Tata Technologies IPO: Everything you need to know

Tata Technologies, a Tata Group company, has filed a draft prospectus with market regulator SEBI as it plans to raise funds through its initial public offering (IPO). The IPO consisted of Offer For Sale (OFS) only, as promoters and other shareholders plan to sell some 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 development and digital services company owned by Tata Motors Ltd. They are a leading global engineering services company providing product development and digital solutions, including turnkey solutions, to global OEMs – Original Equipment Manufacturers – automotive, heavy industrial equipment and aerospace.

TT employs over 11,081 people (10,161 full-time employees and 920 contractors) spread across 18 global delivery centers. Tata Motors owns 74.69% of 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 divided into two segments:

• Services: It is the primary line of business service encompassing the delivery of outsourced engineering services and digital transformation services to global manufacturing customers, helping them conceive, design, engineer and deliver better products. For FY22, it accounted for 75.12% of its total revenue.
• Technology Solutions: They complement their service offerings with products and educational businesses (collectively referred to as technology). Through the product business, they sell third-party software applications, mainly 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 Sell ​​a million shares (1.20%).

According to the DRHP, the average acquisition cost per equity interest acquired by the selling shareholders, including the Promoter’s selling shareholder, is as follows:

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

The IPO price has not yet been determined. According to experts, the issue price of Tata Technologies would be at least four to five times the price at which Tata Motors acquired a stake in Tata Technologies. This would result in an issue price between Rs 30 and Rs 40 per share.

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

Below are some key figures (from DRPH) related to the industry Tata Technologies operates in:

Global ER&D

• In 2021, global ER&D spending is estimated at $1,635 billion.
• North America has the highest share of global ER&D spending and is expected to grow the fastest – due to higher penetration of software and internet companies in the region.
• The addressed market for ER&D services refers to the sum of ER&D spend by Global Capability Centers (GCCs) and ER&D spend outsourced to external Engineering Service Providers (ESPs).
• The global ER&D address market has been priced at US$145-155 billion in 2021.

opportunity for India

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

The Indian ESP market is expected to grow at a CAGR of 13-16% (following Eastern Europe at a 16-18% annual rate) and account for US$20 billion, which is almost 1/4 of the total outsourcing ER&D spend of 85 -$90 billion in 2021.

Global ER&D market across all industries

1. Automobile: Original equipment manufacturers are the original equipment manufacturers of vehicle components and sit at the top of the automotive supply chain pyramid, while Tier 1 suppliers are direct suppliers of independent parts to OEMs and aftermarkets. Global automotive ER&D spending is currently estimated at $167 billion and is the largest contributor to the manufacturing industry, accounting for approximately 10% of total ER&D spending. Automotive ER&D spending was US$167 billion in 2021 and is expected to grow at approximately 6% CAGR to US$207 billion by 2025.
2. Aerospace & Defense: The industry is regaining growth momentum as demand for travel increases around the world, and it adopts new digital technologies to improve services to its customers. ER&D spending for the aerospace and defense industry was US$50 billion in 2021 and is estimated to increase by US$4 billion to US$54 billion in 2025.
3. Transport and construction machinery (TCHM): Global TCHM spending on ER&D has been set at US$41 billion in 2021 and is projected to grow to US$45 billion by 2025. The market for outsourced ER&D service providers of TCHM service provider is currently fixed at US$2-3 billion and is expected to grow to US$3-4 billion by 2025.

How Tata Technologies compares to publicly traded competitors

Comparing Tata Technologies to listed competitors in similar fields, fair value on a conservative basis is ~Rs 20,000 crore with resulting IPO price of ~Rs 500/share.

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

• In terms of revenue (FY22), L&T Technology is the largest player, followed by Tata Technologies. Revenue and earnings growth (over the last three FYs) is the lowest for Tata Technologies.
• Basic earnings per share (EPS) for FY22 is the highest for L&T Tech (90.92), followed by Tata Elxsi and Tata Technologies.
• Public companies in this space operate at high P/E ratios – the average P/E ratio of its peers is 64.89. Investors will have to wait for the details of Tata Tech’s IPO to see how it stacks up against the competition on this parameter.
• Return on Net Worth (RoNW) is the lowest for Tata Technologies among all listed competitors.

Tata Technologies: Finance

• The company reported sales 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 net profit 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 improved to 12.38% in FY22 from 8.82% in FY20. In 9MFY23, margins have increased further to 13.53%.

How will Tata Motors benefit from the Tata Technologies IPO?

With an IPO valuation of ~Rs 20,000 crore, Tata Motors’ stake in the company is priced at ~Rs 15,000 crore. Given Tata Motors’ intention to sell 81.13 million shares, it is very likely to realize ~Rs 4,000 crore from the partial sale of its stake in Tata Technologies. On the one hand, the current IPO will help Tata Motors to unlock the value of its stake in Tata Technologies as the share price could rise at ~Rs 40/share. On the other hand, proceeds from OFS will also help Tata Motors reduce the debt on its balance sheet and align well with the broader vision of becoming debt-free in the years to come. With China reopening and chip supply issues at their worst, Tata Motors is well positioned to report better financials and create wealth for investors going forward

Diploma

Tata Technologies is the first Tata Group company to go public after TCS went public in 2004. With the Tata brand and strong financials from Tata Tech, we can expect a good response once the IPO goes live. It’s a big positive development for Tata Motors, both from an appreciation in value perspective and from a deleveraging perspective.