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The shares in the IPO are offered by promoter Tata Motors, whose holding will drop to 55% after the IPO from 66% and two other investors who will garner nearly ₹728 crore from selling their stakes.
Tata Technologies provides end-to-end software solutions for automakers, especially electric vehicle (EV) manufacturers, to reduce the development cycle of new vehicles. It is playing a pivotal part in the development of EVs for Tata Motors and Vietnam-based Vinfast. EVs are contributing about 20% to its total revenue.
In addition, the company is benefiting from the growing demand for technologies such as advanced driver-assistance systems, connectivity and sharing, which are resulting in increased software content in vehicles and making automakers outsource more engineering research and design (ERD) work. Global outsourcing for ERD services is currently significantly lower than in conventional IT services. The addressable market for Tata Technologies will reach $60 billion in 2025, a gain of 50% from 2021. Given these factors, long-term investors may consider the IPO.
Business: Pune-based Tata Technologies offers product development and digital solutions, ranging from teardown and benchmarking to computer-aided architecture, body chassis engineering and virtual simulation to leading global automakers. Laden with deep domain expertise in the automotive industry, the company reduced the time between basic design and final launch by about two years. By outsourcing a bulk of the development work of new cars to ERD companies, automakers are able to devote more resources to marketing and brand cultivation. The company has anchor customers such as Tata Motors and Jaguar Land Rover and has worked on several programmes for these companies. It has also expanded its customer base by showcasing the work done for Tata Motors and JLR.
Financials: Revenue rose 36% annually between FY21 and FY23 to ₹4,414 crore, while operating profit grew at a compounded annual rate of 45% to ₹ 820 crore, implying a margin of 18.6%. Its operating profit margin expanded 240 basis points (2.4 percentage points) in the last two fiscal years. Net profit expanded at 61% CAGR to ₹624 crore between FY21 and FY23. In the first half of FY24, it posted a profit of ₹351.9 crore on revenue of ₹2,526 crore, with an operating margin of 18.4%.
Risks: The company has a high client concentration. The top five clients contributed 73% to its services revenues in the last fiscal year. A slowdown in revenue from these customers may weigh on its performance. The attrition rate of employees rose to 21.7% in FY23 from 11.5% in FY21. Any paucity of skilled engineering professionals may restrict revenue growth. Tata Technologies had 12,451 employees on its rolls at the end of September 2023.Valuation: At the higher end of the price band, the company is demanding a valuation of 28.82 times its annualised earnings of the first half of FY24. Peers KPIT Technologies, L&T Technologies and Tata Elxsi are trading at 135, 39, and 65 times, respectively, their last 12 months’ earnings. Tata Technologies and KPIT have more than 85% of their revenue coming from the automotive vertical. Just a month ago, Tata Motors sold a 9% stake in the company to TPG at ₹401 per share, which was 20% lower than the price offered to retail investors in the IPO.
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