are in a winner-takes-all situation. There are pros and cons to both.

These are some open-ended thoughts of mine. Hope it helps.

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In case of a name like MTAR or any name that is engaged in cutting edge or state of the art or even breakthrough tech/research, its almost a good idea to just find something that they do is, with a guarantee, suitable to a big market - like ability to produce and sell products at a low cost. This bases everything in reality, and if they have got one such thing down ? they can build on that. Tesla made CARS a success first, then indulged in other things they do. For now MTAR has the Bloom bit going for it, would be better if it is able to make a solid offering for the whole market or do something to make one of its offerings “super sticky”.

Company’s 100% offerings should not be based in expectations or speculations. That’s a real risk.

Edited to make this Addition :

That’s a real risk as it makes the company a perpetually “in the future” one. Something has to work in present times, and work with good degree of success. Or else, it becomes difficult to make sense of it, it might go up in value, but one will never know what exactly is making it happen.

There are many “in the future” companies, and a big sub-category is made up by start-ups ; “when this happens, then this will kick into place and finally we will achieve this…” then it corrects from 2000 to 150…
Hope that gets my point across.

Would like to understand what that at-present-sticky product is.

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Appreciate you starting the discussion. Some points I would like to provide my views on:

I disagree. If you look at blue hydrogen, methane is the feedstock that needs to be combusted. So neither is methane infinite nor is steam methane reforming highly efficient. The more popular option of water splitting by electrolysis requires electricity which, wait-for-it, is going to come from guzzling fossil fuels. So hydrogen production for clean energy applications by actually burning fossil fuels? Seems like the snake biting its own tail. The more sensible approach to combine this partially with renewable energy i.e. solar-assisted water splitting, but despite thousands of published papers and patents, I don’t see a commercially viable/established working model.

If repurposing existing pipelines were that easy or straightforward, the oil & gas industry would have found a way to do that much earlier. For example- hydrogen embrittlement is a phenomenon that degrades and destroys even nuclear vessel steel, let alone your run-of-the-mill oil & gas pipes.
Imagine even a minuscule leakage of a hydrogen-carrying pipeline means it is a bomb due to easy access to atmospheric oxygen.

All said and done, it makes more sense to use hydrogen (blue/green/grey/brown) in steel/iron/non-ferrous metals production plants and power plants rather than as inefficient batteries or automobile fuel.

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26

I am going to be travelling across continents today, so please allow for a delay in my response after this message.

Hi @SAURABH_SWARAJ . I get the point you’re trying to make. I will say a few things here.

As investors, we look at a management team’s track record, and develop our own independent opinion to determine the degree to which forward looking statements they make can be trusted. So far, I love how management has performed since MTAR went public.

MTAR has a lot going for it, and a lot of future potential. In terms of my high conviction opportunities to produce products at scale, I am looking at fuel cell modules, electrolyzers, and the energy storage systems. Just producing these three families of products, at scale, would make me happy. Anything over and above that is a bonus for me.

@SPinfy , I wanted to very briefly answer your points, as we run the risk of departing from the company (MTAR), and going more into the Green H2 thread.

As far as I know, the majority of hydrogen generation that is being planned in this country will be powered by a renewable source of power (hence green H2). The latest example being plans by IOC to have green H2 generation in all of its refineries.

So I will let the multiple large companies in India and beyond with bold plans prove out the technology at scale, and I will be taking notes.

Second, I do not expect the exact same pipeline to be used for natural gas to be switched out for hydrogen (risk of leaks, incorrect grade of steel, etc.). What I expect is a parallel line of sorts. The point I was making is that the masters of the creation, handling and distribution of combustible fluids (the oil and gas industry) will just add H2 to the mix. Also for long haul supertankers, there is the option to convert H2 to ammonia, and transport it that way. Sharing a link on the transportation topic below:

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27

Hey, I see, and I can not bring myself to disgree with you either.
This is, probably one of the few, a company to hold for a long time. So many themes one can play with it. I say this because these guys can make things - manufacturing. That alone makes its a good bet for me - possibilities are endless.

