Tata Technologies IPO: Should You Apply?

One of the most anticipated initial public offerings (IPOs) of 2023 is finally here.

Tata Technologies IPO, a wholly-owned subsidiary of Tata Motors plans to offer 23.6% of its paid-up share capital currently held by Tata Motors, Alpha TC Holdings, and Tata Capital Growth Fund I.

It is set to launch its IPO on Wednesday next week, November 22.

In our previous editorial, we mentioned that we'll do a deep dive into the company's valuations as the price band was not announced.

Now that all the offer details are out, continue reading towards the end to find out whether the valuations are justified.

But before that, let's look at the offer details once again.

Issue period: 22 November 2023 to 24 November 2023

IPO Size: Rs 30 billion

Price band: Rs 475 to Rs 500 per equity share

Face Value: Rs 2

Bid lot: 30 equity shares and in multiples of 30 equity shares thereafter

The last we checked, Tata Technologies shares were trading at a premium of Rs 298 in the grey market, indicating strong investor demand.

However, it is important to remember that grey market premiums (GMPs) are solely an indication of the company's stock standing in the unlisted market and tend to change swiftly.

A Close Look at Tata Tech's Financials

Tata Technologies is not your average tech company. It is a global engineering services firm that specializes in innovative product development and digital solutions.

The company caters primarily to international automobile original equipment manufacturers (OEMs) and their key suppliers (ancillaries).

It also serves the aerospace and industrial heavy machinery industries as well. Here it has a well-diversified client base across the world.

A large chunk of the revenue comes from clients in India. According to the numbers reported in financial year 2022, India accounted for 32% of its total revenue in, whereas the UK, US, and Europe accounted for 20%, 22%, and 4% of its revenue, with the balance from other parts of the world.

Tata Technologies Financial Snapshot (2019-23)

	2018-19	2019-20	2020-21	2021-22	2021-23
Revenue Growth (%)	7.43%	-3.00%	-16.02%	47.39%	25.95%
Operating Profit Margin (%)	18.59%	18.07%	18.08%	19.67%	20.59%
Net Profit Margin (%)	11.98%	8.82%	10.05%	12.38%	20.59%
Return on Capital Employed(%)	27.99%	22.58%	16.67%	27.53%	23.69%
Return on Equity(%)	21.33%	13.94%	11.97%	19.76%	23.69%

Source: Ace Equity

In terms of growth, the tech firm has achieved a commendable revenue and profit compound annual growth rate (CAGR) of 10.4% and 20.5%, respectively over five years between 2019-23.

Over the same period, the company's 5-year average return on equity (RoE) and return on capital employed (RoCE) have been admirable at 18% and 25%, respectively.

Moreover, the asset-light and cash-rich model of the IT industry has enabled the company to build up cash, allowing it to reward shareholders generously.

The dividend yield of the mid-sized IT firms has been rangebound, from 0.5-1.5%. Their dividend payout has been in the range of 30-50%.

Tata Technologies has also been generous to its investors. Its 10-years' long-term average dividend payout stands at 44%, in line with the industry. It reported a cash and bank balance of Rs 11.9 bn in financial year 2023.

Going forward, investors can expect a similar level of payout from the cash-rich company.

How is the Stock Valued?

The cap price of Rs 500 implies a price-to-earnings (P/E) ratio (based on diluted EPS for financial year 2023) of 32.5 times. Whereas, the floor price of Rs 475 implies a PE of 30.8 times.

Now, how does this compare with industry peers?

The company's peers include Tata Elxsi, which also caters to the transport and automotive sectors with a more diversified focus.

Then there is L&T Technology (LTTS), which caters to industrial products, transportation, telecom & hi-tech, and process industries by undertaking complex design and engineering projects that require deep domain expertise.

Finally, there's KPIT Technologies, which specialises in embedded software for the automotive industry's transition to a connected, autonomous, shared and electrified future It provides comprehensive services to OEMs and tier-I suppliers.

Much like Tata Technologies, these companies are all considered mid-sized global IT firms, which operate on a similar scale.

Financial Snapshot

	Revenue (Rs) m	Operating Profit Margin (%)	Return on Equity(%)	Return on Capital Employed(%)	Price / Earnings (x)	Dividend Yield (%)
KPIT Technologies	15,164	31.04%	21.92%	29.18%	126.4	0.29%
L&T Technology Services	71,081	25.31%	25.95%	36.83%	39.1	1.03%
Tata Elxsi	31,447	32.95%	40.97%	51.80%	65	0.74%
Tata Technologies	45,019	20.59%	23.69%	23.69%	32

Data Source: Ace Equity

Tata Elxsi, with its robust growth and strong returns in tow, is currently trading at a PE of 65.1x. Its 5-year long-term median PE stands at 52.6x.

LTTS is available at a PE of 39x, whereas its 5-year long-term median PE stands at 33.7x.

KPTI, with its high margins, is trading at 84x, a premium to its long-term median PE. Its 3-year median PE is 59.8x.

Tata Technologies' lower margins, culminating into weaker returns than its peers, explains its 30-32x valuation. But there's more to the story.

While past performance is not a foolproof indicator of future outcomes, it's crucial to acknowledge that every company embarks on a unique growth trajectory.

Take Tata Elxsi for example. Before its meteoric rise to a 65x PE ratio, the business grew at a 10-year revenue and profit CAGR of 15.6% and 16.6%, respectively, between 2010-2020. The median PE during the same period was around 25x.

Similarly, between 2015-2020, LTTS was trading at a median PE of 25 times, with 5-year sales and net profit CAGR of 17% and 21%, respectively. And now, it trades at 39x.

Will Tata Technologies, with its proven track-record and strong lineage, tread on a similar path?

We can't say that for sure.

But the business is well-positioned to benefit from the growing demand for engineering services in a variety of industries.

Demand for autonomous and connected technologies is growing due to increasing pressure from regulations on passenger safety and cost pressures on OEMs.

Thus, OEMs will continue to focus on delivering better and safer experiences to customers via connected and autonomous technologies.

Moreover, its strong brand legacy, deep automotive expertise, diversified global presence, and partnerships with industry leaders, gives it an enviable edge and bodes well for its growth aspirations.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...