Tata Technologies IPO: All You Need To Know
The Tata Technologies IPO comes at a time when the global auto industry is prepped for a once-in-a-century disruption.
The timing of the Tata Technologies Ltd.'s initial public offering, the first from Bombay House since Tata Consultancy Services Ltd. went public in 2004, couldn’t have been more apt.
Global spending on ER&D—the segment Tata Technologies operates in—is set to grow at a compounded annual growth rate of 10% over the next five years to $2.7 trillion, according to a Zinnov report. The automotive sector, which is the largest manufacturing ER&D vertical, is primed for a once-in-century disruption — courtesy the advent of Connected, Autonomous, Shared and Electrified (CASE) mobility. Global automakers, according to Zinnov, are likely to spend $1.2 trillion through 2030.
Tata Technologies, which derives nearly three-quarters of its revenue from the automotive sector, believes it is well-positioned to make the most of these shifting sands.
It is the only Indian firm, and among a handful globally, that services automotive clients in every stage of a product’s lifecycle—from the drawing board to the showroom floor. The Pune-based ER&D firm is expanding into aerospace, though anchor clients Tata Motors Ltd. and Jaguar Land Rover make up a third of the top line.
Promoter Tata Motors Ltd. stands to gain the most from the Rs 3,000-crore IPO—a pure offer-for-sale of 6.08 crore shares from Nov. 22-24 by the promoter and investors Alpha TC Holdings Pte Ltd. and Tata Capital Growth Fund I. At the upper end of the price band of Rs 475-500 apiece, Tata Motors stands to make a profit of at least 68 times on full subscription.
The shares are priced higher than the valuation at which a stake in the company was sold to an investor about a month ago.
Tata Motors offloaded 9.99% in Tata Technologies to TPG Rise Climate SF Pte, also an investor in Tata Motors’ electric mobility unit, and the Ratan Tata Endowment Foundation at Rs 401.8 apiece. While the management said that was “a deal between a willing buyer and a willing seller”, an investor will end up paying 25% more for each share in the IPO.
Still, Tata Technologies is the cheapest stock in the space, with a price-to-earnings ratio of 32.8-30.8X for the fiscal ended March 31. That's at a discount o peers KPIT Technologies Ltd. (80.31X), Tata Elxsi Ltd. (61.55X) and L&T Technology Services Ltd. (37.47X).
Against that backdrop, here’s all you need to know about the Tata Technologies IPO:
Issue opens: Nov. 22.
Issue closes: Nov. 24.
Fresh Issue: Not applicable.
Offer For Sale: 60,850,278 shares.
Total Issue Size: Rs 3,042 crore.
Price Band: Rs 475–500 per share.
Face Value: Rs 2 per share.
Lot size: 30 shares and multiples thereof.
Listing On: BSE and NSE.
The company raised Rs 791 crore from anchor investors in a pre-IPO placement on Wednesday. As many as 1.58 crore shares were allotted at Rs 500 apiece to 67 anchor investors. India’s two biggest asset managers, SBI Mutual Fund and ICICI Prudential Mutual Fund, invested the highest sum in the anchor round at Rs 42 crore each.
Founded in 1994, Tata Technologies is a global engineering services company offering product development and digital solutions, including turnkey solutions, to original equipment manufacturers and their Tier-I suppliers. The company is primarily focused on the automotive industry and is currently engaged with seven out of the top 10 automotive ER&D spenders and five of the top 10 prominent new energy ER&D spenders.
The company operates two lines of business:
1. Services: The company provides outsourced engineering services and digital transformation services to global manufacturing clients to help them conceive, design, develop and deliver better products. The services line contributed Rs 3,531 crore and Rs 1,986 crore to revenue from operations in FY23 and H1 FY24, respectively. That’s 80% and 78.62% of the top line for the respective periods.
2. Technology solutions: This business is two-pronged.
Through its products business, Tata Technologies sells third-party software applications, primarily product lifecycle management software and solutions. It also provides value-added services such as consulting, implementation, system integration and support.
Through its education business, it provides “phygital” education solutions in manufacturing skills, including upskilling and reskilling public and private sector employees in the latest engineering and manufacturing technologies through its iGetIT platform.
The technology solutions segment contributed Rs 883 crore and Rs 540.3 crore to the company’s revenue from operations in FY23 and H1 FY24.
Use Of Proceeds
The IPO proceeds will go to the selling shareholders only, in proportion of their offloaded stake.
Tata Technologies derives more than a third of its revenue from its top five clients, essentially Tata Motors and Jaguar Land Rover. A disruption in their business or the termination of their contract with them will adversely affect the company’s revenue.
An economic slowdown or geopolitical factors affecting the automotive segment can have an adverse effect on the company’s financials and business operations.
Uncertainties around the business model of new energy vehicle companies can adversely impact Tata Technologies’ financials and business operations.
The company often invests in unsecured debt instruments, which may carry interest rates lower than the market rate and affect its profitability.
Tata Technologies has had negative cash flows in the past, and that’s likely in the future, which could impact its liquidity and operations.
Exchange rate fluctuations in the geographies the company operates in can materially impact the company’s financials and business operations.
Certain Tata Group companies operate in a similar line of business, which can result in competition and potentially a loss of business opportunity.
A lack of trained personnel and higher attrition rates can materially impact the company’s top line and profitability in the long run. Higher employee costs can also weigh on the company’s competitive advantages.
Any adverse change in the company’s relationships with software vendors and partners for the products business can affect availability, delivery, reliability and cost.
Competition from ER&D firms, as well as OEMs who may choose to “insource” software and services, can materially impact Tata Technologies’ financials and business operations.