14th July 2023 - a historic date for Indians as it marked the launch of what became one of the most important space missions for the country - the Chandrayaan 3. What’s even cooler is India did it on a Rs. 600 crore budget (Russians spent 3x more and the Chinese spent 7x more)!
Well, we found a Stark Tech-esque company that was responsible for the core parts of the rocket’s engine but is also a “marvel” in clean energy projects and nuclear reactors - MTAR Technologies.
After listing in March 2021, the company has given its Day-1 investors a neat 2x return, but recent investors didn’t enjoy that as the share has fallen by 24% since September 2023!
After the euphoric success of its back-to-back space missions that shot the stock “to the moon”, MTAR Tech has been looked at with scepticism.
With some promotor bulk deals and the management’s reduced revenue estimates for FY24, investor confidence is shot.
Yet, there still seem to be longer-term triggers in play that can give the stock some much-needed rocket fuel! But, before we proceed, you’re going to want to know what the business of MTAR Tech looks like:
1. Downgrade of FY24 Guidance: A Long-Term Tailwind?
November 2023 marked the beginning of a downward spiral in the stock price as the 2QFY23 earnings call began with the MD announcing that the revenue estimates for FY24 had been revised from a 45% growth YoY (Rs. 830 crore) to about 20% YoY (Rs. 670-700 crore) - a 25 percentage point downgrade!
This is all owing to one client that contributes to more than half of MTAR Tech’s total revenue - Bloom Energy USA.
The company is a leading name in clean energy generation, and MTAR Tech manufactures hot boxes (a machine that converts methane gas into energy in a process that emits 50% less greenhouse gasses than coal) for it, with MTAR Tech being its largest and only Indian supplier.
So, why has Bloom Energy caused a gaping hole to the tune of Rs. 160 crore?
Inventory Destocking - Bloom Energy had an excess in methane hot boxes and hence deferred the new order for these towards the next quarter and spill over into FY25
New Location - Bloom Energy has shifted its operations from Yuma to Santa Cruz (within the state of Arizona), due to the higher energy generation opportunity, with the latter offering 15 KW more than the former. While it still has hot boxes to begin operations, the next set of orders will need a redesign to suit the higher-generation load and a ramp-up in units for the new location
With these in motion, a temporary adjustment in guidance for the sake of a longer-term tailwind in the form of larger orders for the new location (which will be an additional Rs. 70-80 crore worth of orders coming in 4QFY24 - 1QFY25 itself)!
2. The Hydrogen Play
There is another benefit of associating with Bloom Energy - its efforts to become the final name in green hydrogen, one of the cleanest forms of energy on this planet!
In fact, as proof of concept, Bloom Energy has already built a concept system called a “Bloom Box” that is said to be the largest and most efficient single system of hydrogen production that produces 25% more hydrogen per MW than the existing versions.
It is essentially a combination of 2 products that MTAR Tech supplies to Bloom Energy:
Solid Oxide Fuel Cell - these units take methane into a machine, superheat it, and derive hydrogen from it. It is said to be the most efficient way of using methane to convert into hydrogen
Electrolysers - this is an apparatus that undertakes a chemical process of splitting the hydrogen out of water (H2O) and is the only way to generate green hydrogen (it is called this because it doesn’t need to burn any other fuel or gas)
The 4MW system created out of these two products runs at an efficient level of 90-95%, making Bloom Energy (and MTAR Tech by association) the global leader in this space, one that is set to grow at an apparent 25% CAGR from now till FY30!
With a majority of the Clean Energy segment consisting of orders from the hydrogen department, and as Bloom Energy achieves scale with its new system, MTAR Tech will see equivalent growth in the long run - but this is on the export side of things!
Considering India’s Green Hydrogen Mission goal is to bring India to the forefront of manufacturing this tech, a whopping 90% of the total Rs. 19,744 crore has been allocated towards this area - all of it indicating that MTAR Tech is doing the right things at the right time, and could be privy to this capex outlay between now and FY30!
3. Solid Order Book Prospects
While the clean energy segment is the largest revenue drawer and is a high-growth space, the other segments are also seeing tailwinds:
Space - With MTAR Tech’s decadal relationship with ISRO, all future projects will have the company as a contributor. The Gaganyaan mission, among others, will be a continual opportunity for MTAR Tech to shine
Defence - Now that the company acquired a Defence Industrial License in the previous quarter, it allows MTAR Tech to produce key electronic systems for the Navy and to also participate in the Make In India movement’s attempt to manufacture these systems for foreign armed forces, with partnerships already in place with BHEL and L&T
Other Products - As a value-addition attempt, the company has started offering sheet metal for the SOFC units to Bloom Energy. In its first year (FY23), it accounted for 5% of revenues and might progress to 8-10% over the next few years
Coupled with 2 new nuclear reactor projects in play and the above tailwinds, FY24 could close with an overall order book of Rs. 1,400-1,500 crore (stands at Rs. 998 crore as of 1HFY24), which is about 2.5x FY23 revenues, giving at least 2 years of revenue visibility and the assurance of faster order book filling in FY25!
With the prospects of a 25% earnings and revenue CAGR over the next 2 years, the stock seems to trade at a 47x 1-year forward PE (this is from trading at a 60x multiple at the September 2023 peaks).
This stock seems to have had a malfunction and is now refuelling for its next location - but whether it gets there is, as usual, anybody’s guess!
The opportunity it presents as it migrates to higher value, whether that is new tech in methane hot boxes, green hydrogen, or value-added products, we couldn’t resist keeping an eye on this through our Value Migration portfolio!
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