May 18, 2024

Valuation of Tata Technologies

In 2022, India experienced a surge in IPO volumes with high growth Indian stocks but a significant decrease of nearly 56% in overall proceeds compared to the preceding year, 2021. Despite this slowdown, there was a notable highlight during 2022, with the Life Insurance Corporation conducting one of the largest IPOs, successfully raising $2.7 billion. This occurred against subdued investor confidence due to uncertain market conditions and disappointing post-IPO performances.

During this period of subdued investor sentiment and less favorable market scenarios, the announcement of the Tata Technology IPO emerged as a noteworthy development.

In October 2023, Tata Technologies, a subsidiary of Tata Motors, submitted an addendum to its DRHP with SEB. As per the supplement, Tata Tech offered 9.57 crore shares in its IPO at a face value of ₹2 per share.

The initial DRHP was filed on March 10, and the structure of the Tata Technology IPO might include an Offer for Sale (OFS) along with the issuance of new shares. Tata Motors, holding a 74.69% stake in Tata Tech, intends to sell up to 81.1 million shares, equivalent to a 20% stake in the company. Additionally, Alpha TC Holdings plans to sell 9.7 million shares, while Tata Capital Growth Fund I will sell 4.9 million. Detailed IPO particulars will be disclosed upon SEBI’s approval of the DRHP.

The article examines whether the Tata Technologies IPO news will reinvigorate waning investor sentiment or gradually lose traction over time. It will provide an in-depth fundamental analysis of the company, encompassing its business lines, financial performance, and more. This analysis intends to assist investors in making informed decisions regarding their participation in the Tata Technology IPO.

Tata Technologies concentrates on four primary industries:

  • Automobiles
  • Aerospace
  • Industrial Machinery
  • Industrials

The company offers a range of services and specializes in various domains:

  • Engineering, Research, and Development (ER&D) services
  • Digital Enterprise Solutions (DES)
  • Education Offerings
  • Products and Value-added Reselling

Key Business Highlights:

Tata Technologies experienced a remarkable 47% increase in revenue and a substantial 74% boost in profits after tax (PAT) in FY22, marking its best-ever year-on-year growth.

Financial Analysis of Tata Technologies Limited:

The company has maintained a debt-free status for the last three years, showcasing a robust balance sheet with a cash reserve of Rs—7.8 billion as of March 2021. However, there has been a gradual increase in receivables in recent years, impacting working capital.

Over the past five years, revenue growth has been modest, primarily due to a slowdown in research and development (R&D) spending within the global automotive sector. This slowdown affected operating margins, although the company has managed to sustain margins above 15%.

The revenue for fiscal year 2021 declined, mainly because of the COVID-19 pandemic and the overall industry slowdown, especially in China’s automotive sector. Despite these challenging circumstances, Tata Technologies has maintained impressive RoE) and RoCE over the past five years. Additionally, the company has been debt-free for the last two years.

Tata Technologies reported a revenue of USD 473.5 million (INR 3529.6 crore), an operating profit of USD 86.5 million (INR 645.6 crore), and a PAT of USD 58.0 million (INR 437.0 crore) for FY 2022. It resulted in a significant year-on-year growth of 47% in revenue, 65% in operating profit, and 74% in after-tax profit in USD.

In FY22, Tata Technologies achieved an operating margin of 18.3%, marking a 200 basis points increase from the previous year’s operating margin of 16.3%. Additionally, the cash balance escalated from $115 million to $165 million, reflecting a 43% annual increase.

The Services order book saw an uptick, reaching $250 million by March 31, 2022, marking a 29% increase compared to the previous year’s Services order book. Moreover, their Days Sales Outstanding (DSO) went down from 95 days in FY21 to 77 days in FY22.

 

The Tata Tech IPO commenced on November 22, offering shares within a price band of ₹475 to ₹500 per share. Notably, there was no fresh issue component in this IPO. Instead, it was entirely an Offer for Sale (OFS) of 6.08 crore shares by the promoter Tata Motors, along with investors Alpha TC Holdings and Tata Capital Growth Fund 1, participating in the offering.

Considering the upper end of the price band, the IPO’s estimated size ranged from ₹2,890 crore to ₹3,042 crore. Simultaneously, the calculated market capitalization of the company stood at approximately ₹20,283 crore.

Tata Tech IPO Highlights

Tata Technologies secured Rs 791 crore from 67 investors through the anchor book, allocating 1,58,21,071 equity shares for Rs 500 per share. Among notable global investors participating in the anchor book were companies like Goldman Sachs, Government Pension Fund Global, BNP Paribas Funds, Prudential Assurance Company, HSBC Global, Florida Retirement System, and Oaktree Emerging Markets.

This IPO marks a significant event as Tata Technologies is the first IPO launched by the Tata Group in almost two decades following Tata Consultancy Services. The objectives behind the IPO include leveraging the pros of listing equity shares on stock exchanges and providing an opportunity for selling shareholders to fully or partially exit the company.

Tata Technologies focuses on delivering value to its customers by aiding in developing products that prioritize safety environmental friendliness, and enhancing the quality of life for end-users. Leveraging its substantial expertise in the automotive industry, the company has expanded its capabilities to cater to clients in related sectors such as aerospace, transportation, and heavy construction machinery.

 

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