MTAR Technologies - A wager on innovation meeting economies of scale

Stock Opportunities Not-so-Hidden Gems
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To summarize a very long first message on this thread, I invested in MTAR for the following reasons:

• Management had a recent track record of exceeding guidance numbers
• Robust revenue growth from FY20 to FY23 (~₹214 – 574 cr), with EBITDA margins in the mid to high 20s
• Precision engineering company – lots of expertise and IP
• Active in critical growth sectors – clean energy, space, defence, nuclear energy
• The most upside (in my opinion) was in clean energy (fuel cells, H2 boxes, and electrolyzers), not to mention the highest potential for economies of scale to kick in (batch manufacturing to mass manufacturing of electrolyzers, etc.)

To say that Q3 results came as a shocker today would be an understatement.

Commenting on the results, Mr. Parvat Srinivas Reddy, Managing Director & Promoter, MTAR Technologies, said, “Revenues in FY24 shall be marginally higher as compared to FY23 due to deferment of export shipments in Clean Energy sector to the next fiscal year. However, the growth outlook for FY25 remains intact with 45% - 50% YoY likely increase in revenues. The company is in final stages of discussion with reputed global MNCs as well as made good progress in Small Satellite Launch Vehicle project.”

Rewinding the clock and going back to Q2 results, while this has been covered in detail in previous messages, I just wish to reiterate a few points from that con call:

• While order deferment from Bloom Energy was cited as the reason, I was not a fan of the drastic cut in revenue guidance for FY24 down to ₹670 – 700 cr from ₹830 – 860 cr. In addition the EBITDA margin guidance was reduced to 26% (+/- 100bps)
• Still expecting to see a closing order book of ₹1400 to 1500 cr
• Delivered approximately 400 and 200 units of Yuma and Santa Cruz Block 1, respectively
• Expecting to deliver 528 units of Santa Cruz Block 2 in Q3
• Expecting to deliver 44 electrolyzers in Q3 and 66 in Q4
• In talks with Fluence Energy around energy storage systems, which could be a ₹120 – 130 cr business in FY25, with plans to deliver 1000 units. Fluence wants MTAR to build the capacity to deliver 3000 plus units
• Over the long term, proactively planning to get EBITDA margins to 28%
• Expecting H2 domestic sales to be 3x what they were in H1, indicating a jump from ₹50 cr to ₹150 cr

So when I look at the Q3 numbers, I have a lot of questions, which I hope will be answered in tomorrow’s con call:

• With the total revenue from Q1 to Q3 adding up to around ₹440 cr, what actual number are we targeting for FY24 revenue? If it is significantly lower than the lower end of the Q2 revised guidance of ₹670 cr, I will have trouble taking guidance figures at face value going forward
• Is there a revenue recognition issue that caused this massive drop in Q3 revenue? For example, products that should have been shipped on Dec 29 did not leave the factory till January 3, and therefore revenue will have to be recognized in Q4?
• How many Santa Cruz boxes were shipped in Q3? The target was around 530 from the previous call
• How are the conversations with Fluence Energy progressing? Is the ₹120 – 130 cr revenue projection for FY25 (~1000 units) still accurate?
• How many electrolyzers were actually shipped in Q3? What are we expecting for Q4, and when are we going to make the transition from batch manufacturing to high volume mass manufacturing here? Over the next 3-5 years, can the revenue contribution from electrolyzers increase massively, and even exceed the contribution from fuel cells/hot boxes/hydrogen boxes?
• Are second half domestic sales going to be anywhere close to the projected ₹150 cr?
• What does management project for the FY24 closing order book number?

Just so I don’t misquote something, I will wait for the transcript of tomorrow’s call before drafting my next message.

Disclosure of holding: I started buying MTAR Technologies in August 2022, at a price of ₹1422. My cost basis has moved up to ₹1555. I have a fairly concentrated portfolio, and do not hold more than 10 companies at any given time.

