Tata Technologies IPO: A deep dive into its business, risk factors and whether you should invest

Tata Motors subsidiary Tata Technologies IPO opened for subscription on November 22. This is the first initial public offering by a Tata Group company in almost two decades after Tata Consultancy Services went public in 2004.

The price band for the 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, which is 15 percent of the paid-up capital.

While most analysts have a positive view of the company, the low compound annual growth rate of revenue compared to peers, dependence on Tata Motors and Jaguar Land Rover, and concentration in the automotive segment are the major concerns.

Let’s delve into the key aspects of the company’s business model, financials, and the factors influencing performance.

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What does Tata Tech do?

Tata Tech operates in the global engineering research and development (ER&D) services industry and offers product development and digital solutions, including turnkey solutions, to global original equipment manufacturers and their tier-1 suppliers.

It has domain expertise in the automotive industry and leverages this to serve clients in adjacent industries such as aerospace, transportation and construction heavy machinery.

The lines of business are categorised into two segments:

Services

Services is the primary business and includes providing outsourced engineering services and digital transformation services to global manufacturing clients. The segment contributed 80 percent to total revenue from operations in FY23.

The automotive sector accounts for the bulk of the revenue in the services segment, with Tata Motors/Jaguar Land Rover being the anchor clients. They contributed about 34 percent of the revenue from operations in FY23, while the automotive sector accounted for 69 percent overall.

The remaining contribution in the services segment comes from industries such as aerospace and other manufacturing verticals. Of the 69 percent contribution from the automotive segment, about 26 percent of revenue was from new energy vehicle companies.

Technology solutions

The technology solutions segment includes the products and the education businesses. Through the products business, it resells third-party software applications, primarily product lifecycle management software and solutions, and provides value-added services such as consulting, implementation, systems integration and support.

The education business provides ‘phygital’ (physical and digital) solutions in manufacturing skills including upskilling and reskilling in relation to the latest engineering and manufacturing technologies to public sector institutions and private institutions and enterprises through curriculum development and competency centre offerings through its proprietary iGetIT platform.

In FY23, the technology solutions business contributed 20 percent to the total revenue from operations.

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Financial performance

Tata Tech reported a 42.8 percent growth in consolidated net profit to Rs 624 crore in FY23 and a 25 percent rise in revenue from operations to Rs 4,414.2 crore.

In the six months ended September, profit surged 36 percent to Rs 351.9 crore and revenue increased by 34 percent to Rs 2,526.7 crore compared to the year-ago period. From FY22, the EBITDA margin has stayed in the 18-20 percent range. Also, the company has no debt.

Valuation

At the upper price band of the IPO, the company’s valuation stands at Rs 20,283 crore. Promoter Tata Motors will offload 46.2 million shares worth Rs 2,314 crore in the offer. Investors Alpha TC Holdings will sell 9.7 million shares worth Rs 486 crore and Tata Capital Growth Fund I will sell 4.9 million shares worth Rs 243 crore.

When Tata Tech filed the draft red herring prospectus for the IPO earlier this year, the company intended to offer 95.7 million shares, representing 23.6 percent of the paid-up capital. However, the offer size was cut after Tata Motors sold a 9.9 percent stake in Tata Tech to investors led by private equity major TPG in October. This valued the company at about Rs 16,300 crore.

Return ratios

Tata Tech’s price-to-earnings ratio at 33x is much cheaper than KPIT (105x), L&T Technology Services (40x), Tata Elxsi (70x) and Cyient (37x). The return on equity rose to 20.9 percent in FY23 from 19.2 percent in FY22. Return on capital employed slipped marginally to 24.3 percent from 24.6 percent in the same period.

Tata Tech’s revenue growth rate has been behind all peers except Cyient for FY20-23E at 12.1 percent.

“If we include the Covid years, the CAGR looks a bit lower when compared to peers, but if we exclude that year, the CAGR is going to be much higher than the peers. Looking at the business visibility and product engineering segment with a high focus on the EV space and the industry size, which is assumed to be around $100 billion worldwide growing 11-13 percent YoY, we expect the company would continue to grow better than industry peers,” said Prashanth Tapse, senior VP for research at Mehta Equities.

Also Read: Tata Technologies IPO: 10 things to know before subscribing to Rs 3,042 crore issue

Tata Tech’s dependence

Tata Tech's anchor clients, Tata Motors and JLR, account for 34.1 percent of its revenue, although this has narrowed from 42.89 percent in FY21.

“The high dependence on clients concentrated in the automotive segment would be part of industrial risk but eventually, Tata Tech also started to diversify into defence and education solutions, which can grow with high growth in topline while contributing low on the bottom line,” said Tapse.

Tata Tech CEO Warren Harris said that there is no operational influence that the Tata Group or Tata Motors positions on Tata Tech. He expects the business at Tata Motors and JLR to continue to grow in the short term but their contribution percentage to come down in the medium to long term.

Analysts call

Most brokerages, including IDBI Capital, Reliance Securities, Arihant Capital and Mehta Equities, have assigned a ‘subscribe’ rating to the issue.

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