After a bumper debut in November 2023, has Tata Technologies lost its appeal among brokerages? In a report dated June 19, the foreign brokerage Goldman Sachs initiated coverage on the stock with a sell call and a target price of Rs 900, representing a 12 percent downside from the June 18th closing price of Rs 1,029. However, Goldman Sachs is not the only brokerage altering its stance on the Tata Group company.
For the record, Tata Technologies’ IPO that was floated in November 2023 marked the first IPO debut from the Tata Group in over 19 years and recorded the third-best closing gains on the listing day in the history of the Indian capital market.
Currently, approximately six brokerages have a sell call on the stock, while three have a buy call. This is in contrast to four sell calls and two buy calls in April 2024. Many brokerages have revised their calls on the company following the announcement of its Q4 earnings. Tata Technologies is a Tata Group manufacturing-focused engineering research and development company, primarily concentrated on the automotive sector.
Tata Technologies was listed on both bourses on November 30 at an impressive 140 percent premium to the IPO price, with the stock opening at Rs 1,200 and closing at Rs 1,328 on the NSE. The IPO, which comprised an offer-for-sale (OFS) of 6.08 crore shares by the promoters Tata Motors, along with investors Alpha TC Holdings and Tata Capital Growth Fund 1, had seen a mad rush from investors – retail and institutions alike -- with over 73.38 lakh total applications. The public offer was oversubscribed 69.43 times.
Weak Q4 and Overdependence on Anchor Clients
On May 3, Tata Technologies reported a 28 percent decline in consolidated net profit to Rs 157 crore for the quarter ended March 31, 2024, down from Rs 217 crore in the previous fiscal year. Revenue from operations also fell by 7 percent to Rs 1,301 crore in Q4FY23. Since its debut, Tata Technologies' stock has declined by approximately 23 percent and was trading at Rs 1,011 at the close on June 20.
Also read: Goldman Sachs has a Sell on Tata Tech, VinFast reliance a vulnerability
In their report, analysts at Goldman Sachs raised concerns about lower revenue projections from VinFast, one of Tata Tech's major customers. In Q4, Tata Technologies reported that revenue in the services segment fell 0.6 percent sequentially to Rs 995 crore due to a ramp-down in its VinFast account. Additionally, it noted that it anticipates moderation in VinFast revenue in Q1FY25.
The Vietnamese carmaker has witnessed its stock price decline by 88% percent in the last year. The EV maker has been grappling with issues since its listing in August 2023. While the stock price surged almost 700 percent at that time, it has been on a downhill since then. Moneycontrol had reported at the time of IPO that some analysts expressed concerns about the Nasdaq-listed Vinfast, citing related party-driven electric vehicle (EV) sales, frothy valuations, and declining customer traction.
Goldman Sachs also highlighted a decline in long-term research and development (R&D) spending in the emerging aerospace segment over the last few cycles. Another concern raised by most brokerages is the overdependence on anchor clients, which constitute around 46 percent of their revenue share.
Analysts at JP Morgan (in a May 4 report) have also raised concerns about limited evidence of scaling non-anchor clients beyond $20 million-plus in annual revenues, except for VinFast, and low earnings growth expectations of 15 percent over FY24-26E compared to peers' average of 18 percent. "We remain underweight as valuations remain excessive at 52x 1-year forward PE when revenue growth is expected to be only in the low double digits with minimal margin expansion in FY2025," the brokerage noted in its report. JP Morgan remains underweight on the stock with a target price of Rs 800.
Explaining the change in views on the stock, Sagar Lele of Rupeeting said that Tata Technologies' IPO gained significant interest due to its initial valuation at half the P/E ratio of KPIT and Tata Elxsi. "The discount made the IPO popular, but the valuation gap closed immediately after launch," Lele explained. However, post-listing, Lele added that the business faced challenges, including revenue issues with anchor clients like VinFast. The stock, he explained will face pressure until top clients stabilize and growth rebounds.
On the other hand, some brokerages, such as JM Financials, remain optimistic about the stock. In a report from May 2024, the brokerage presented an "optimistic" outlook for the stock, noting that "Tata Technologies has more growth engines now than a few years back," which should help sustain the underlying momentum, hence supporting multiples. JM Financials has a buy call on the stock. The brokerage also pointed out that while the management indicated some residual draw-down in VinFast will continue in Q1, strong underlying momentum in the rest of the portfolio should endure.
Kranthi Bathini, Director of Equity Strategy at Wealthmills Securities, also noted that the stock has re-rated. “These is a strong company with good corporate governance, but the valuation appears stretched currently.”
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