The much awaited IPO (Initial Public Offer) of Tata Technologies Limited is one step closer to reality. The market regulator, SEBI, approved the DRHP of Tata Technologies Limited on 27th June 2023. Tata Technologies Limited had filed its DRHP (Draft Red Herring Prospectus) with the market regulator, SEBI, on 13th March 2023. This will be the first Tata Group Company IPO in 19 years. The last one being TCS which got listed in 2004.
The book running lead managers are JM Financial Ltd., Citigroup Global Markets India Pvt. Ltd. and BofA Securities India Ltd. while the RTA is Link Intime India Pvt. Ltd.
IPO Preparations
The preparations for the IPO seem to be in the works for some time now. Preempting any regulator queries while processing the DRHP, the company provided a buyback option to its shareholders in March 2022. The Tata Motors’ board gave an In-principle approval for the IPO on 12th December 2022. On the same date, the company issued a postal ballot notice to the shareholders. Inter alia, the resolutions included a subdivision of Rs. 10/- Face Value shares into 5 shares of Face Value Rs.2/- and thereafter, a bonus issue of 1:1. The end result being that 1 Share of FV10 became 10 Shares of FV2. The record date for these was 16th January 2023. This increase in the number of shares and the consequent decrease in the share price would allow for more participation in the IPO process.
Comparison of Financials and Growth Rates Vis-à-vis peers
Let us compare the financials of Tata Tech and the three mentioned peers.
Tata Technologies’ DRHP identifies three listed peers viz.
- KPIT Technologies Limited
- L&T Technology Services Limited
- Tata Elxsi Limited
Let us compare the financials of Tata Tech and the three mentioned peers.
The DRHP uses the previous year ending (FY22) numbers to calculate the Price to Earning multiple. Since the latest numbers have been published, we can use the FY23 numbers for our discussions.
The PE ratios give a range of approximately 37 times to 78 times multiple of the FY23 EPS with an average of approx. 59 times. The price to book multiples range from approx. 9 times to 22 times with an average of approx. 16.38.
Now, let us compare the growth rates of these companies
From the above table we can see that while the 3 years’ Revenue and profits growth rates of Tata Technologies Ltd. are slightly lower than those of its peers; its profit growth rate in last year is the highest amongst peers. The pricing expectation will have to be adjusted accordingly.
Identifying the closest listed comparable
Let us reproduce some portions of the TTL DRHP below to identify the closest listed comparable.
Competition Landscape
The global ER&D spend is allocated across in-house ER&D departments of enterprises, GCCs and third-party ESPs. The third party ESP outsourced market is currently pegged at $85-90 billion (₹7,032-7,446 billion). The market is global and fragmented in nature and can be broadly classified into 4 categories as shown below. The types of ESPs are set out below:
According to Zinnov Zones, our Company is a leading global engineering services company offering product development and digital solutions including turnkey solutions to global OEMs and their Tier 1 suppliers across the automotive, TCHM, aerospace and adjacent verticals.
We are part of the Tata Group, with a differentiated value proposition amongst the two listed Tata Group companies in the outsourcing services space:
- Tata Elxsi is a design specialist focused on software and digital engineering services.
- Tata Consultancy Services is an IT services behemoth offering end-to-end IT solutions and services across verticals.
- Tata Technologies is a pure play ER&D and digital solutions specialist offering end-to-end solutions across the value chain with a focus on manufacturing led verticals.
Primary India-heritage ER&D Specialists include Tata Technologies, KPIT, LTTS and Tata Elxsi. Among these, TTL has the deepest Automotive footprint among India-based ER&D players and has a balanced talent presence across offshore and onsite locations. The table below sets out the comparative view of the top service providers:
KPIT Technologies is clearly the closest listed comparable of Tata Technologies Ltd.
Geography wise market potential and presence
With recession looming over several western economies; TTL’s risk mitigation would be better due to its more diversified geographic mix.
Valuation by Comparables
The FY23 EPS of Tata Technologies Ltd is 15.37 per share and Book Value is 73.65 per share.
Tata Technologies should command a premium over its closest listed comparable i.e. KPIT Technologies Ltd. due to its most respected parentage, huge growth prospects, better geographic diversification, highest one year growth rate and superior profit margins and it should be discounted for the lower revenue growth rates.
Applying the EPS and BV multiples of KPIT to TTL, we get figures of 1,192 and 1,308 for TTL. After slight adjustments for the premium and discounting factors; it is safe to estimate that barring any unforeseen market disruption; the Tata Technologies shares are likely to get listed on the exchanges between Rs. 1,100/- and Rs. 1,300/- per share.
Tata Technologies IPO price band
The Tata group is arguably the most respected business group in the country and is known for its ethical dealings. So it is likely that the company will leave a lot on the table for the IPO investors. For want of a more recent example we use the IPO price and Listing price of Tata Consultancy services of 2004. TCS’ IPO price was 850 and it got listed at Rs. 1,076. That means the IPO price was at a 26.6% discount to the market discovered price. On the same lines, one can infer that the Tata Technologies IPO price band can be 20% to 30% lower than the fair price and the shares may list on the stock exchanges between Rs. 1,100/- to Rs. 1,300/- per share. Whatever be the actual market outcomes for the Tata Technologies’ IPO, one thing is certain that the stock will see a lot of excitement in the days to come!
Disclaimer: This is an opinion piece. Nothing in this should be construed as investment advice. Investors are requested to consult their investment adviser before making any investment decisions.
About the Author:
The author is the MD & CEO of Enrich Advisors Pvt. Ltd. and a specialist in unlisted equity investments. He has over 20 years of experience in the financial services. He has an MBA from IIM, Indore and an Engineering degree from Mumbai University.