IPO Analysis: Tata Technologies Ltd

IPO Rating: Apply for the long-term

About the issue

Tata Technologies Ltd (TTL) is a global engineering services company offering product development and digital solutions, including turnkey solutions, to global original equipment manufacturers (OEMs) and their tier 1 suppliers. The company is coming out with its initial public offering (IPO) of equity shares with a face value of Rs 2 per equity share. The price band of the issue has been fixed at Rs 475 to Rs 500 per equity share. The issue size is Rs 3,042.51 crore at a higher price band.

The IPO opening date is November 22, 2023, and it will be closing on November 24, 2023. The IPO market lot size is 30 Shares and in multiple thereof. A retail-individual investor can apply up to a maximum of 13 lots (390 shares or Rs 190,000) at the upper price band. The company has reserved about 10 per cent or 60,85,027 equity shares of the issue for Tata Motors Ltd shareholders and 0.50 per cent or 20,28,342 equity shares for its eligible employees.

Objects of the Issue

The objectives of the offer are to:

(i) achieve the benefits of listing the Equity Shares on the Stock Exchanges, and

(ii) carry out the Offer for Sale (OFS) of up to 60,850,278 Equity Shares by the Selling Shareholders.

Promoter holding

The pre-issue shareholding is 66.79 per cent, post the IPO the promoter stake will be 55.39 per cent.

About the company

TTL is a pure-play manufacturing-focused ER&D company, primarily focused on the automotive industry. The company is currently engaged with seven out of the top 10 automotive ER&D spenders and five out of the 10 prominent new energy ER&D spenders in 2022 (Source: Zinnov Report).

As of September 30, 2023, the company have 19 global delivery centres spread across North America, Europe and Asia Pacific. For the six-month period that ended September 30, 2023, the company’s India business contributed 35.14 per cent to its revenue from operations, followed by Europe (26.90 per cent), North America (19.26 per cent) while the rest of the world contributed 18.71 per cent.

The company primarily categorize its lines of business as (i) Services and (ii) Technology.

(i) Services business: Services is the company’s primary business line, which includes providing outsourced engineering services and digital transformation services to global manufacturing clients helping them conceive, design, develop and deliver better products. Its services business contributed Rs 3531.15 crore and Rs 1986.40 crore to its revenue from operations in FY23 and the six-month period ended September 30, 2023, respectively, comprising 80 per cent and 78.62 per cent of its revenue from operations for the respective periods.

(ii) Technology business: The company’s Products and Education verticals collectively form the Technology Solutions business. Through its Products business, the company resell third-party software applications, primarily product lifecycle management (PLM) software and solutions and provides value-added services such as consulting, implementation, systems integration and support. Its education business provides ‘phygital’ education solutions in manufacturing skills including upskilling and reskilling in relation to the latest engineering and manufacturing technologies to public sector institutions and private institutions and enterprises through curriculum development and competency centre offerings through our proprietary iGetIT platform. In Fiscal 2023 and the six-month period ended September 30, 2023, the company’s Technology Solutions business contributed Rs 883.02 crore and Rs 540.31 crore to its revenue from operations, respectively, comprising 20 per cent and 21.38 per cent of its revenue from operations for the respective periods.

TTL’s comprehensive portfolio of services for the automotive industry addresses the product development and enterprise optimization needs of traditional OEMs and new energy vehicle companies, together with their associated supply chains. Its automotive ER&D services span the entire automotive value chain and include concept design and styling, tear down and benchmarking (TDBM), vehicle architecture, body engineering, chassis engineering, virtual validation, ePowertrain, electrical and electronics, connected, manufacturing engineering, test and validation and vehicle launch.

In addition to the spectrum of discrete service offerings, it also offers turnkey full vehicle development solutions for traditional internal combustion engine (ICE) powered vehicles, plug-in hybrids (PHEV) and battery electric vehicles (BEV) which have been developed over a period of 10 years. In this area our services extend from concept, detailed design and development, test and validation to the production launch of the vehicle.