Good job with your analysis.
Will update you with further findings and thoughts.

Enjoy your travel.

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28

Article about BloomEnergy (Major customer for MTAR)

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Below Information MTAR IPO RHP
#########################
INTERNAL RISKS

  1. We depend on Bloom Energy Inc. (“Bloom Energy”) and a limited number of other customers for a
    significant portion of our revenue. The loss of one or more of our top three customers or a significant
    reduction in demand for our products from such top three customers, our failure to succeed in
    tendering for projects for them in the future despite our previous track record, or a decline in their
    business performance may adversely affect our business, financial condition, result of operations and
    cash flows.
    A significant proportion of our revenues have historically been derived from Bloom Energy, our top customer in
    terms of contribution to our revenue from operations. The contribution of Bloom Energy as a percentage of the
    revenue from operations of our Company for the Fiscals ended March 31, 2018, March 31, 2019 and March 31,
    2020, and the nine months ended December 31, 2019 and December 31, 2020 is 49.14%, 61.43%, 64.53%, 71.01%
    and 49.33% respectively. There is no guarantee that we shall retain the business of Bloom Energy or maintain our
    current levels of business with them in the future. In the event there is an adverse change in the supply chain
    strategies of Bloom Energy, or a reduction in their outsourcing of the products we offer, or if they choose our
    competitors over us, our revenues shall be impacted adversely, which may lead to a significant impact on our
    financial condition and cash flows.
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30

Sure we must keep any antithesis in mind but I would take it with a pinch of salt.

  1. This is almost 4 years old report.

  2. After the report came out, BE share went 10x before it derated again in early 2021.

  3. Look at the top three institutions holding.

image
image2778×710 168 KB

Sure it isn’t risk free, No investment is. As investors if we have the conviction, limit the allocation based on risk appetite. As @worldlywiseinvestors says allocation hai khaas baaki sab bakwas.

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31

Hi,
In Oman we are about to start a green hydrogen steel plant as per EU norms to supply green steel products to Europe from 2025. H2 will be generated by electrolysis using solar power.

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32

Guys,

I can say 1 thing.
Management is very confident about growth and they are over delivering their guidance till now.
I am very much impressed the way management guide investors and explains in detail.

They are coming with new products every year which is giving them incremental revenue in addition to the blooms revenue. They have nuclear and space segments which are going to contribute good amount over the next few years to downgrade clean energy segment revenue share.

As far as bloom is concerned, management will share advance information if they lost Bloom energy, then we can take a call.

Energy storage system is going to be a next big vertical for them, if they can add few customers in pipeline then game will begin and domestic demand is also going to pickup in couple of years in this segment.

electrolyzer can be one more big product like SOFC boxes, once they ramp up production it can double the bloom revenue share.

Regarding valuations, I don’t think any more de rating is going to happen as 30-40% growth for 4-5 years is evident for all investors.

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33

Guys here is my anti thesis, so please ignore it if you don’t like it…

After going through investor presentations, last annual report and this blog, I feel everything is way too perfect…Presentations are glossy with lots of pictures, lots of customer logos and photos of rockets, satellites thrown in to add more impact. First 30 pages of annual report talks more about their products, capabilities, customers etc. (almost feels like sales pitch) Their board is full of ex ISRO, ex DRDO, ex Bloom energy, ohmium executives.

But as you dig deep, you come across company’s over dependence on few customers like Bloom Energy. Space and Nuclear is mainly B2G business as of now, which means it will be long cycle low margin business. Company talks of building capabilities and new products but only time will tell if that comes true. Promoters hold less than 50% stake and continues to reduce it further. After going through their capability, products and expansion plans, I got a feeling that company is trying to be supplier of “everything to everyone” as I think company is spreading itself too thin and lacking focus on doing few things great.