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130

I feel that Q4 will be flattish YoY & expected growth of FY24 is differed by 1 year to FY25.
Order inflow is quite strong in Q3 and i expect that Q4 will see more orders, as long as the orderbook is building then i don’t see any much risk.
Electrolyzers opportunity is much bigger than these SOFC boxes, fluence energy & product related revenue (import substitutes) can contribute significant revenue in FY25.

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131

Very good insights from con call.
I am very much convinced with the management guidance this time with good breakup and very low (35%) exposure to bloom energy.
They are expecting other verticals could contribute good amount of revenue in FY25 with decent margins.
Electrolyzers revenue is not included in the revenue projection of 900Cr, but i feel there will be some contribution of this vertical as well.

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132

Is it available online yet?
Cant find on their site also!

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134

Need some overall market correction, and stock to consolidate along 1200-1500 before building any new position.

I am not invested as long as promoter is on a selling spree.

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Concall notes available on screener

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136

Really thought provoking questions + write up by @ankit_george above. Going through the earnings call for Q3, I’d like to take a shot at answering all the Qs asked above:

  1. FY24 revenue guidance is INR 610 crore, significantly lower than the earlier estimates. Definitely shakes confidence in the estimation capabilities of the management.
  2. Couldn’t deduce whether it was a revenue recognition issue, but the management highlighted stabilization issues at Bloom Energy which disrupted delivery schedule. They believe the worst is over and things should become smooth from Q4.
  3. 500+ hot boxes delivered to Santa Cruz in Q3. 664 hot boxes estimated to be shipped in Q4.
  4. Expecting orders of 300 units from Fluence Energy in FY25, which could increase to 1K units in FY26 and 3K units in FY27.
  5. 44 electrolyzers shipped in Q3. 60 electrolyzers expected to be shipped in Q4. No comment by management on transition to high volume mass manufacturing. No comment on volumes over the next few years – however, management sees electrolyzers as a BIG OPPORTUNITY.
  6. No exact commentary on this, but given a lower revenue guidance I don’t think they’ll achieve the INR 150 crore domestic sales #
  7. Expecting order book to close at INR 1,400 crore for FY24.

I covered the Q3 earnings call HIGHLIGHTS + LOWLIGHTS in this article if anyone wants a deeper dive.

Again, amazing thought activity @ankit_george !

Disclosure: Not invested. Tracking QoQ performance.

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Thank you @siddybee for typing these answers :slight_smile: . Overall, I have to say that I was quite pleased with the concall.

I am very excited about answer number 5. Electrolyzers, given the way the world is evolving, are going to be a big deal. At this stage, I believe only one company manufactures electrolyzers at scale in this country. There is a lot of talk among other players, but no one else has started mass manufacturing them, to my knowledge (please correct me if I am wrong).

MTAR has proven that they can batch manufacture electrolyzers for Bloom Energy. So, contingent on Bloom Energy getting orders for these devices, I expect that the transition to mass manufacturing on MTAR’s end should be fairly smooth.

I agree with @murali603 that there will be some contribution from this vertical in FY24-25, and I also appreciate that management is being very conservative with guidance this time around. Personally, I hope that we have a hockey stick growth moment late in FY24-25 over here, but that’s just me being bullish.

Disclosure of holding: I started buying MTAR Technologies in August 2022, at a price of ₹1422. My cost basis has moved up to ₹1555. I have a fairly concentrated portfolio, and do not hold more than 10 companies at any given time.

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Whether it’s guidance around revenue growth, or EBITDA margins, I am going to take anything coming from MTAR’s management with a pound of salt going forward. Results are disappointing, to say the least. I am going to wait for an earnings call transcript before sharing my updated thoughts on the company.