The company was engaged with Tata Motors Ltd (TML) to convert their existing ICE vehicles to EVs. The projects involved complete ownership of design, packaging and integration of EV components like battery, motor, charging socket and respective electronics in the base car. TTL not only converted the vehicle into an EV, but it also engineered it to ensure it that it met the stringent Global New Car Assessment Programme (GNCAP) 4-star safety ratings. The project was completed in 18 months and complied with all the client’s quality requirements. To date, the company have successfully completed and launched two ICE to EV conversion vehicles – Tata Tigor EV (2021) and Tata Tiago EV (2023) and these have enabled the client to have a strong foothold in the current EV market in India. Furthermore, the company has received two more ICE to EV conversion projects which will be completed in the future.

TTL is also ranked first among all India-based global engineering service providers and is among the top two globally, for electrification of vehicles by Zinnov Zones in its 2023 ER&D report. Some of its notable projects include: eMo (2010-11), JLR electrification (mild hybrids) (2013-2014), Polestar 1 (2016), Chinese OEM EV programs (2017-18), a project for a North American EV manufacturer (2018), a Chinese OEM EV program (2018), TML Tigor (ICE to EV) (2019-20), a British OEM EV program (2020-21) and VinFast VF 8 and VF 9 (2022-23) for which its clients received numerous awards and recognitions, such as Polestar, which was awarded second place in the euro car body award contest in 2019 from the Automotive Circle, an internal OEM advisory board.

TTL’s automotive revenue attributable to the Services segment for FY23 and the six-month period ended September 30, 2023, was Rs 3,131.46 crore and Rs 1,745.75 crore, respectively, comprising 88.68 per cent and 87.89 per cent of its revenue attributable to the Services segment for the respective periods. Additionally, its revenue attributable to the Services segment from verticals other than automotive for Fiscal 2023 and the six-month period ended September 30, 2023, was Rs 399.68 crore and Rs 240.63 crore, respectively, comprising 11.32 per cent and 12.11 per cent of its revenue attributable to the Services segment for the respective periods.

Financials

For the half year ended September 30, 2023, the company reported revenue from operations of Rs 2,526.70 crore compared to Rs 1,887.90 crore signifying a YoY growth of 33.84 per cent. EBITDA grew by 33.03 per cent to Rs 525.47 crore in H1FY24 as against Rs 395 crore in H1FY23. Net profit stood at Rs 351.90 crore compared to Rs 259.06 crore, a YoY growth of 35.84 per cent. Adjusted EBITDA margin fell by 134 bps to 18.39 per cent.

Below is the consolidated financial performance of the company from FY19 to FY23

Valuation and Outlook

If we attribute the company’s H1FY24 earnings on an annualized basis, the asking price is at a P/E of around 28.83x. The issue is priced at 7.12 times its book value based on its NAV of Rs 70.27 as of September 30, 2023.

According to the offer document, the company has mentioned KPIT Technologies Ltd, L&T Technology Services Ltd, and Tata Elxsi Ltd as its listed peers. They are currently trading at a TTM P/E of 84.4x, 38.3x, 47.7x, and 66.8x(as of August 09, 2023).

The listed peers might not be the exact comparables to TTL as it primarily caters to the automotive space while the others are diversified into different businesses. However, the issue is still priced reasonably given the company has enough headroom to grow in the ER&D space.

If we compare the company's EBITDA margins (which is 18.39 for the half-year) with its peers, which appears lower might be because of its high attrition levels (21.70 per cent in FY23) and significant dependence on top 5 clients and the anchor clients (Tata Motors and JLR), which account for 73 per cent and 40 per cent of overall revenue, respectively. This might be giving the company less pricing power for its services offered.

The company has maintained its leadership in the ER&D space. Furthermore, the issue is priced reasonably. Given the legacy of Tata Group, we recommend investors to subscribe to the issue with a long-term perspective.