Tata Technologies IPO Review: The Tata Group is finally coming out with an IPO after 19 Long Years. Their last offer being from Tata Consultancy Services in 2004. Tata Technologies Limited will open for subscription on November 22, 2023, and close on November 24, 2023. So let us read about the Company and understand when was the business established, and how Tata Tech fits in the basket of Tata Group.
In this Tata Technologies IPO Review, we look at the tata group company, its financials, strengths, weaknesses, GMP and more.
Tata Technologies IPO Review – About The Company
Tata Technologies, a subsidiary of Tata Motors, is a global leader in Engineering and product development. The Company has been a pioneer in the Automotive and Aerospace segment providing industry-leading Engineering Research and design services (ER&D).
Tata Tech was the brainchild of Mr. Ratan Naval Tata, the Chairman Emeritus of the Tata Group. The Company was born in 1989, as Mr. Tata saw an opportunity in the evolving demand in the Product and engineering space.
In 2005, the Company acquired a UK-based ER&D Company named INCAT International. Later Tata Tech secured funding from Apla TC Holdings and Tata Capital Growth Fund, (which will be offering their shares in the upcoming IPO).
Apart from ER&D, the Company also provides Digital Enterprise Solutions, Education Offerings, and Software Product Reselling. Being a subsidiary of Tata Motors Ltd, it has the benefit of long-term contracts from the TML & JLR divisions.
The Company has a very diverse & well-balanced geographical presence. Although a majority of its revenue comes from India, it’s only marginally. Europe & North America each contribute to a quarter of the revenue. You will find a geographical representation of Tata Tech’s Revenues below.
Tata Technologies IPO Review – About The Industry
As we know by now, the Company is predominantly in the ER&D services Industry. These are a set of services that involve the process of designing and developing a device, or equipment. It could also be a device assembly, platform, or application that is produced as a product for sale through software development or a manufacturing process.
Players in the ER&D services industry typically focus on the design, development, and maintenance aspects of the product and not on mass manufacturing. Currently, global ER&D spending is estimated at $1,811 billion (Rs.150 Lakh Cr.) as of 2022. Out of the total ER&D market Rs. 67 Lakh Cr. was attributed to digital engineering spending.
This mainly comprised spending on new-age technologies like the Internet of Things (“IoT”), blockchain, 5G, augmented reality, virtual reality, cloud engineering, and a lot more. Additionally, digital engineering spending. The industry is expected to grow at a CAGR of approximately 16% from 2022 to 2026.
India and China are key locations for offshore ER&D centers, accounting for more than 60% of the total Global Capacity Centres (GCC) spending. More than 85% of the top 50 ER&D spenders have GCCs in India owing to its software engineering maturity and digital talent availability.
Tata Technologies IPO – Financial Highlights
Tata Tech made a revenue of Rs. 4502 Cr in FY23, which increased by 25.81% from Rs. 3578 Cr in FY22. The Company has been scaling its revenue at the rate of 36.23% CAGR in the past 3 years.
Net Profits of the Company have increased by 42.8%, increasing from Rs. 437 Cr in FY22 to Rs. 624 Cr in FY23. The Company has increased its Net Profits at the rate of 61.53% CAGR in the past 3 years.
Looking at the revenue growth, we can see that the Company has been scaling quickly in these three years. Alongside revenue growth, we see signs of Margin expansion as Net Profit is increasing at a much faster rate.
The Consolidated Balance sheet of the Company has expanded by 23.32%, increasing from Rs. 4218 Cr in FY22 to Rs. 5202 Cr in FY23. When we look closely at its Balance Sheet we realise that Trade Receivables are its biggest Asset constituting 21.27% of the total Balance Sheet.
The Company has Contract Assets worth Rs. 718 Cr which become the 3rd largest group of assets of the Company. From this, we can interpret the Asset Light Approach of the Company which does not require heavy investments in PPEs.
As per the IPO’s RHP, the Company maintains Adjusted EBITDA Margins of 18.60%, increasing by 240 Bps from FY21. As of FY23, it reported an ROE of 20.87% which is commendable.
Considering its FY23, Basic Earnings per share of Rs. 15.38, the Company is expected to to list at a Price-to-Earnings ratio of 31x-32.5x.
Key Players in the Market
The following image will show how Tata Technologies stands against its domestic competitors in the Engineering Services specific to the Automotive segment.
