5 reasons why MTAR Technologies has fallen out of market favour

Once a D-Street favourite, it didn't take MTAR Technologies too long to be demoted from that spot. It generated outsized gains of 53 per cent per annum between its listing in March 2021 and September 2023, when the downturn began. It has been a year of decline since then, and the market value has crashed 36 per cent.

The initial gains were not unsubstantiated. MTAR's stronghold in niche industries like defence, aerospace, nuclear power, and clean energy made it a solid bet (it manufactures high-precision components and equipment for these sectors). And its revenue and profit growth of 27 and 33 per cent per annum during FY19-23 justified investor interest. So what brought the subsequent decline? The recent weakness in the defence sector is not to blame. At the same time, others in the clean energy business have been doing phenomenally, which further affirms that MTAR's problems are mostly its own.

Below are reasons that explain why D-Street has had a change of heart, and some lessons that the company's decline lays out for investors:

1. Repeated guidance revisions

The company set the bar too high for FY24. It projected revenue growth of 45-50 per cent, but revised down the target several times throughout the year. There were also repeated downward revisions for the revenue target of Rs 830-860 crore. It managed to achieve only Rs 580 crore in revenue and the profit nearly halved for FY24 due to delays in orders from its single-largest client Bloom Energy. The sharp diversion from the promised growth meant the stock had to face investor ire. It also raises doubts over the credibility of the management, which seems to lack a clear view of its position.

2. Promoter selling

MTAR's promoters have reduced their stake from over 50 per cent in FY21 to below 36.4 per cent at present. The management attributes this to non-core family members selling their shares. But such steep dilution signals lack of confidence by company insiders, especially as it coincides with the company's operational challenges. It remains a big red flag.

3. Concentration risk

MTAR's dismal performance in the previous year shines light on how revenue concentration can wreak havoc on a business. MTAR is overly dependent on a single client-US-based clean energy company Bloom Energy- for its business. In FY23, more than 70 per cent of the revenue came from Bloom Energy alone. A delay in orders from Bloom, due to technological transitions and rising interest rates in the US, led to the sharp decline in MTAR's revenue and profitability.

4. The other side of high margins

MTAR's business segments were mostly high-margin in nature, which primarily generated investor interest in the company. However, investors tend to overlook that high-margin businesses often have lower volumes. This means that even a small fluctuation in these segments can drag overall profitability, as seen with MTAR. It operated with EBIT margins of 25-29 per cent from FY19 to FY23, but they plunged to 8 per cent in recent quarters due to rising costs and deferred orders. Thus, it is crucial to keep in mind that even high-margin businesses are vulnerable to sudden drops in profitability, particularly when they face operational or supply chain issues like in the case of MTAR.

5. Working capital woes and poor cash conversion

MTAR's working capital management is arguably its toughest operational challenge. Despite strong revenue growth in recent years, the company has struggled to convert profits into cash. In FY23, MTAR generated Rs 155 crore in operating profits but could manage to convert only around Rs 5 crore into cash, highlighting inventory management inefficiency and poor payment collections. Its working capital days have ballooned to over 250 as of Q1 FY25. While management has acknowledged these issues, it has not laid out any corrective measures.

Your takeaway

There are some broad lessons to learn from MTAR Tech's challenges. Repeated guidance cuts and sharp diversions from a company's projections means the management perhaps lacks farsightedness, or it is misjudging the growth. Add to that promoters' profit booking and the credibility further gets damaged. A company's stability also gets called into question if the business model is overly reliant on a handful of customers.

That said, despite the challenges and no clear resolution plan in place, MTAR Tech continues to offer lofty projections. The management is optimistic about clocking 30-35 annual growth in coming years. But given its woes have no end in sight, and that Q1 FY25 also marked a disappointing start to the year, achieving the said growth remains doubtful.

Also read: Despite a 4x surge, this brokerage trades at a P/E of 16. Is it a value buy or a trap?

Disclaimer: This is not a stock recommendation. Investors must do their own research before making an investment decision.