Tata Technologies, a subsidiary of Tata Motors, commenced its initial public offering (IPO) subscription on November 22. This marks a significant milestone as it’s the first IPO from a Tata Group company in nearly twenty years since Tata Consultancy Services’ public offering in 2004.
This offer, which closes on November 24, has been set at Rs 475-500 per share. The Rs 3,042.51 crore public offer is entirely an offer-for-sale of 60.8 million shares, or 15% of the paid-up capital.
Despite analysts’ positive views of the company, the company’s low compound annual growth rate, dependence on Tata Motors and Jaguar Land Rover, and concentration in the automotive sector are major concerns.
Let’s examine the company’s business model, financials, and factors influencing its performance.
What are Tata Technologies primary functions?
Tata Tech navigates within the worldwide engineering research and development (ER&D) services industry. Their spectrum comprises providing product development and digital solutions, offering comprehensive turnkey solutions to international original equipment manufacturers (OEMs) and their tier-1 suppliers.
They possess specialized knowledge within the automotive sector, using this expertise not only to cater to automotive clients but also to extend their services to related sectors like aerospace, transportation, and heavy machinery in construction. This allows them to broaden their clientele and impact across multiple industries.
The business operations are divided into two distinct segments:
Technology Solutions
The technology solutions segment encompasses both product and education divisions. Under the products business, it specializes in reselling third-party software applications, mainly focusing on product lifecycle management software. Alongside, it offers additional services such as consulting, implementation, systems integration, and support.
Meanwhile, the education arm delivers “phygital” (physical and digital) solutions centered on manufacturing skills. It includes upskilling and reskilling programs that cover the latest engineering and manufacturing technologies. These offerings are extended to public and private institutions and enterprises through curriculum development and competency center services facilitated by its proprietary iGetIT platform.
During FY23, the technology solutions business contributed 20 percent to the total revenue generated from operations.
Services
In FY23, 80 percent of the company’s revenue came from its services segment, which provides outsourced engineering services and digital transformation services to global manufacturing clients.
Among the main clients in the services segment, Tata Motors/Jaguar Land Rover contributed 34 percent of the revenue from operations in FY23, while the automotive sector accounted for 69 percent.
In the services segment, the remaining revenue is contributed by aerospace and other manufacturing verticals. Of the 69 percent contribution from the automotive segment, about 26 percent came from new energy vehicles.
Financial Performance
During FY23, Tata Tech showcased robust financial performance, recording a significant 42.8 percent surge in consolidated net profit, amounting to Rs 624 crore. Simultaneously, their revenue from operations witnessed a substantial 25 percent climb, reaching Rs 4,414.2 crore.
In the half-year concluded in September, the company sustained its upward trajectory with a 36 percent spike in profit, totaling Rs 351.9 crore, while experiencing a 34 percent revenue upswing, touching Rs 2,526.7 crore compared to the corresponding period in the prior year.
Throughout FY22, Tata Tech consistently maintained an EBITDA margin within the 18-20 percent range, demonstrating stable financial health. Moreover, the company boasts a debt-free status, adding to its strong financial position.
Valuation
At the upper price band of the IPO, the company’s valuation stands at Rs 20,283 crore. In the offer, Tata Motors will sell 46.25 million shares worth Rs 2,314 crore. Alpha TC Holdings will sell 9.7 million shares for Rs 486 crore, and Tata Capital Growth Fund I will sell 4.9 million shares for Rs 243 crore.
When Tata Tech filed the draft red herring prospectus for the IPO earlier this year, it intended to offer 95.7 million shares, or 23.6% of its paid-up capital. As a result of Tata Motors’ October sale of 9.9% of Tata Tech to TPG, the offer size was reduced. This valued Tata Tech at about Rs 16,300 crore.
Return Ratio
At 33x, Tata Tech’s price-to-earnings ratio is much lower than KPIT’s 105x, L&T Technology Services’ 40x, Tata Elxsi’s 70x, and Cyient’s 37x. Return on equity increased from 19.2 percent in FY22 to 20.9 percent in FY23. In the same period, capital employed returned to 24.3% from 24.6%.
For FY20-23E, Tata Tech’s revenue growth rate was 12.1 percent, behind all peers except Cyient.
According to financial researchers, when considering the Covid years, the CAGR may appear lower than peers. However, without including that year, the CAGR is expected to be significantly higher than industry peers. This expectation is based on factors such as the company’s business visibility and focus on product engineering in the EV sector, as well as the projected industry size of $100 billion worldwide with a YoY growth rate of 11-13 percent. Therefore, it is anticipated that the company will continue to outperform its peers in terms of growth.
Tata Tech’s Reliance
While Tata Motors and JLR have historically been major contributors, constituting 34.1 percent of Tata Tech’s revenue, there has been a reduction from the FY21 figure of 42.89 percent.
Despite the inherent industrial risk associated with a high dependence on clients within the automotive sector, Tata Tech has actively diversified its portfolio. Ventures into defense and education solutions, characterized by robust topline growth with a relatively lower impact on the bottom line, are part of this strategic shift, as noted by Tapse.
CEO Warren Harris emphasized that operational decisions within Tata Tech remain unaffected by the positions of the Tata Group or Tata Motors. While anticipating short-term growth in business with Tata Motors and JLR, he foresees a gradual decline in their contribution percentage in the medium to long term. This strategic approach aims to enhance resilience and reduce dependence on specific clients over time.
Analyst Call
The issue has been rated as ‘subscribe’ by most brokerages, including IDBI Capital, Reliance Securities, Arihant Capital, and Mehta Equities.
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