(Source: RHP of Tata Technologies)
Strengths of the Company
- Expertise in the Auto Industry: Tata Technologies has deep expertise in the Automotive Industry, especially in Internal Combustion Engines (ICE) building the entire vehicle architecture, body, Chasis Engineering, and others.
- Electric Vehicles: As Tata Motors & JLR have their Electric Vehicle divisions, Tata Technologies is developing electric Vehicle Modular Platform (eVMP), which will focus on developing products around Plug-in Hybrids (PHeV) as well as Battery Electric Vehicles (BeV).
- Marquee Client Record: Tata Tech’s clients include some of the most notable names such as Airbus, McLaren, Honda, Ford, and Cooper Standard.
- Diversification: The Company has also ventured into a proprietary E-Learning platform to tap into the upskilling market. This should help it diversify from its core business.
- Tata Brand: Tata Tech benefits greatly from being part of the Tata Group, especially securing long-term contracts with Tata & JLR Brands.
Weaknesses of the Company
- The IPO Proceeds will entirely be transferred to the selling shareholders and the Company will personally draw no benefit from this.
- The top 5 clients of the Company contributed to 60.49%, giving rise to concentration risks. Also, investors must be aware that these clients include Tata Motors & JLR.
- Since Tata Tech is in the Engineering & Software Product Development segment it might be a competitor to TCS & Tata Elxsi. There is a possibility that Tata Tech might lose sales as well.
- The Company derives 70% of its revenue from foreign markets, with 21% & 23% from North America & Europe respectively. Both these markets are currently in a slowdown or in a recession and could affect the revenue streams of the Company in the short term.
Tata Technologies IPO Review – GMP
The shares of Tata Technologies Ltd traded at a premium of 70.8% in the grey market on November 16th, 2023. The shares tarded at Rs 854. This gives it a premium of Rs 354 per share over the cap price of Rs 500.
Tata Technologies IPO – Key IPO Information
|IPO Size||Rs. 3,043 Cr.|
|Offer for Sale (OFS)||Rs. 3,043 Cr.|
|Opening date||22 November 2023|
|Closing date||24 November 2023|
|Face Value||Rs. 2|
|Price Band||Rs. 475 - 500|
|Minimum Lot Size||1 (30 Shares)|
|Maximum Lot Size||13 (390 Shares)|
|Min. Investment||Rs. 15,000|
|Listing Date||5 December 2023|
|Reservation for Emloyees||3%|
|Reservation for TML Shareholders||10%|
Tata Motors Shareholding in Tata Tech currently is at 66.79%, which will reduce to 55.39% Post IPO.
Promoters: Tata Motors Ltd
Book Running Lead Manager: JM Financial Ltd, BofA Securities, and Citi Group
Registrar to the Offer: Link Intime India Pvt Ltd.
The Objective of the Issue
- The main purpose of Listing is for early investors to offload their shares.
- The Company expects to enhance its brand image & visibility via the IPO.
Note: Tata Motors Ltd, the promoter Company of Tata Tech will be offloading about 4.6 Cr Shares of the Company. Along with TML, Alpha TC Holdings & Tata Capital Growth Fund will be offloading about 97 Lakh & 48 Lakh shares respectively.
Tata Technologies IPO Review – Reservations
The Company has allotted 20.28 Lakh shares (5% of the Issue size) to Eligible employees. It has also allotted about 60.85 Lakh shares (10% of the Issue size) to shareholders of Tata Motors.
Qualified Institutional Buyers (QIBs) will be allotted a maximum of 50% of the Net Issue, followed by Retail Shareholders who will be offered 35% of the Net Issue. HNI Investors can expect to get not more than 15% of the Net Issue.
Tata Technologies surely stands to benefit greatly from its group, but what we find interesting is that the business is not solely dependent on its Parent Group. Tata Tech is diversifying its client base & one of the main purposes of the IPO is to market the Company & earn a public image.
The Company is backed by strong financials, scaling its Revenue and profits at a considerably strong rate. A small point of concern however is the exposure to Trade receivables as compared to the total assets of the Company. The Company has to work on reducing these to boost cash flows & improve liquidity.
Looking at its valuations, Tata Tech’s peer trades at an Average PE of 62x, which is significantly higher than Tata’s 32.5x. KPIT currently trades at the highest PE of 82.6x. This makes Tata Tech’s proposition an attractive bet.
So, what are your thoughts on this upcoming IPO? Would you be applying for it? Let us know in the comments below.
Written by Nasir Hussain
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