So I will be watching this company for few quarters to see 1. whether company can meet its guidance 2. whether promoter stake sale continues before taking call on investment.

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34

Well said, but then the issue of ‘entry’ comes into the picture. Waiting almost always seems like a wiser choice compared to entering at a wrong time, but no one also knows whats the right time to enter. Rising Anxiety.

This is, and possibly be, a slow moving business. This isn’t IT. The industries and sectors where MTAR clients are ? those places are slow moving. Rockets aren’t made every day, Hydrogen won’t become a mainstay tomorrow, same with everything else they do.

This is not IT, where the world economy has made itself a super-fertile ground for acceptance of IT products and services. This is why IT companies are doing well, because world wants them and is willing to take it, India gives it to them for cheap. MTAR is unique not jsut for India, but the world too. The perceived value could push the price up, but justifications for the movement will be few and far in between, and would expect strong support from investors.

So, better to enter whenever one feels compelled with the business or else if it moves up ? it might just stay there for long, and again you will think “better to wait isn’t it ?”.

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35

On your last point related to working capital reduction beyond 220 days, I suspect it will happen anytime soon. Majority of revenue is either from exports (so order shipment time + payment terms) or B2G (which again we know has longer cycle). In addition, there need to constantly maintain high amount of inventory will ensure the play to reduce WC is marginal.
new CFO has been trying to find cost effective ways to do invoice discounting to reduce WC but that has yet to show results.
I personally wont keep high hopes of working capital reduction anytime soon beyond 220.

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Both space and nuclear are niche technology areas and hence command higher margin compared to other technology services. they are also trying to develop products for Govt in import substitution category where again the margins are high because Govt wants to push for development of technology in India even if it is expensive compared to import.

Though I agree with other observation of yours on MTAR trying to become supplier of “everything to everyone” . That is clearly a risk if management loses focus.

Everything else that you have mentioned is already known.

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37

Thanks for sharing this report - very detailed one. While I do not agree with all the claims made in it, some of the points they have raised are very very valid - especially on servicing obligations around replacement of fuel cells and server due to failure, lower efficiency or end of useful life. This cost can suddenly show up after a few years and it will be much bigger as volume grows up substantially. It can manifest into a material risk for the company and can force it into bankruptcy.
The only way to know if this risk has reduced is to check whether Bloom has really improved upon the useful life of the fuel cells and servers as per its original claim. Unfortunately I do not have necessary expertise in this.

Disclaimer: invested with average cost of 1550

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38

Interesting company and in a very interesting space too, no doubt prospect looks great, - I will avoid getting into details of business or saying what will happen or what won’t happen - but looking at the working capital cycle & segment that they are in, combined with the valuations that they trade at, lots of things need to work out for them to make money as an investor ( at least I can speak for myself) and very few things need to go bad for me to either incur opportunity cost - or not make money, or lose money even. Does not work out for me on risk reward basis.

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Sharing some facts -

  1. Company lives to its guidance. As others pointed out, mgmt is conservative. If you notice, they up the guidance thrice and is on track to achieve it

  2. Promoters stake sale - they clarified this in an interview and Ankit posted a link in his first post. Co is a 51 year old company. Promoters selling stake have not been involved in the Co for several years! Post the sale, co has still been churning robust performance (note that capital goods Cos generally have H2 better than H1 because execution cycle)

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Given that 50% of revenues come from Bloom and these are yearly contracts, do we know what are credit terms with them?

For the balance 30% from India government, in an interview mgmt said they receive payment within 35-45 days of delivery.

If we compare this to defence stocks like HAL or Datapatterns, overall industry has long WC days.

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Promoter Selling does not help the company perception much.

Enjoy.

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https://twitter.com/Bloom_Energy/status/1643723572245041152?t=6XXytmsfNM3PsN9nXyJ4uA&s=19

Good news for MTAR

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