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Agreed. The worst thing is the constant revision of guidance. First it was 800 Cr for FY24, then 680 Cr, then 610 Cr while promising 900 Cr in Fy 25, now 30-35% growth in revenue which on a rev of 580 Cr would be 760 - 780 Cr for FY25 and an EBITDA margin revision to 22% coming down from 28 and then 26. Atleast have the decency to stick to a specific guidance. Last concall there was a lot of reassurance in play with claims of 900 Cr being a “conservative” figure. Now further revision in guidance! Unbelievable.

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Financial Details:

  • Revenue: MTAR Technologies reported a revenue of ₹588 crore in FY2023-24, compared to ₹573.8 crore in the previous fiscal year.
  • EBIT: The EBIT for FY2023-24 stood at ₹102.7 crore, down from ₹150 crore in FY2022-23.
  • Profit Before Tax: The company recorded a profit before tax of ₹73 crore, compared to ₹114.2 crore in the previous fiscal year.
  • Profit After Tax: Profit after tax was ₹56.1 crore, a decrease from ₹103.4 crore in FY2022-23.
  • Net Operating Cash Flows: Improved to ₹57.4 crore in FY2023-24, up from ₹7.4 crore in the previous fiscal year.
  • Debt Levels: Fund-based debt stands at ₹190 crore, with working capital debt at ₹93.9 crore and a net debt of ₹54.7 crore.

Operational Details:

  • Customer Transition Impact: The decline in earnings was attributed to a transition by key customer Bloom Energy, which impacted procurement volumes.
  • Cost Management: MTAR is focusing on proactive cost management strategies to improve AB margins and investments in R&D projects.
  • Order Book: Closed the year with an order book of ₹950 crore and expects to reach ₹1500 crore by March FY2024-25.
  • Raw Material Management: Improved management of raw materials with a reduction in raw material days to 118 days from 154 days in the previous year.

Sector Details:

  • Clean Energy: Encountered a temporary reduction in procurement volumes from Bloom Energy due to a business model transformation.
  • Defense and Nuclear: Significant projects in defense and nuclear sectors, with an emphasis on sustainable and long-term growth.
  • Aerospace: Developing new products and securing agreements in the aviation sector, expecting substantial orders in the near future.

Business Details:

  • Revenue Guidance: MTAR expects a revenue increase of 30-35% in FY2024-25, with 40% of revenue in the first half and 60% in the second half.
  • ABIT Margins: Targeting ABIT margins of around 22%, with a long-term goal to improve margins to 24%+.
  • Long-Term Agreements: Secured agreements in the aviation sector worth ₹90-120 million over the next 15 years.

Customer Details:

  • Key Customers: Bloom Energy, multiple multinational corporations (MNCs) in various sectors, including aviation.
  • Diversification: Aiming to reduce dependency on any single customer, with Bloom Energy expected to contribute around 35-40% of revenue by FY2026.
  • New Partnerships: Collaborating with new MNCs and exploring opportunities in the oilfield sector under new leadership.

Product Details:

  • First Articles Development: Investing in R&D to develop first articles and products for MNCs, aiming for future revenue streams.
  • Aviation Sector Products: Agreements signed for aviation sector projects, expecting significant business opportunities.
  • Electrolyzer Products: Working on delivering 34 electrolyzers, with potential orders in the second half of the year.
  • Defense Products: Developing various defense products, with a focus on long-term growth in the defense sector.

Summary:

MTAR Technologies Ltd faced a challenging Q4 FY2023-24 due to a transition by key customer Bloom Energy. Despite this, the company remains optimistic about future growth, expecting a significant increase in revenue and margins in the coming years. The company is focusing on diversifying its customer base, developing new products, and securing long-term agreements in sectors like aviation, defense, and nuclear. Financial metrics showed a decline, but operational improvements and strategic investments are positioning MTAR for long-term success.

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141

At this point. I guess we need to see MTAR as a futuristic company and keep the shares in a vault. I don’t expect anything next quarter or even half yearly and I am ready to see lower revenues. But they are in a great position to capitalize on all growing sectors.

