Tata Motors subsidiary Tata Technologies commenced its initial public offering (IPO) on November 22, marking a significant event as the first IPO by a Tata Group company in nearly two decades. The IPO, valued at Rs 3,042.51 crore, is an offer-for-sale of 60.8 million shares, constituting 15% of the paid-up capital. The subscription period extends until November 24.
Business Model and Overview:Tata Technologies operates in the global engineering research and development (ER&D) services industry, specializing in product development and digital solutions for global original equipment manufacturers and tier-1 suppliers. While its primary focus is on the automotive sector. The company extends its services to adjacent industries such as aerospace, transportation, and construction heavy machinery.
Business Segments:
- Services Segment (80% of FY23 Revenue):Offers outsourced engineering services and digital transformation services. Tata Motors and Jaguar Land Rover are anchor clients, contributing 34% to revenue. Remaining revenue comes from industries like aerospace, with 26% from new energy vehicle companies.
- Technology Solutions Segment (20% of FY23 Revenue):Encompasses product reselling and education businesses. Product business involves reselling third-party software applications. Education business provides ‘phygital’ manufacturing skills solutions.
Tata Technologies Financial Performance:
- In FY23, Tata Technologies reported a robust 42.8% growth in consolidated net profit to Rs 624 crore and a 25% rise in revenue to Rs 4,414.2 crore.
- The first half of the fiscal year ending September saw a 36% surge in profit and a 34% increase in revenue compared to the previous year.
- EBITDA margin has consistently stayed in the 18-20% range since FY22, and the company carries no debt.
Tata Technologies Valuation and IPO Details:
- At the upper price band, Tata Technologies’ valuation reaches Rs 20,283 crore.
- The IPO involves an offer-for-sale, with Tata Motors set to offload 46.2 million shares, valued at Rs 2,314 crore.
- Investors Alpha TC Holdings and Tata Capital Growth Fund I will also sell shares, totaling Rs 486 crore and Rs 243 crore, respectively.
Return Ratios and Valuation Comparison:
- Tata Technologies’ price-to-earnings ratio at 33x is notably lower than peers such as KPIT, L&T Technology Services, Tata Elxsi, and Cyient.
- Return on equity rose to 20.9% in FY23, and return on capital employed slightly decreased to 24.3%.
- Despite a lower revenue growth rate compared to peers, analysts express optimism, considering the business visibility and the company’s focus on the electric vehicle (EV) space.
Dependence on Key Clients:
- Tata Motors and JLR currently contribute 34.1% of Tata Technologies’ revenue, showing a decline from 42.89% in FY21.
- Analysts acknowledge the risk of dependence on automotive clients but note Tata Technologies’ efforts to diversify into defense and education solutions.
CEO’s Perspective and Analyst Recommendations:
- Tata Technologies CEO Warren Harris reassures stakeholders that there is no operational influence from Tata Motors or the Tata Group.
- Analysts from IDBI Capital, Reliance Securities, Arihant Capital, and Mehta Equities have assigned a ‘subscribe’ rating to the IPO, reflecting a positive outlook on the company’s prospects.
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