Tata Technologies IPO 

Hello everyone, I'm Clarice from Equitymaster, and in this video, we will address the elephant in the room and the most talked about topic for this week - The Tata Technologies IPO.

Tata Technologies is a wholly-owned subsidiary of Tata Motors and it plans to offer up to 23.6% of its paid-up share capital in this IPO.

The IPO opened for subscription today, 22nd November 2023.

The company has fixed the price band at Rs 475 to Rs 500 per equity share.

At present, Tata Technologies shares are trading at a premium of Rs 350 in the grey market.

However, it is important to remember that the grey market premium (GMPs) is solely an indicator of the company's stock standing in the unlisted market and it tends to change quickly.

Let's look at the company's financials.

A Close Look at Tata Tech's Financials

Tata Technologies is not your average tech company. It's a global engineering services firm that specializes in innovative product development and digital solutions.

The company caters to international automobile original equipment manufacturers and their key suppliers.

It also serves the aerospace and industrial heavy machinery industries. Here, it has a well-diversified client base across the world.

A large chunk of its revenue comes from clients in India. According to the numbers reported in financial year 2022, India accounted for 32% of its total revenue, whereas the UK, US, and Europe accounted for 20%, 22%, and 4% of its revenue.

Tata Technologies Financial Snapshot (2019-23)

In terms of growth, the tech firm has achieved a commendable revenue and profit CAGR of 10.4% and 20.5%, respectively over five years between 2019 and 2023.

Over the same period, the company's 5-year average return on equity and return on capital employed have been 18% and 25%, respectively.

Moreover, the asset-light and cash-rich model of the IT industry has enabled the company to build up cash, allowing it to reward shareholders generously.

The dividend yield of the mid-sized IT firms has been rangebound, from 0.5-1.5%. Their dividend payout has been in the range of 30-50%.

Tata Technologies has also been generous to its investors. Its 10-years' long-term average dividend payout stands at 44%, in line with the industry. It reported a cash and bank balance of Rs 11.9 bn in financial year 2023.

Going forward, investors can expect a similar level of payout from the cash-rich company. [W2]

Now let's look at the most important part, the company's valuations.

How is the Stock Valued?

The cap price of Rs 500 implies a price-to-earnings ratio of 32.5 times. Whereas, the floor price of Rs 475 implies a price-to-earnings ratio of 30.8 times.

Now, how does this compare with industry peers?

The company's peers include Tata Elxsi, which also caters to the transport and automotive sectors with a more diversified focus.

Then there is L&T Technology, which caters to industrial products, transportation, telecom & hi-tech, and process industries.

Finally, there's KPIT Technologies, which specialises in embedded software for the automotive industry's transition.

Much like Tata Technologies, these companies are all considered mid-sized global IT firms, which operate on a similar scale.

Financial Snapshot

Tata Elxsi, with its robust growth and strong returns in tow, is currently trading at a PE of 65. Its 5-year long-term median PE stands at 53.

L&T Technology is available at a PE of 39, whereas its 5-year long-term median PE stands at 34.

KPIT technologies, with its high margins, is trading at a PE of 84, a premium to its long-term median PE. Its 3-year median PE is 60.

Tata Technologies' lower margins, culminating into weaker returns than its peers, explains its valuation multiple of 30-32. But there's more to the story.

While past performance is not a foolproof indicator of future outcomes, it's crucial to acknowledge that every company embarks on a unique growth trajectory.

Take Tata Elxsi for example. Before its meteoric rise to a PE of 65, the business grew at a 10-year revenue and profit growth of 15.6% and 16.6%, respectively, between 2010-2020. The median PE during the same period was around 25.

Similarly, between 2015-2020, L&T Technology was trading at a median PE of 25, with 5-year sales and net profit CAGR of 17% and 21%, respectively. And now, it trades at a PE of 39.[W4]

Will Tata Technologies, with its proven track-record and strong lineage, tread on a similar path?

We can't say that for sure.

But the business is 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 original equipment manufacturers.

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

Moreover, Tata Tech's strong brand legacy, deep automotive expertise, diversified global presence, and partnerships with industry leaders, gives it an edge and bodes well for its growth aspirations.

It is evident that no matter which industry it is present in, Tata Technologies is a specialist rather than a generalist which ensures that its offerings are irreplaceable and would continue to remain in high demand over the long term.

Also considering the growth of tech in the decade gone by and the number of unicorns created within the space, the assumption that's going in close circles these days is that these tech IPOs would generate even better returns than the average IPO.

Tech, as a whole has performed phenomenally, however it's largely because of the growth seen in few established companies.

We'll just have to wait and see what kind of response this IPO gets in the coming two days. As there are five IPOs lined up this week along with Tata Tech.

There's a healthy chance that most retail investors would prefer going with the Tata Tech IPO due to all the factors mentioned above.

That's it from us today.

We hope you have a safe and profitable day.

Happy Investing!