Markets
Tata Tech IPO: All bright spots?
Summary
- At the upper end of the price band, Tata Technologies is being valued at around 32x its FY23 earnings per share
MUMBAI : After nearly two decades, a company from the Tata group stable is gearing up for its stock market debut. This itself is enough to stir excitement. Enter Tata Technologies Ltd, the initial public offering (IPO) of which opens for subscription today. It is entirely an offer for sale issue. The price band is ₹475-500 per share translating into an issue size of ₹3,042 crore at the upper end.
True, the Indian information technology (IT) services sector is going through a rough patch now, but reports indicate that the grey market premium for Tata Technologies shares is high, suggesting strong demand for this issue. But what about the growth profile?
Tata Technologies, a global engineering research & development company, derives revenues from services segment (79% contribution to revenues in H1FY24) and technology solutions. It caters to manufacturing-led verticals such as automotive, aerospace, and transportation and construction heavy machinery. Among these, automotive is a key revenue generator with a contribution of 88% to services segment revenue in H1FY24.
The company boasts of a marquee global client base, but its revenues are highly dependent on clients concentrated in the automotive segment. Thus, a slowdown in the auto sector can hurt earnings outlook. Plus, it derives a large share of revenue from top five clients in the services segment (73% and 71% of revenue in FY23 and H1FY24, respectively), which also includes anchor clients Tata Motors and JLR. Thus, it would be a problem if any of its top five clients decides not to renew their contracts.
To diversify its revenue streams, one of the steps it has taken here is to collaborate with Airbus. Plus, Tata Technologies expects a major chunk of revenue to flow from new energy companies in future, which could include startup companies. Here, uncertainties about their funding plans pose a risk.
To be sure, given that the two Tata group IT companies that are listed (Tata Consultancy Services and Tata Elxsi) are engaged in a similar line of business, it means a risk of overlap in business offerings remains.
Coming to the financials, Tata Technologies revenue has grown at a CAGR of 36% over FY21-FY23. In H1FY24, year-on-year revenue growth was 34%. “Tata Tech’s (revenue) growth trajectory over FY16-23 remains slower than peers’ but has seen improvement in the last three years because of traction in select accounts," said Emkay Global Financial Services. Tata Technologies Ebitda margin in FY23 stood at 18.6% compared to 21.35% of L&T Technology Services (LTTS) and 30.56% of Tata Elxsi.
“Weakness in a large client in H1FY24 due to near completion of the large full-vehicle development projects may weigh on the company’s near-term performance which, in our view, is adequately captured in the IPO valuations," said the Emkay report.
At the upper end of the price band, Tata Technologies is being valued at around 32x its FY23 earnings per share. This is a discount to listed peers such as LTTS and Tata Elxsi whose FY23 price-to-earnings ratios stood at around 39x and 68x, respectively, Bloomberg data showed.
Even though valuation is comparatively lower, investors could end up disheartened. As Arun Kejriwal, founder of Kejriwal Research and Information Services, points out, “The relatively smaller size of the Tata Technologies IPO issue would mean the chances of getting an allotment for the retail investor is quite low even as the issue may be heavily oversubscribed."
He added, “Investors are then likely to look at the Tata Technologies stock post listing."
