TATA Technologies IPO Review

Tata Group has a history of delivering exceptional value to its stakeholders, be it consumers, the country, or investors. TATA Technologies IPO Review. With successful ventures like TCS and Titan, the group has consistently raised the bar. The latest buzz surrounds the new IPO of Tata Technologies, the first IPO from the Tata Group in 19 years since TCS. This article delves into whether investing in Tata Technologies is a prudent decision.

History of Tata Technologies

Founded in 1989 as a division of Tata Motors, Tata Technologies began its journey by providing technological services for Tata Motors’ vehicle design and product development. In 1994, it was spun off into a separate entity, Tata Technologies Limited, expanding its services beyond Tata Motors to global clients.

Tata Technologies and Tata Motors

Initially, Tata Technologies exclusively served Tata Motors. As the company gained expertise and recognition for its stellar service, Tata Group decided to offer its services to other companies. This strategic move mirrors the growth trajectories of TCS and Titan, both of which started as internal divisions within larger Tata entities.

Comparison with TCS and Titan

Just like TCS and Titan, Tata Technologies started by catering to internal needs before expanding outward. TCS evolved from an internal division to a global IT giant, and Titan’s Tanishq became a leading jewelry brand under similar circumstances. Tata Technologies might follow a similar path, leveraging its deep expertise to dominate the ER&D sector.

Industry Overview

Engineering Research and Development (ER&D) Sector

Tata Technologies operates in the ER&D sector, providing engineering services and digital transformation solutions. This includes product development, design, and enhancing existing products. The company’s primary focus areas include the automotive, aerospace, and industrial machinery sectors.

Future of the ER&D Industry

The ER&D industry is poised for significant growth. With the global push towards advanced manufacturing and electrification, the demand for innovative engineering solutions is escalating. The sector is expected to grow at a rate of 16-17% over the next 4-5 years, driven by the need for automation and new product development.

Financial Performance

Sales Growth

Tata Technologies has demonstrated robust sales growth over the past few years. In 2021, the company reported sales of ₹2380 crores, which grew to ₹3529 crores in 2022, and further to ₹4414 crores in 2023. In the first six months of the current financial year alone, sales have already reached ₹2526 crores, projecting an annual figure of around ₹5000 crores.

Profit Margins

The company’s profitability has also shown impressive growth. EBITDA increased from ₹430 crores in 2021 to ₹694 crores in 2022, and ₹908 crores in 2023. The profit margins improved from 10.5% in 2021 to 14.4% in 2023, reflecting efficient cost management and economies of scale.

Strengths of Tata Technologies

Expertise in Automotive Industry

With over three decades of experience, Tata Technologies has established itself as a leader in the automotive sector, particularly in the electrification of vehicles. Its contributions have been pivotal in making Tata Motors a leader in the EV market.

Marquee Clients

The company boasts an impressive roster of high-profile clients. Approximately 57% of its revenue comes from its top five clients, including Tata Motors and Jaguar Land Rover.

Global Delivery Model

Tata Technologies operates more than 18 global delivery centers, ensuring a diversified and resilient operational model. This global presence mitigates risks associated with regional economic downturns.

Weaknesses of Tata Technologies

Client Concentration

The reliance on a few major clients poses a risk. Should any of these clients reduce their business with Tata Technologies, it could significantly impact the company’s revenue.

Revenue Concentration on Automotive

Nearly 70% of the company’s revenue comes from the automotive sector. While the sector’s future appears promising, any downturn could adversely affect Tata Technologies’ financial health.

Dependence on Startups

A significant portion of future revenue is expected from new energy startups. The inherent volatility in the startup ecosystem poses a potential risk to these projections.

Foreign Currency Risk

With 65% of revenue coming from outside India, the company is exposed to foreign currency fluctuations. However, as an export-oriented business, a weakening rupee could be advantageous.

IPO Details

IPO Dates and Price Band

The IPO will open on 22nd November and close on 24th November, with a price band of ₹475 to ₹500. Tata Motors and other major stakeholders are divesting a portion of their holdings.

OFS (Offer for Sale)

The IPO is entirely an OFS, meaning the proceeds will go to existing shareholders rather than the company. Tata Motors, Tata Capital Growth Fund, and other investors are divesting their stakes.

Valuation Analysis

EPS Calculation

With an EPS of 15.3, the implied P/E ratio at the upper price band of ₹500 is approximately 32.

Comparison with Competitors

Competitor P/E ratios are significantly higher, with KPIT Technologies at 80, Tata Elxsi at 65, and LTTS at 36. Thus, Tata Technologies’ valuation appears reasonable.

Gray Market Premium (GMP)

The GMP for Tata Technologies is over ₹350, indicating strong market interest and suggesting a potential listing price of around ₹850, providing a substantial listing gain.

Should You Invest?

Given the reasonable valuation, strong financial performance, and positive industry outlook, investing in Tata Technologies’ IPO seems prudent. The expected listing gain further enhances its attractiveness for short-term investors.

Long-term Potential

For long-term investors, Tata Technologies offers a compelling case with its leadership in the ER&D sector, robust client base, and alignment with the growing EV market. While it may not replicate the meteoric rise of TCS or Titan, it holds promise for steady, substantial returns.

Conclusion

Tata Technologies’ IPO presents a lucrative opportunity for both short-term and long-term investors. With its strong financials, reasonable valuation, and favorable industry trends, it is well-positioned for growth. However, potential investors should conduct their research and consider their risk tolerance before investing.