Thursday, February 29, 2024

Tata Technologies IPO: The price is right say analysts

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  • Tata Technologies’ IPO opens for subscription on November 22, amidst a lot of competition.
  • Analysts believe that the outsourced ER&D market will see good growth ahead, and say that its price band offers investors an upside.
  • Even though it’s a complete offer for sale, brokerages predict good earnings growth for the company going ahead.

The initial public offer (IPO) of Tata Technologies is opening its subscription alongside four other issues. While investment bankers are confident of the ‘high-quality business’ from the House of Tatas, analysts are backing the ₹3,042 crore issue due to its prospects, business model and mostly its pricing. The grey market is also the most optimistic it’s ever been in the recent past as it predicts 70% listing gains.

The engineering research and development (R&D) company offers product development and digital solutions to manufacturing companies. “Its areas of expertise include product engineering and manufacturing engineering in the mechanical domain such as body engineering, while it is adding capabilities in the software and embedded engineering segments,” says a report by Emkay.

This market of global outsourced ER&D market was estimated to be around $105-110 billion in 2022. Moreover, the digital engineering market is expected to grow at a compounded annual growth rate (CAGR) of 16% between 2022 to 2026.

Auto to EV to aviation

The subsidiary of Tata Motors is heavily focussed on the auto sector where it gets 75% of its revenues from. But its turnkey solutions can also be used across the manufacturing vertical. It has set its sights on aviation where the outsourced ER&D market is as big as $9 billion per annum.

“Apart from automotive, it will be a key beneficiary of tailwinds in aerospace led by capacity expansion plans of aircraft manufacturers and MRO (Maintenance, Repair, and Overhaul) activities,” says a report by IDBI Capital.

The growing electric vehicle sector too is another area of focus. Prashanth Tapse, senior VP of research at Mehta Equities says that portfolio is diverse across traditional OEM’s to new-age electric vehicles.

“We think outsourcing business models would be in great demand going forward in engineering services and digital transformation services to global manufacturing clients helping clients to conceive, design, develop and deliver better products,” Tapse adds.

While services constitute around 80% of its revenues, it also gets 11% of revenues from products business where it re-sells third-party software applications. It also has an education vertical where it provides ‘phygital’ solutions in manufacturing skills – that nets it with 9% of revenues.

Slower than peers, but better

In the last three fiscal years, from FY21 to FY23, its revenue and profit after tax grew at a compounded annual growth rate (CAGR) of 36% and 62% respectively. Analysts say that the growth is a tad slow, as compared to its industry peers be it LTTS, its own group company Tata Elxsi and KPIT Cummins.

“Tata Tech’s growth trajectory over FY16-23 remains slower than peers’, but has seen improvement in the last three years because of traction in select accounts. Weakness in a large client in H1FY24 due to near completion of the large full-vehicle development projects may weigh on the company’s near-term performance,” says a report by Emkay.

The company had specified in its risk factors in the RHP that it’s heavily dependent on its top five clients. This also includes its anchor clients – its promoter Tata Motors, and its subsidiary, Jaguar Land Rover.

Particulars FY23 FY22 FY21
Revenue from operations ₹4,414 crore ₹3,529 crore ₹2,380.9 crore
Net profit ₹624 crore ₹436.9 crore ₹239 crore

Source: RHP

‘Investor-friendly pricing’

Emkay also quickly adds that all the above issues are fairly captured in its valuations. It has set a price band of ₹475-500 for the issue. At the upper end of the price band, Tata Tech is being valued at around 32 times its FY23 EPS. The same ratio for LTTS is at 40x, Tata Elxsi at 69x, and KPIT at 110x.

Most brokerage reports say that the company has left something on the table for its IPO investors. “Despite 100% OFS offer investors are keen to own the share based on group legacy. We strongly advocate a good long term prospects for the company. We recommend it from a long-term perspective as well as strong listing gain due to investor friendly pricing given good room for upside,” said Tapse.

IDBI Capital too said that it expects robust earnings growth going ahead, while Ventura also says that it has good earnings growth potential.

“With the gradual recovery in the global economy, rising manufacturing capex and shift in manufacturing from US/Europe/China to India due to cost inflation and China+1 strategy, we are expecting strong in the TTECH’s financial performance in the coming years,” the Ventura report said.

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