Tata Technologies made its shareholders richer by Rs700 apiece as its shares debuted at Rs1,200 on the NSE, a whopping 140 percent premium over its issue price of Rs500.
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As widely anticipated, shares of Tata Technologies did not disappoint shareholders on their stock market debut day. With the listing on Thursday, Tata Technologies made its shareholders richer by Rs700 apiece as its shares debuted at Rs1,200 on the NSE, a whopping 140 percent premium over its issue price of Rs500.
That’s not all. The stock jumped to Rs1,400 a share during the day before closing at Rs1,326.7. However, investors snubbed shares of its promoter company, Tata Motors, which ended at Rs707, 0.75 percent lower from their previous close on the NSE.
With a price band of Rs475-Rs500 apiece, Tata Technologies planned to raise Rs3,043 crore via the initial public offering (IPO). The company is valued at roughly Rs20,283 crore and is only an offer-for-sale (OFS) by promoter Tata Motors and investors Alpha TC Holdings and Tata Capital Growth Fund 1. The issue was open for subscription from November 22 to 24.
Almost all analysts were unanimous in recommending the issue to investors, betting on its brand legacy, valuations and automotive expertise. “We believe Tata Tech can be a beneficiary of strong momentum in Auto & Aero ER&D spends in the near to medium term,” says Karan Uppal, research analyst, PhillipCapital. He points out risks as slowdown in any of its top 10 clients, steep competitive intensity and margins pressure due to higher SG&A (selling, general and administrative expenses) spends.
The IPO was subscribed 69.43 times, with qualified institutional buyers' (QIBs) portion at a record 203.41 times while non-institutional investors (NIIs) and retail investors bid for 62.11 times and 16.50 times, respectively.
The company has already raised Rs791 crore via anchor book from a clutch of 67 investors. Anchor investors include global investors like Goldman Sachs, Government Pension Fund Global, BNP Paribas Funds, Prudential Assurance Company, HSBC Global, Florida Retirement System, Oaktree Emerging Markets Equity Fund, Brinker Capital Destinations Trust, Great Eastern Life-Singapore Life Insurance Fund, RBC Asia Pacific Ex-Japan Equity Fund, and Copthall Mauritius Investment.
“Apart from automotive, it will be a key beneficiary of tailwinds in aerospace led by capacity expansion plans of aircraft manufacturers and maintenance, repair and overhaul (MRO) activities,” Devang Bhatt, analyst, IDBI Capital, says.
In the year ending March 2023, the total income of Tata Technologies was at Rs4,501.9 crore rising from Rs3,578.3 crore in the year-ago period and Rs2,425.7 crore in FY21. In the same period, the net profit has also grown, but so have the expenses.
Net profit in FY23 was Rs624 crore, up from Rs436.9 crore and Rs239.1 crore in FY22 and FY21, respectively. In FY23, expenses mounted to Rs3,593.24 crore from Rs1,995.2 crore in FY21. In the first six months of the current financial year, it hit a net profit of Rs351.9 crore on a total income of Rs2,587.42 crore, but expenses also stayed high at Rs2,061.95 crore.
The offer is valued at 32.5 times and 30.9 times its FY23 earnings per share (EPS) at upper and lower price band respectively, say analysts at Sharekhan by BNP Paribas. “The issue price is at a steep discount of 69 percent and 53 percent to its peers KPIT and Tata Elxsi on FY23 financials. At annualised EPS, the IPO is valued at 28.8 times its FY24E EPS, Tata Technologies’ future outlook is promising given its proven track record, established capabilities in ER&D services and focus on adjacencies of Aerospace & TCHM (transport and construction heavy machinery),” they add.
Based on FY23 financials, KPIT Technologies shares are available at 104.8 times PE, which is the most expensive in the segment, show calculations by Sharekhan. Tata Elxsi PE is at 69.7 times while L&T Technology Services is at 40 times.
Analysts at SBI Securities believe that Tata Technologies is well-placed to encash on the growth opportunities in the ER&D (Engineering Research & Development) space and look at the relatively cheaper valuations. However, the company’s revenues are highly dependent on clients concentrated in the automotive segment, drawing 69 percent of total revenue which makes it risky.
What does Tata Tech do?
Tata Technologies is a pure-play manufacturing ER&D primarily focussed on the automotive industry. ER&D services are defined as a set of services offered to enterprises on activities, which involve designing and developing a device, equipment, assembly, platform, or application such that it may be produced as a product for sale through software development or a manufacturing process. Promoted by Tata Motors, Tata Technologies was incorporated in 1994.Tata Tech caters to the automotive vertical—the second-largest in terms of global R&D spend with third-party outsourcing mix of 10 percent, which is around $17-18 bullion.
“Although Tata Tech concentrates its outsourced spending in key areas, the emerging sectors of hybrid and electric mobility/powertrain and AD-ADAS align with competitors such as KPIT, Telx, and L&T Technology Services. Growing investment in electric and hybrid vehicles underscores the need for lightweight architecture, a domain in which Tata Tech with its mechanical expertise would play a significant role,” says Dipesh Mehta, analyst, Emkay Global Financial Services.
Further, expenditure on mechanical engineering by OEMs/Tier 1 players is more established and likely to witness increased outsourcing compared with software-related spending. OEMs/Tier 1 players tend to retain software-related expenses in-house, as these areas are still evolving and their differentiation lies in the software embedded within the vehicles, he adds.
The automotive outsourced ER&D market is pegged at $18-20 billion in 2022 and is expected to grow at a faster rate than overall automotive ER&D spending during 2022-2026. As of September, Tata Tech had 19 global delivery centres spread across North America, Europe and Asia-Pacific. It provides services and technology solutions across the industry verticals of automotive and others, including transportation and TCHM, aerospace and other verticals.
The company has also expanded its offerings in the education business through iGetIT platform to public and private sector academic institutions, through curriculum development and competency centre offerings for upskilling and reskilling in the latest engineering and manufacturing technologies. However, the growing share of education business may weigh on margins and cash generation going forward.
“The education business operated at lower margins compared with other businesses and has been particularly exposed to fluctuations in revenue due to the nature and frequency of the projects and the payments involved in the contracts,” Mehta adds. It derives 97 percent of the education revenue in the first half of FY24 from projects with state governments and public universities.