The timing of the Tata Technologies Ltd IPO, Bombay House's first public offering since Tata Consultancy Services Ltd went public in 2004, could not have been more appropriate.
According to the Zinnov report, 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 reach USD 2.7 trillion. The automotive sector, the largest ER&D manufacturing sector, is poised for a once-in-a-century disruption, thanks to the arrival of Connected, Autonomous, Shared, and Electric (CASE) mobility. According to Zinnov, global automakers are likely to spend USD 1.2 trillion through 2030.
Tata Technologies, which derives nearly three-quarters of its revenue from the auto sector, believes it is well placed to make the most of this shifting sands.
It is the only Indian company, and among a handful of companies globally, that serves automotive customers at every stage of the product life cycle, from the drawing board to the showroom. Pune-based ER&D is expanding into the aviation sector, though major clients Tata Motors Ltd. and Jaguar Land Rover account for a third of total revenue.
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 on November 22-24 by promoter and investors Alpha TC Holdings Pte Ltd. and Tata Capital Fund 1. At the upper end of the price band of Rs 475 to Rs 500 apiece, Tata Motors can make at least 68 times the profit on a full subscription.
The stock price is higher than the valuation at which a stake in the company was sold to an investor about a month ago.
Tata Motors has sold a 9.99% stake in Tata Technologies to TPG Rise Climate SF Pte, which is also an investor in Tata Motors' e-mobility unit, and the Ratan Tata Endowment Foundation for Rs 401.8 apiece. While management said this was a “deal between a willing buyer and a willing seller,” the investor would end up paying an additional 25% for each share in the IPO.
However, Tata Technologies is the cheapest stock in the sector, with a price-earnings ratio of 32.8-30.8 times for the financial year ended March 31. This represents a discount to 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:
1. Issue opens
Nov 22.2. Issue closes
Nov 24.3. Fresh Issue:
Not applicable.4. Offer For Sale:
60,850,278 shares.5. Total Issue Size:
Rs 3,042 crore.6. Price Band:
Rs 475–500 per share.7. Face Value:
Rs 2 per share.8. Lot Size: 30
shares and multiples thereof.9. Listing On
BSE and NSE.
The company will undertake a pre-IPO placement on Nov. 21.
Founded in 1994, Tata Technologies is a global engineering services company providing product development and digital solutions, including turnkey solutions, to OEMs and their tier-1 suppliers. The company focuses primarily on the automotive industry. It currently collaborates with seven 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:
- Services: The company provides outsourced engineering and digital transformation services to global manufacturing customers to help them envision, design, develop, and deliver better products. The service line contributed Rs 3,531 crore and Rs 1,986 crore to revenue from operations in FY23 and H1FY24 respectively. This represents 80% and 78.62% of total revenues for the respective periods.
- Technological solutions: This business is two-pronged.
Through its products business, Tata Technologies sells third-party software applications, primarily product lifecycle management software and solutions. They also provide value-added services such as consulting, implementation, systems integration and support.
Through its education business, it provides “physical” learning solutions in manufacturing skills, including upskilling and retraining 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 operating income in FY23 and H1FY24.
Use of proceeds
The IPO proceeds will go to the selling shareholders only, in proportion to their offloaded stake.
1. Tata Technologies derives more than a third of its revenue from its five largest customers, which are primarily Tata Motors and Jaguar Land Rover. Disrupting their business or terminating of their contract with them will adversely affect the company's revenues.
2. Economic slowdowns or geopolitical factors affecting the automotive sector may have an adverse impact on the Company's finances and business operations.
3. Uncertainties surrounding the business model of new energy vehicle companies may adversely impact the finances and business operations of Tata Technologies.
4. The Company often invests in unsecured debt instruments, which may have below-market interest rates and affect its profitability.
5. Tata Technologies has had negative cash flows in the past, and this is likely to happen in the future, which may impact its liquidity and operations.
6. Exchange rate fluctuations in the geographic areas in which the Company operates may materially affect the Company’s financial and business operations.
7. Some of the Tata Group companies operate in the same line of business, which may lead to competition and possible loss of business opportunities.
8. A shortage of trained employees and high attrition rates can significantly impact a company's revenue and profitability in the long term. High employee costs can also affect a company's competitive advantages.
9. Any adverse changes in the Company's relationships with software vendors and product business partners may affect availability, delivery, reliability and cost.
10. Competition from R&D companies, as well as OEMs who may choose to “outsource” software and services, may materially impact Tata Technologies’ finances and business operations.
Also Read: Amazon Launches Free AI Classes in Bid to Win Talent Arms Race