Tata Technologies Limited – IPO Note – Equity Research Desk

Company Overview:

Tata Technologies Limited, a subsidiary of the multinational conglomerate Tata Motors, is a leading global engineering services company offering product development and digital solutions, including turnkey solutions, to global original equipment manufacturers (“OEMs”) and their tier 1 suppliers. The company endeavours to create value for clients by helping them develop products that are safer, cleaner and improve the quality of life for their end-customers. The company leverages their deep domain expertise in the automotive industry to serve clients in adjacent industries such as aerospace and transportation and construction heavy machinery (“TCHM”) as well. With operations set across the globe, Tata Technologies is backed with a diverse talent pool with multiple skillsets to collaborate in real time and solve complex engineering problems for their clients. Their globally distributed onshore-offshore service delivery capability helps in the timely and efficient addressal of the global and international client requirements. Their primary business line is services (“Services”), which includes providing outsourced engineering services and digital transformation services to global manufacturing clients helping them conceive, design, develop and deliver better products. The company complements its service offerings with the Products and Education businesses (collectively, “Technology Solutions”) wherein it resells third-party software applications, primarily product lifecycle management (“PLM”) software and solutions and provide value-added services such as consulting, implementation, systems integration and support.

Objects of the Offer:

• Achieve the benefits of listing the Equity Shares on the Stock Exchanges.
• Carry out offer for sale of up to 60,850,278 Equity Shares by the Selling Shareholders.

Investment Rationale:

• Deep expertise in the automotive industry: Tata Technologies’ comprehensive portfolio of services for the automotive industry addresses the product development and enterprise optimization needs of traditional OEM’s and new energy vehicle companies, together with its associated supply chains. They are positioned in the “leadership zone” by Zinnov Zones, the leading ER&D global consultant, for ER&D services ratings in 2023 for the seventh consecutive year. It has also been ranked as the top India-based automotive ER&D service provider for the fourth consecutive year by Zinnov, recognizing the company as having the deepest automotive footprint among India-based ER&D companies.

• Differentiated capabilities in new age automotive trends (“EVs”): The company provides end-to-end solutions for EV development, manufacturing and after-sales services that are designed to help OEMs develop competitive EVs while maintaining a balance between cost, quality and timelines. The company has a long-standing history of developing EV capabilities since as early as 2010. Over the past decade, the company have been heavily involved in various aspects of client’s journey to electrify their product portfolio. The company is also ranked first among all India based global engineering service providers and are among the top two globally, for electrification of vehicles by Zinnov Zones in its 2023 ER&D report.

• Global delivery model: The company has a global workforce of 12,451 employees serving multiple global clients from 19 global delivery centers in Asia Pacific, Europe and North America, as of September 30, 2023. It’s globally distributed execution model ensures balance between onshore client proximity and offshore efficiency. With the right skill set at a global scale, an optimized engagement model and a balance of onshore/offshore employees, it is able to provide aligned onshore client proximity and support the iterative nature of product development services together with the capacity and cost-effectiveness of offshore delivery centers.

• Well-recognized brand: The company benefit from the strong track record, reputation and experience of its Promoter, TML, which is part of the Tata Group. The Tata Group is one of the leading business conglomerates in India, with a heritage of over 100 years, comprising of more than 28 equity listed companies across multiple verticals such as technology, steel and automotives. TML is one of the leading global automobile manufacturers in the world, providing integrated and smart e-mobility solutions to customers in over 125 countries. The company is well positioned to benefit from the Tata group’s business priorities to increase investment in EVs, aerospace and defense.  In addition to benefiting from the high standards of corporate governance and brand value associated with the Tata Group, it also has the opportunity to leverage and benefit from the Tata Groups’ global network for exploring potential business opportunities and acquiring direct access to senior decision makers at potential end clients.

• Financial Track Record: The company reported a revenue of Rs.4414 crore in FY23 as against Rs.3530 crore in FY22, an increase of 25% YoY. The revenue has grown at a CAGR of 36.16% between FY2021-23. The EBITDA of the company in FY23 is at Rs. 909 crore and EBITDA margin is at 20.60%.  The PAT of the company in FY23 is at Rs. 624 crore and PAT margin is at 14.14%. The CAGR between FY2021-23 of EBITDA is 45.23% and PAT is 61.58%. The ROE and ROCE of the company stands at 20.88% and 12.04% in FY23, respectively. Additionally, the company is almost debt-free indicating the financial stability of the company.

Key Risks:

• OFS risk – The IPO consists of only an Offer for Sale of up to 60,850,278 Equity Shares by the Selling Shareholders, including the company Promoter. The entire proceeds from the Offer for Sale will be paid to the Selling Shareholders, including Promoter and the Company will not receive any such proceeds. The offer comprises the sale of 46,275,000 shares by the company promoter Tata Motors Limited. Other investors Alpha TC Holdings Pte. Ltd. and Tata Capital Growth Fund I are selling their stake of 9,716,853 and 4,858,425 shares respectively.

• Dependence on top 5 clients for revenue – If any or all of the company’s Top 5 Clients were to suffer a deterioration of business, cease doing business with or substantially reduce their dealings with the company, the revenues could decline, which may have a material adverse effect on the business, results of operations, cash flows and financial condition. 

• Forex Risk – The company is exposed to foreign exchange risks, as it conducts significant portion of operations from international markets in foreign currencies. Fluctuations in exchange rates could affect its financial performance.

Outlook:

Tata Technologies Limited is the first IPO from the Tata Group in nearly 20 years. This makes it a highly anticipated event for investors, as the Tata Group is one of the largest and most successful conglomerates in India.  The company is well positioned to benefit from the Tata group’s business priorities to increase investment in EVs, aerospace and defense. According to RHP, KPIT Technologies, L&T Technology Services Limited and Tata Elxsi Limited are the only listed competitor for Tata Technologies. The peers are trading at an average P/E of 59.78x with the highest P/E of 80.31x and the lowest being 37.47x. At the higher price band, the listing market cap of Tata Technologies Limited will be around ~Rs.20283.43 crore and the company is demanding a P/E multiple of 32.50x based on post issue diluted FY23 EPS of Rs.15.38. When compared with its peers, the issue seems to be fully priced in (fairly valued). Based on the above views, we provide a ‘Subscribe’ rating for this IPO for a medium to long-term Holding.

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