loader2
NRI

Open DEMAT AND TRADING ACCOUNT WITH ICICIDIRECT

  • 18 Mar 2023
  • ICICIdirect

TATA TECHNOLOGIES IPO: ALL YOU NEED TO KNOW

 

Tata Technologies, a Tata Group company, has filed a draft prospectus with the market regulator - SEBI as it plans to raise funds through Initial Public Offering (IPO). The IPO consisted of only Offer For Sale (OFS) as promoters and other shareholders plan to sell part of their shares. 

Today, we will discuss all the crucial aspects of Tata Technologies' IPO.

About the company

Tata Technologies (TT) is a global product engineering and digital services company owned by Tata Motors Ltd. They are a leading global engineering service company offering product development and digital solutions, including turnkey solutions, to global OEMs - Original Equipment Manufacturers in the field of Automobile, Industrial Heavy Machinery and Aerospace. 

TT employs over 11,081 people (10161 full-time and 920 contractors), spread across 18 global delivery centers. Tata Motors has a 74.69% stake in Tata Technologies. Tata Capital Growth Fund I and Alpha TC Holdings Pte hold 3.63% and 7.26% of the company, respectively.

The business is categorized into two segments:

  • Services: It is the primary business line service which includes providing outsourced engineering services and digital transformation services to global manufacturing clients helping them conceive, design, develop, and deliver better products. For FY22, it comprised 75.12% of its total revenue. 
  • Technology Solutions: They complement their service offerings with Products and Education businesses (together called Technology). Through the Products business, they resell 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.


Tata Technologies IPO Details

The IPO consists of a pure OFS of up to 95.71 million shares. Tata Motors will sell up to 81.13 million shares (20%), Alpha TC Holdings Pte plans to sell up to 9.72 million shares (2.40%), and Tata Capital Growth Fund I will sell up to 4.86 million shares (1.20%).

As per the DRHP, the average cost of acquisition per equity share acquired by the selling shareholders, including the promoter selling shareholder, is as follows: 

  • Tata Motors Limited holds 303,006,000 equity shares at an average cost of Rs 7.40 per share.
  • Alpha TC Holdings Pte. Ltd. holds 29,445,010 equity shares at an average cost of Rs 25.10 per share.
  • Tata Capital Growth Fund I hold 14,722,500 equity shares at an average price of Rs 25.10.

The IPO price is yet to be fixed. As per experts, Tata Technologies' issue price would be at least 4-5 times the rate at which Tata Motors acquired a stake in Tata Technologies. It would translate to an issue price between Rs 30 and Rs 40 per share.

Industry Overview: All detail you need to know about the industry

Below are some key numbers (from DRPH) around the industry in which Tata Technologies operate:

Global ER&D

  • In 2021, the global ER&D spend is estimated at $1,635 billion.
  • North America has the highest share of global ER&D spend and is expected to grow the fastest – due to the higher penetration of software and internet firms in the region. 
  • The ER&D services addressed market refers to the sum of the ER&D expenditure by global capability centers (GCCs) and the ER&D expenditure outsourced to third-party engineering service providers (ESPs). 
  • The global ER&D addressed market was pegged at $145-155 billion in 2021.
 
 
 

Opportunity for India

India has emerged as a favorable destination for outsourced ER&D spend by global enterprises due to its large talent pool, innovation ecosystem, affordable costs, maturing in-house R&D centers landscape, and geopolitical support. 

The Indian ESP market is expected to grow at a CAGR of 13-16% (second only to Eastern Europe, which has a YoY rate of 16-18%) and account for $20 billion, equating to nearly 1/4th of the overall outsourced ER&D spends of $85-90 billion in 2021. 

Global ER&D Market Across Verticals

  1. Automotive: Original equipment manufacturers are the original producers of a vehicle’s components and are at the top of the automotive supply chain pyramid, whereas Tier-1 suppliers are direct suppliers of independent parts for OEMs and aftermarkets. The global automotive ER&D spend is currently pegged at $167 billion and is the largest contributor among the manufacturing verticals, amounting to approximately 10% of the overall ER&D spend. The automotive ER&D spend during 2021 was $167 billion and is estimated to grow at approximately 6% CAGR to $207 billion by 2025.
  2. Aerospace & Defense: The industry is regaining growth momentum with an increase in travel demand across the globe and has been adopting new digital technologies to improve services to its customers. The ER&D spend for the aerospace and defense industry for the year 2021 stood at $50 billion and is estimated to grow by $4 billion to reach $54 billion in 2025.
  3. Transportation & Construction Heavy Machinery (TCHM): The global TCHM ER&D spend was pegged at $41 billion in 2021 and is estimated to grow to $45 billion by 2025. The TCHM service provider outsourced ER&D market is currently pegged at $2-3 billion and is expected to grow to $3-4 billion by 2025. 
 

Comparison of Tata Technologies with Listed Peers

Comparing Tata Technologies with listed peers who operate in the similar domain its fair value on conservative basis is arrived at ~Rs 20,000 crore with consequent IPO price at ~Rs 500/share.

The company considers KPIT Technologies, L&T Technology Services, and Tata Elxsi as its competitors. The comparison is as below:

  • In terms of revenue (FY22), L&T Technology is the biggest player, followed by Tata Technologies. The revenue and profit growth (over the last three FY) is the lowest for Tata Technologies.
  • The basic Earnings Per Share (EPS) for FY22 is the highest for L&T Tech (90.92), followed by Tata Elxsi and Tata Technologies.
  • The listed companies in the space operate with a high P/E - the average PE of peers is 64.89. Investors will have to wait for Tata Tech IPO details to see how it stands concerning peers on this parameter.
  • The Return on Net Worth (RoNW) is the lowest for Tata Technologies, among all the listed peers.
 
 

Tata Technologies: Financials

  • The company reported a revenue of Rs 2,852.06 crore, Rs 2,380.91 crore, Rs 3,529.58 crore, and Rs 3,011.79 crore for FY20, FY21, FY22, and 9MFY23, respectively.
  • Tata Technologies reported a net income of Rs 251.57 crore, Rs 239.17 crore, Rs 436.99 crore, and Rs 407.47 crore for FY20, FY21, FY22, and 9MFY23, respectively.
  • The company's net profit margins have improved from 8.82% in FY20 to 12.38% in FY22. In 9MFY23, the margins have further increased to 13.53%.
 

How does Tata Technologies' IPO benefit Tata Motors?

At an IPO valuation of ~Rs 20,000 crore, Tata Motors stake in the company is pegged at ~Rs 15,000 crore. Given Tata Motors intent to offload 81.13 million shares, it is most likely to realise ~Rs 4,000 crore from the partial stake sale in Tata Technologies. The present IPO one hand will help Tata Motors unlock value for its stake in Tata Technologies with potential upside to the stock price pegged at ~Rs 40/share. While on the other hand the proceeds from OFS will also help Tata Motors reduce debt on its balance sheet and gels well under the broader vision of going net automotive debt free over next few years. With China reopening and worst of the chip supply side issues behind us, Tata Motors is well poised to report better financials and create wealth for investors going forward

Conclusion

Tata Technologies is the first company under the Tata Group to go public on the exchanges after TCS's IPO in 2004. With the Tata brand and strong financials of Tata Tech, we can expect a good response once the IPO goes live. It is a big positive development for Tata Motors from both unlocking value as well as debt reduction perspective.