After 15% drop in 2024 YTD, why InCred is bullish on MTAR Tech, sees 42% upside

“MTAR Technologies is a precision machining company with exposure across niche sectors like fuel cells (for Bloom Energy), nuclear, defence, and space. Rising power costs in the US due to grid problems, coupled with the rising cost competitiveness of Bloom Energy, will result in significant tailwinds for MTAR. We value the stock at 45x FY26F EPS to reach our target price of 2,644. Initiate coverage on it with an ADD rating,” said the brokerage.

InCred forecasts that MTAR is likely to register a 41 percent topline growth over FY24-26F, with margin improvement by roughly 500 bps due to operating leverage kicking in. Moreover, going ahead, even if Bloom Energy (MTAR’s largest client) misses its consensus revenue estimates for CY26F by 5 percent, it will only have a 10 percent negative PAT impact on MTAR, owing to its ramp-up in other revenue segments, thus providing a reasonable margin of safety. The brokerage expects MTAR to register an 80 percent PAT CAGR over FY24-26F.

Stock Price Trend

The stock has shed 4.5 percent in the last 1 year and 15 percent in 2024 YTD. This year so far, the stock has given negative returns in 4 of the 6 months. While it rose 3.5 percent in June till now, it had lost 4.5 percent in May. Meanwhile, in April, the stock jumped 12 percent. Before that, the stock was in the red for 6 straight months between October 2023 and March 2024, crashing almost 34 percent in this period. In the first 3 months of 2024, the stock fell 12 percent in March, 8.8 percent in February and 5 percent in January.

The stock had hit its record high of 2,920 on September 11, 2023, and its 52-week low of 1,601 on June 4, 2024. Currently trading at 1,862.65, the stock is over 36 percent away from the peak and has risen over 16 percent from its year-low.

Investment Rationale

MTAR’s unique machining capabilities separate it from its peers: As per the brokerage, MTAR stands out among machining companies like Bharat Forge for its dual capabilities in both conventional and non-conventional machining. Non-conventional methods, which involve techniques not reliant on sharp tools, are crucial for MTAR’s operations. Besides conventional machining, MTAR excels in EDM (electronic discharge machining), leveraging electrical energy to shape metals, especially for ceramic machining in Bloom Energy’s fuel cells. This capability not only provides MTAR with a competitive advantage but also opens avenues for expanding into challenging-to-machine materials, it had said.

Clean energy to be the biggest growth driver for MTAR: InCred stated that MTAR specializes in manufacturing mission-critical precision components and assemblies with tight tolerances (5-10 microns). In the clean energy sector, MTAR supplies components to Bloom Energy, a US-based manufacturer of solid oxide fuel cells (SOFCs) known as energy servers. These fuel cells are crucial for addressing US grid transmission challenges, making them a significant growth driver for MTAR in the future. Additionally, MTAR’s strong research capabilities enable continuous enhancement of its value addition for clients, reinforcing its position in the value chain.

Bloom Energy is getting significant incremental orders: Bloom Energy excels in providing resilient power solutions, with its energy servers already operational in over 40 data centers across the US, serving major entities like AT&T, Equinix, and JP Morgan, informed Incred. While Bloom Energy currently benefits from sales to existing (brownfield) data centers, which have shorter sales cycles, future growth is anticipated from new (greenfield) data centers with longer sales cycles. Bloom Energy has approximately 0.5GW of incremental demand from data centers in its current pipeline. MTAR Technologies derives 60 percent of its revenue from Bloom Energy, illustrating their close strategic relationship.

European defence spending could also act as a trigger for the defence segment of MTAR: MTAR Technologies’ defence segment contributed approximately 3 percent to its FY24 revenue. However, this segment holds significant growth potential in the coming years, bolstered by clients such as Rafale and Israeli Aerospace Industries (IAI). With heightened defence spending amid conflicts

like the Israel-Hamas and Russia-Ukraine wars in Europe, MTAR is poised for growth. Additionally, MTAR has secured a long-term agreement with IAI spanning 15 years to supply critical assemblies for the aviation sector, with the contract valued between US$90 million to US$120 million over 20 years, said the brokerage.

Renewables (solar/wind) is not the solution – it’s fuel cells & nuclear: According to the brokerage, renewable sources like solar and wind exhibit intermittent and unpredictable energy generation, which poses grid stability issues. Unlike gradual changes in grid demand, these sources fluctuate suddenly with changes in weather conditions. While batteries offer a potential solution, existing utility-scale battery packs are insufficient for true grid-scale backup, it noted. However, it pointed out that fuel cells and nuclear energy emerge as viable alternatives due to their on-site energy storage capabilities, ensuring reliability. MTAR Technologies benefits significantly from these technologies, with Bloom Energy, the world’s sole commercial-scale fuel cell manufacturer, and nuclear energy contributing 70 percent of MTAR’s FY24 revenue. This trend is expected to provide significant growth opportunities for MTAR in the foreseeable future, it stated.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.

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Published: 17 Jun 2024, 11:46 AM IST

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