Tata Technologies vs Tata Elxsi: How these Tata Group Stocks Stack up Against Each Other

One of the most anticipated initial public offerings (IPOs) of the year involves the sale of up to 95.7 million (m) equity shares. And this will be the first IPO by a Tata Group company in nearly two decades.

We're talking about Tata Technologies IPO, a subsidiary of Tata Motors that now intends to go public.

The company plans to offer 23.6% of its paid-up share capital currently held by Tata Motors, Alpha TC Holdings, and Tata Capital Growth Fund I.

A lot has been said and written about the company's IPO in the past one year, and the hype has definitely built up. Investors are waiting with bated breath for the company to disclose the IPO dates.

Mind you, Tata Technologies is not your average tech company. It is a global engineering services firm specialising in innovative product development and digital solutions.

The company caters primarily to international automobile original equipment manufacturers (OEMs) and their key suppliers (ancillaries). It also serves the aerospace and industrial heavy machinery industries as well.

On the other hand, the Tata group's well-known mid-sized IT arm, Tata Elxsi, also caters to the transport and automotive sectors. But it has a more diversified focus. It serves a variety of industries including automotive, broadcast and communications, consumer electronics, healthcare, and transportation.

Tata Technologies provides a wide range of engineering services, including product design, engineering, manufacturing, and testing.

Tata Elxsi also provides a wide range of engineering services, but its focus is on design and innovation. It has a strong focus on digital engineering, including software development, user experience design, and data analytics.

A large chunk of Tata Elxsi's revenues comes from clients across the world. 42% of its revenues are from the US, 30% from Europe, 16% from India, and the remaining from other parts of the world.

For Tata Technologies, a large chunk of the revenue comes from clients in India. India accounted for 32% of its total revenue in 2022, whereas the UK, US, and Europe accounted for 20%, 22%, and 4% of its revenue, with the balance from other parts of the world.

Both companies have an employee strength of close to 10,000. However, Tata Technologies has a higher attrition rate of 25% (in 2022), compared to Tata Elxsi's 20% (in 2022) and 17.3% (in 2023).

Financial Comparison

Although they appear to serve a similar clientele, Tata Elxsi seems to have gained a financial edge, thanks to its wider customer base and diverse range of services.

Tata Technologies, in terms of total revenue (Rs 45 bn) is bigger than Tata Elxsi (Rs 31 bn).

In terms of revenue growth, Tata Technologies trails behind Tata Elxsi. While the former achieved a commendable 10.4% compound annual growth rate (CAGR) over five years between 2019-23, the latter reported an even more impressive growth of 17.8%.

Moreover, Tata Technologies' average operating margin between 2019-2023 of around 19% was lower than that of Tata Elxsi's 30%.

But, on net profit growth, both companies are close. Over the same period, Tata Technologies and Tata Elxsi reported a 5-year net profit CAGR of 20.5% and 25.8%, respectively.

Incidentally, both Tata Technologies and Tata Elxsi recorded net profits close to Rs 7 bn, with Tata Technologies at Rs 7.1 bn and Tata Elxsi at Rs 7.5 bn.

However, we cannot say the same about the returns reported by the companies. There's a noticeable gap in their return profiles due to differences in profit margins.

Tata Technologies' 5-year average return on equity (RoE) and return on capital employed (RoCE) stood at 18% and 25%, respectively.

Comparatively, Tata Elxsi outperformed with a 5-year average RoE and RoCE of 34% and 48%, respectively.

Additionally, both boast debt-free balance sheets given the asset-light and cash-rich model of the IT industry.

Tata Elxsi Financial Snapshot (2019-2023)

	2018-2019	2019-2020	2020-2021	2021-2022	2021-2023
Revenue Growth (%)	14.62%	2.08%	11.43%	34.80%	28.04%
Operating Profit Margin (%)	28.78%	25.01%	30.85%	32.84%	32.95%
Net Profit Margin (%)	18.16%	15.91%	20.16%	22.25%	24.01%
Return on Capital Employed(%)	51.68%	35.35%	42.50%	51.20%	51.80%
Return on Equity(%)	34.50%	25.20%	30.15%	37.23%	40.97%

Data Source: Ace Equity

Tata Technologies Financial Snapshot (2019-2023)

	2018-2019	2019-2020	2020-2021	2021-2022	2021-2023
Revenue Growth (%)	7.43%	-3.00%	-16.02%	47.39%	25.95%
Operating Profit Margin (%)	18.59%	18.07%	18.08%	19.67%	20.59%
Net Profit Margin (%)	11.98%	8.82%	10.05%	12.38%	14.14%
Return on Capital Employed(%)	27.99%	22.58%	16.67%	27.53%	30.90%
Return on Equity(%)	21.33%	13.94%	11.97%	19.76%	23.69%

Data Source: Ace Equity

Tata Tech has a healthy cash reserve. So why is it considering an IPO?

The anticipated market capitalisation for Tata Technologies is estimated to fall in the range of Rs 180-200 bn. As part of the Tata Technologies IPO, Tata Motors intends to sell up to 81.1 m shares through an offer for sale (OFS).

It's fair to assume this public offering can potentially improve Tata Motors' balance sheet. It will allow the auto giant to unlock value in its investment in the upcoming IPO.

The proceeds can most likely help Tata Motors retire a part of its burgeoning debt and fund future growth.

According to reports, Tata Technologies' shares may be offered for around Rs 500 per share. This price and marketcap imply a PE value of 25x, which seems fair, considering the average PE of the IT industry is 28x.

Please note, the price band is not finalised yet and these are just numbers reported by leading financial dailies. We'll get to know more once the company announces its IPO dates.

Tata Elxsi, with its robust growth and stronger returns in tow, is currently trading at a PE of 60.5x. Its 5-year long-term median PE stands at 52.6x.

But before the stock skyrocketed, the business had registered a 10-year (between 2010-2020) revenue and profit CAGR of 15.6% and 16.6%, respectively. The median PE during the same period was around 25x.

A significant portion of this growth comes from the communication and broadcasting, as well as transportation sectors.

The company has also ventured into the expanding electric vehicle (EV) market. It's also also expanding their healthcare segment, which has tripled in the past few years.

Tata Elxsi's Historical Valuations

	2013-2014	2014-2015	2015-2016	2016-2017	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022	2021-2023
Price / Book Value(x)	7.22	12.73	15.18	8.17	8.31	6.36	3.6	12.4	34.39	17.8
Price / Earnings (x)	22.57	35.05	37.82	26.07	25.56	20.69	15.31	45.57	100.16	49.16

Data Source: Ace Equity

Conclusion

Both Tata Technologies and Tata Elxsi are well-positioned to benefit from the growing demand for engineering services in a variety of industries.

Demand for autonomous and connected technologies is growing due to increasing pressure from regulations on passenger safety and cost pressures on OEMs.

Thus OEMs will continue to focus on delivering better and safer experiences to customers via connected and autonomous technologies.

However, Tata Elxsi's faster growth rate and higher profit margin may make for a more attractive investment for some investors.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...