Tata Technologies IPO had everything going for it before listing. A solid pedigree background, strong financial and operating performance, reasonable IPO valuation and massive oversubscription to top it off. Given all these, the blockbuster listing is no surprise. However, if you were amongst the lucky investors to have got an allotment of shares, it’s time for some serious introspection on what you should do as the stock trades at over 160 per cent premium to its IPO price on day one of trading.
In our IPO note on Tata Technologies published on our bl.portfolio edition dated November 19, we had recommended investors to subscribe to the IPO for the factors mentioned above and its strong long term business prospects. However from an IPO valuation of PE of 29 times (1HFY24 EPS annualised), Tata Technologies post listing is now trading at PE of around 78 times. This has already pulled forward many years of potential gains. Its time to eat the cake and hence investors can book profit in the stocks.
The risk-reward of holding the stock for the long term at a PE of 78 times as compared to its FY21-24 (1HFY24 annualised) net profit growth of 35 is not favourable any more at a time when high-interest rates may sustain for longer and are likely to dampen equity valuations. In such an environment, while a PE of around 78 times for Tata Technologies may persist, it will not be sustained in the long run.
Business and prospects
Tata Tech is amongst the leading pure-play global ER&D companies offering product development and digital solutions to global original equipment manufacturers. The ER&D services industry usually focusses on the design, development, testing, rollout and maintenance aspects of the product and process development chain, not mass manufacturing. ER&D players partner end-to-end or at different stages with OEMs in the product development cycle. They also provide process engineering services that assist manufacturing, such as plant design engineering and implementing process control systems.
Third-party ER&D players bring to OEMs the benefits of cost savings, flexibility in investments and reduced product development timelines (with their domain expertise and enhanced workforce). On the flip side, the risks are sometimes outsourcing crucial product-related work to a third-party player who may also be working with a competitor. According to Tata Tech management, this is not a barrier, as there are processes and checks to protect client confidentiality.
Within this broader ER&D segment, Tata Tech operates under two main segments — Services (80 per cent of revenue) and Technology Solutions Segment (20 per cent).
The automotive sector is the major revenue contributor, accounting for the bulk of revenue in the services segment, with Tata Motors/Jaguar Land Rover being the key anchor clients. The anchor clients contributed around 34 per cent of total revenue from operations in FY23, while the automotive sector accounted for 69 per cent overall. The balance contribution in the services segment comes from industries such as aerospace and a few other manufacturing verticals, representing areas where the company aims to tap opportunities over a longer time horizon.
Out of the 69 per cent contribution from the automotive segment, around 26 per cent of revenue was from new energy vehicle companies (EV-related). Business from new energy vehicle companies is likely to be the major driver of growth for Tata Tech in the foreseeable future.
The Technology Solutions segment consists of, one, revenue from reselling software (primarily product life cycle management software) and related valued added services such as implementation/support); and two, providing education solutions in imparting/enhancing manufacturing skills in relation to the latest technologies. The company owns and runs the iGetIT e-learning platform that leverages its domain expertise to impart skills. This service is used by private/public sector enterprises and education institutions.
Risks
Risks to watch out for are the impact of global economic slowdown and customer concentration risks. Tata Tech derived 60 per cent of its revenue from the top 5 clients in FY23. This risk is, to some extent, minimised by the close relationship with Tata Motors/JLR.