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Even though the co has very small listed history, it has been a growymtg co based on management guidance (for me). The guidance was alwats based on existing order book and ongoing talks with the customers.
Now, for any co, even the management doesn’t have much capability to predict about the deferment of orders. That’s okay the management couldn’t predict and do missed on the guidance
The risk that has played out is the customer concentration risk. If, the customer concentration risk weren’t there, the management wouldn’t have missed the guidance by so much margin.

What could be the way forward

  1. Bloom evergy coming back with orders and taking deliveries. But, when will this happen
  2. Revenue from other verticals increasing, which reduces the dependence on single customer. A major risk would be eliminated
  3. Penalty clause for future orders, contracts. But, I believe the co. doesn’t have enough power for a customer to agree to such deals

Disc: No personal investment currently

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Beg to differ here. The critical aspect is understanding the tech part of Bloom’s electrolyzer. They work on the solid oxide technology, however there are companies which are commercializing technology which is way cheaper than Bloom. Secondly, the concept of mining hydrogen also called white hydrogen, is also gaining traction. Don’t expect electrolyzer to contribute significantly to MTAR’s topline in 3-5 years. Although, agreed, fuel cells are a fantastic product, and that’s where I see majority of growth coming for MTAR

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I agree. This is turning into one of those long term holds, with a wait and see approach. Personally, this is not the outcome I was expecting. I expected to see a company that would announce multiple large orders in FY24, and one that would make significant headway in the electrolyzer and energy storage system domain in the near term.

In short, a dominant clean energy company, where the defence, space and nuclear sectors would be added bonuses. But looks like the ex-clean energy sectors will start doing some heavy lifting.

As someone with a technical background, I love the work that MTAR is doing, but management really needs to be careful when giving guidance, and needs to seriously address the client concentration issue.

Also, I agree with @praveen_potnuru 's potential way forward. I was happy to see the very large and long term agreement with Israel Aerospace Industries. Hoping to see more orders like this materialize.

Also @vipraw_srivastava , I was of the view that SO electrolyzers were cheaper to operate, but more expensive to install, while PEM and other technologies had the opposite problem. Has this changed? Also, just like green H2 is in its initial stages, white H2 is at an even earlier stage. So I think there is a scope to prove out both, and time will tell who the winner will be. Regarding MTAR, I was expecting them to say they would hit triple digits in terms of quarterly electrolyzer units shipped, but that has not happened. I am cautiously optimistic that this could still happen in the second half of this FY.

Disclosure of holding: I started buying MTAR Technologies in August 2022, at a price of ₹1422. My cost basis has moved up to ₹1555. I have a fairly concentrated portfolio, and do not hold more than 10 companies at any given time — However, as of this week, I have sold off half of my MTAR shares, as I believe better opportunities exist elsewhere, and I am not satisfied with the multiple downward revisions in guidance

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A large number of industries in US (including Green energy) are facing the effects of sky high interest rates. Incremental spending has simply collapsed to only essentials… Unless the interest rates start easing in US, there wont be any major movement on new Clean Energy projects which means Bloom’s order book will be weak which results into a weaker order book for MTAR. Besides that another near term uncertainty will be US elections…If Trump wins, will he set aside Biden policies promoting green energy? That may also impact clean energy spend.

Just my 2 cents. MTAR will need a lot of patience

Disclaimer: Invested

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The client bases are different. Incremental orders for Bloom is going to come from data centers. Now, i get your point regarding high interest rates, but data centers industry in US is booming and growing, with the advent of Nvidia and others. Don’t see why won’t Bloom and ultimately MTAR benefit from this

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Electrolyzer as a product is not feasible. To replace grey hydrogen, green hydrogen needs to be sold at or around 2$/kg. No one is close to this price, except a company called Hysata. Secondly, with the advent of white hydrogen, electrolyzer might actually get disrupted in near future. However, remain very bullish on fuel cells. Disc: Biased and Invested

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