Tata Technologies

IPO Size: Rs. 3,043 cr Entirely Offer for Sale (OFS)

• 76% of Rs. 2,314 cr by the promoter Tata Motors (65% stake to trim to 53%)
• 24% by 2 investors Alpha TC and Tata Capital Fund (11% combined stake to drop to 7%)

Price band: Rs. 475-500 per share

M cap: Rs. 20,284 cr, implying 15% dilution

• 10% of issue is reserved for Tata Motors shareholders. Tata Technologies will continue to be a subsidiary of Tata Motors, post IPO as well, with the 53% holding being worth Rs. 10,800 cr, at the upper price band.  

IPO Date: Wed 22^nd Nov to Fri 24^th Nov 2023, Listing Tue 5^th Dec 2023

Grey Market Premium (GMP): We are strongly against ‘grey market premium’ as it is an unofficial figure, against SEBI guidelines.

Automotive Engineering Services IT Company

Tata Technologies is #1 Indian engineering service provider in the automotive space, with special focus on development and launch of electric vehicles (EVs). It has 2 business divisions:

1. Services (80% of revenue) for outsourced engineering and digital transformation, which helps OEMs reduced vehicle development time. Tata Technologies developed a new vehicle in record 22 months for Vietnamese electric OEM VinFast.
2. Technology Solutions (20% of revenue): comprises third-party software application products and education in manufacturing skills.  

Client concentration risk is not concerning, as anchor clients Tata Motors and Jaguar Land Rover (JLR) are ambitious and pioneering EVs globally. Moreover, their share in company’s revenue has been declining, down to 34% in FY23, from 43% in FY21.

Growing Financials

Between FY20 to FY23, revenue grew at 16% CAGR to Rs. 4,414 cr, with profit growth stronger, net profit surging at 35% CAGR to Rs. 624 cr, leading to 14% net margin. As share of onshore is higher for Tata Technologies vis-à-vis other technology outsourcing players, its margins are lower, and may increase only moderately.

FY23 constant currency (cc) revenue growth stood at 24% YoY, while H1FY24 cc revenue growth was at 29% YoY, to Rs. 2,527 cr. Of this, nearly 70% came from automotive industry. H1FY24 net profit was reported at Rs. 352 cr, translating into an EPS of Rs. 8.7, up 36% YoY from H1FY23’s Rs.6.4 and from FY23’s Rs. 15.4.   

Company is debt-free with net worth of Rs. 2,853 cr, of which, Rs. 900 cr or Rs. 22 per share is cash and equivalents.

Secondary Sale at Rs. 402 per share last month

On 25^th Oct 2023, Tata Motors sold 9% stake in Tata Technologies to TPG Rise and 0.9% to Ratan Tata Endowment Foundation at Rs. 402 per share. Current IPO price, at upper end, is 24% premium is a month’s time! Prima facie, this ‘premium’ is not expected from Tata Group, known for strong corporate governance and investor-friendly policies.  

One wonders if the previous month’s transaction was on arm length basis, as TPG Rise is already an investor in Tata Motors’ EV subsidiary, while the Endowment Foundation could be termed ‘related party’ or ignored for ‘non-profit’ reasons?

Tata Motors shareholders may argue differently though. If public market demand-supply factors help fetch a higher price, it will help fasten company’s deleveraging exercise.

Keeping all these ‘viewpoints’ aside, best is to take a fundamental view on the company valuation, as under:  

Pricing for Growth

Based on FY24E EPS of Rs. 18.5, shares are being offered at a PE multiple of 27x on current year basis, which is inexpensive in relation to peers.

Group company Tata Elxsi, with FY23 PAT of Rs. 755 cr has a m cap of Rs. 52,400 cr, implying a PE multiple of 65x. Although its net margin is stronger at 23%, H1FY24 revenue growth was lower at 16%. KPIT Technologies, which clocked 60% topline growth in H1FY24 and operates on 12% net margin, is currently trading at a PE multiple of 68x! Another peer L&T Technology Services reported 9% YoY revenue growth in H1FY24 with 14% net margin, yet ruling at a PE of 38x, on FY24E earnings. Thus, Tata Technologies’ lower margin is adequately factored in the pricing, despite bright growth prospects.

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