Tata Sons Trims TCS Stake. IPO Dodge or Strategic Move?

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Tata Motors demerger

Tata Group in the semiconductor space

Tata Chemicals stocks' rally

The list goes on... such has been the story of Tata group in 2024.

The Tata group has dominated headlines in 2024 with a flurry of activity.

Today, the Tata juggernaut continued but with an unexpected turn. Initially, three Tata companies captured the spotlight, with Tata Steel's decision to shutter its Welsh coke ovens causing a stir.

However, the narrative swiftly shifted as two other Tata entities emerged into the limelight: India's IT powerhouse, Tata Consultancy Services (TCS), and the highly anticipated IPO of its holding company, Tata Sons.

Tata Sons today sold a stake in TCS via a block deal.

About Tata Sons

Tata Sons is the investment holding company of the Tata group.

The Tata group comprises over 100 operating companies in seven business sectors: communications and information technology (IT), engineering, materials, services, energy, consumer products, and chemicals.

About 66% of the equity capital of Tata Sons is held by philanthropic trusts endowed by members of the Tata family. The biggest two of these trusts are the Sir Dorabji Tata Trust and Sir Ratan Tata Trust.

Tata Sons is the owner of the Tata name and the Tata trademarks, which are registered in India and several other countries.

Block Deal

Tata group holding company Tata Sons on Tuesday likely sold around 20.2 m shares or 0.6% equity in Tata Consultancy Services (TCS) in a block deal, following which the shares fell 3% to Rs 4,021.3 on BSE.

The deal is reported to be worth around Rs 90 billion (bn) at an average share price of Rs 4,043 per share.

Tata Sons had yesterday initiated the process of a block deal to sell up to 23.4 m shares of TCS at a floor price of Rs 4,001 per share, representing a discount of 3.7% to Monday's closing price.

However, a final confirmation of the buyer and seller would be known in the evening when stock exchanges release data.

Tata Sons owns the bulk of a 72.4% stake in TCS, which is India's largest software services exporter and second most valued listed company with a market capitalisation of Rs 14.6 trillion (tn).

There is no official clarification for the reason behind the stake sale yet.

However it's believed the fundraising is part of an exercise by the salt-to-software conglomerate to cut down debt and fuel ambitions in newer areas like semiconductors.

What Does This Mean for Tata Sons IPO?

The company has been classified as an upper-layer non-banking financial company (NBFC), supporting, and promoting other Tata group businesses.

This fundraising could be part of an exercise by the Tata group to avoid a Tata Sons IPO under RBI rules which mandates all 'upper layer' non-banking finance companies (NBFCs) to get listed on the stock exchanges.

Earlier in the month, the market was buzzing with rumours that Tata Sons is planning to get listed on stock exchanges under RBI rules and that the IPO to offload a 5% stake worth about Rs 550 bn by valuing the holding company at Rs 11 trillion.

Later, a media report stated that the conglomerate was considering restructuring its balance sheet to avoid going public.

If Tata Sons reorganised debt by repaying borrowing or transferring the holding in Tata Capital to another entity, it may get deregistered as a core investment company (CIC) and upper-layer NBFC.

RBI has given a deadline of September 2025 to all upper-layer NBFCs, including Tata Sons, to get listed.

After RBI reportedly refused to give an exemption to Tata Sons as it could lead to similar demands from other corporate holding companies, the company has been consulting legal and finance experts to find a solution.

However, it's essential to note these discussions and strategies remain speculative at this stage, with no concrete decisions announced as of now.

According to calculations done by market experts, the market value of Tata Sons could be pegged at Rs 16 trillion.

Based on these numbers, the stake that the listed Tata companies hold in Tata Sons is valued at substantial amounts. So much so in the case of Tata Chemicals it accounts for almost 80% of Tata Chemicals' current marketcap.

Tata Sons is also eligible for the holding company discount, which roughly surrounds 30-60%. Assuming a 60% discount, the market value is ascertained at somewhere around Rs 8 tn.

A look at Financials

Tata Son's net sales has shown a consistent growth trend over the five years.

The net sales (revenue) of the company have grown steadily over the years, with a compound annual growth rate (CAGR) of 13.2%. This indicates a healthy increase in the company's top line.

There was a substantial increase in FY22 and FY23, with growth rates of 27% and 34%, respectively, indicating robust revenue expansion, due to increased demand and market expansion.

The net profit has witnessed significant fluctuations over the years. Although there was a notable increase in FY22, followed by a decline in FY23, the CAGR has seen a de-growth over the past five years.

The net profit margin also fluctuated, reaching a peak of 10% in FY22 but declining to 4% in FY23, indicating volatility in the bottom-line performance.

Tata Sons Financial Snapshot (2019-2023)

Rs m, consolidated	FY19	FY20	FY21	FY22	FY23
Net Sales	2,173,134	2,301,666	2,375,707	3,024,578	4,039,796
Growth (%)	19%	6%	3%	27%	34%
Operating Profit	546,402	538,926	640,778	719,146	814,647
OPM (%)	25%	23%	27%	24%	20%
Net Profit	203,572	68,770	1,26,846	3,03,903	1,68,478
Net Margin (%)	9%	3%	5%	10%	4%

Data Source: Ace Equity

Apart from this, the company has paid big dividends, and has increased its dividend payout over the years.

Conclusion

The Tata group boasts a strong track record of success across various sectors, suggesting potential for future growth.

With these strong records, the group's combined market capitalisation soared past Rs 30 tn, marking a historic moment for Indian business.

The surge in shareholder wealth has been driven by buying interest seen in Tata Consultancy Services, Tata Motors, Tata Power, and Indian Hotels shares this year.

Going forward, TCS plans to diversify its focus to new markets like Japan, Latin America, and Southern Europe due to a slowdown in North America. This will further create room for growth for the company.

While, looking back at its most recent IPO, launched after nineteen yearsin November 2023, Tata Technologies made a spectacular debut at a staggering 168% surge on its listing day.

This remarkable feat marked the most impressive listing since November 2021 for an IPO exceeding Rs 5 billion (bn).

The stellar reputation associated with the Tata name sets a promising stage for Tata Sons' potential debut, underscoring the anticipation and excitement surrounding its prospects in the market.

Although the Tata Group companies have always remained at the forefront of innovation and the India growth story, it does not mean Tata stocks aren't vulnerable to macroeconomic conditions.

You should treat them like any other company when considering them from an investment perspective.

Remember, a fundamentally strong company has the potential to give good returns in the long run. Hence, it is better to carry out proper due diligence before investing in any stocks, including Tata group companies.

As you're interested in Tata group stocks, check out the new section in our Stock Screener, where you can view the fundamentals of companies within a business group in one screen, including the Top Tata group stocks.

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