Analysts upbeat on Tata Tech IPO; GMP signals robust demand

Tata Technologies IPO: In the grey market, the stock is commanding a premium of up to Rs 350 or 70 per cent over the upper price band of Rs 500

The strong headroom for growth in manufacturing-led engineering services and an attractive valuation have kept analysts optimistic about the initial public offering (IPO) of Tata Technologies (Tata Tech).

Siddhesh Mehta, research analyst at Samco Securities, suggests subscribing to the engineering research and development (E&RD) services company’s IPO for the long term, as it is “reasonably priced with strong long-term growth prospects”. At the upper price band of Rs 500, the issue is valued at a price-to-earnings (P/E) multiple of 32.5 times 2022-23 (FY23) earnings.
 

This is a steep discount of 69 per cent and 53 per cent compared to peers KPIT Technologies and Tata Elxsi’s respective P/E multiples of 105 times and 70 times based on FY23 financials.
 

“The issue offers a favourable risk/reward, and the firm’s outlook is promising, given its proven track record, established capabilities in ER&D services, and focus on adjacent verticals like aerospace and transport and construction heavy machinery,” said a note by Sharekhan.
 

The issue, entirely an offer-for-sale, will open for subscription on November 22 and close on November 24. In the grey market, the stock is commanding a premium of up to Rs 350, or 70 per cent, over the upper price band.
 

Experts note that significant headroom remains for the company in the ER&D industry, with only 5.5 per cent of the global ER&D spending currently being outsourced.
 

Of the overall ER&D, automotive ER&D spending accounts for just 10 per cent. It is expected to see a compound annual growth rate of 7 per cent from $180 billion in 2022 to $238 billion by 2026, according to Tata Tech’s red herring prospectus.
 

Tata Group company primarily offers outsourced product and process engineering services in the automotive sector, which made up 89 per cent of its services revenue in FY23.
 

The services business comprised 80 per cent of its overall FY23 revenue.
 

Tata Tech boasts a robust client base of global original equipment manufacturers (OEMs) and electric vehicle makers. The company, with Tata Motors and Jaguar Land Rover (JLR) as its ‘anchor clients’, has reduced its concentration on the two, which experts say is positive, as its high dependence on automotive clients is a key risk.
 

Tata Motors and JLR accounted for 34 per cent of Tata Tech’s FY23 revenue, down from 43 per cent in 2020-21. However, the top five clients, including the duo, still accounted for 64 per cent of its total revenue in the first half of 2023-24.
 

“Tata Tech’s capabilities were predominantly developed via its ties with Tata Motors and JLR over time. However, it has expanded its presence to other OEMs and Tier-I players, including new energy companies like VinFast. It has recently been empanelled by Airbus, which is expected to become a strong growth avenue and diversify its revenue base further,” said analysts at Emkay Global. The company’s solutions for emerging products like electric or hybrid vehicles are another positive, experts say.
 

“Tata Tech carries the legacy and trust of the Tata brand. Its financial growth is also stable. For the last three financial years, it has reported an average earnings per share of Rs 12.26 and an average return on net worth of 18.68 per cent,” said Ravi Singh, a research analyst.
 

For the April-September period, its net profit rose 36 per cent to Rs 352 crore from a year ago, while revenue was up 34 per cent to Rs 2,527 crore.
 

IDBI Capital expects earnings growth to be robust going forward, driven by the company’s strategy of increasing wallet share, targeting top ER&D spenders in priority verticals and geographies, and investing in software-embedded electronics and e-learning platforms.