Tata Technologies IPO enjoys highest grey market premium among five issues this week

The grey market is an unofficial platform wherein the IPO shares can be bought and sold till the listing.

Tata Technologies, the first initial public offering by the Tata Group in almost 20 years, attracted the highest grey market premium amongst the five mainboard IPOs to be launched this week. Tata Consultancy Services was the last IPO from the Group in 2004.

The global engineering services company's shares were available at Rs 850 apiece in the grey market, which is 70 percent premium over the upper price band of Rs 500 per share, analysts said on condition of anonymity, adding Gandhar Oil Refinery, Flair Writing and IREDA shares quoted at a 21-30 percent premium, while Fedbank Financial Services was at around 8 percent premium over the upper price band.

Experts attributed this robust premium to the company's healthy financials, reasonable valuations, potential growth in the future with a promising industry outlook and the Tata brand.

The grey market is an unofficial platform wherein the IPO shares can be bought and sold till the listing.

On valuation parse at an upper price band of Rs 500 and based on FY23 earnings and fully diluted post-IPO paid-up capital, the issue is available at a P/E (price-to-earnings) of 32.5x on a consolidated basis, with a market capitalisation of Rs 20,283 crore. At the same time, its peers, mentioned by the company in the draft papers, like KPIT Technologies (at a PE of 80.3x), L&T Technologies Services (37.5x) and Tata Elxsi (61.55x) available at higher valuations.

"The industry outlook is promising, and the company is also performing well both in terms of growth and returns. The valuations appear to be cheaper than the comparable listed companies," Dhananjay Sinha, co-head of equities and head of research for strategy and economics at Systematix Group told Moneycontrol.

The much-awaited Tata Technologies IPO will open for subscription on November 22, with a price band of Rs 475-500 per share. It is planning to raise Rs 3,042.51 crore via the issue of over 6 crore equity shares at the upper price band.

It is entirely an offer-for-sale (OFS) by the promoter Tata Motors, and investors Alpha TC Holdings, and Tata Capital Growth Fund I. Hence, the company will not get any money from the public issue.

Further, Tata Technologies' IPO pricing (Rs 475-500 per share) significantly exceeds the Rs 401.8 price of its pre-IPO placement, indicating strong confidence in its market potential and future growth. This strategy elevates the company's valuation from Rs 16,300 crore during the stake sale to a post-issue market capitalisation of Rs 20,283 crore, Sonam Srivastava, founder and fund manager at Wright Research said.

Also read: Tata Technologies IPO Launch Draws Near: 10 things to know before subscribing the issue

Tata Motors, on October 25, sold 3.65 crore equity shares to TPG Rise Climate SF Pte Ltd at Rs 401.81 per share, amounting to Rs 1,467 crore.

"Notably, despite this premium, Tata Technologies will enter the market with a price-to-earnings ratio lower than peers like KPIT Technologies, Tata Elxsi, and L&T Technology Services, potentially making it an attractive investment," Sonam said, adding the company's impressive 34 percent revenue growth and 18.6 percent operational profitability, along with the backing of investors like TPG Rise Climate SF Pte and Ratan Tata Endowment Foundation, further bolster investor confidence in its prospects.

The company backed by the Tata name might just be able to convince investors on the valuation front, she believes.

On the financials front, Tata Technologies has delivered healthy growth in earnings with profit rising more than 60 percent and revenue increasing 36 percent in the year FY21-FY23. Further, its EBITDA margin increased by 240 bps during the same period.