IPO: Tata Technologies

Tata Technologies, a leading global engineering services provider, will launch its IPO (initial public offering) on November 22, 2023. Here's a breakdown of the company's strengths, weaknesses, and growth prospects to help investors make an informed decision.

In a nutshell

• Quality: Its three-year average ROE and ROCE are 17 and 25 per cent, respectively. Additionally, it generated positive cash flows in the last two of the three financial years. However, its trade receivables accounted for around 21 per cent of the total assets in FY23.
  
• Growth: Its revenue and net profit have grown at an annual growth rate of 36 and 62 per cent, respectively, in the last three years. It also recorded an average operating margin of 15 per cent in the last three years.
  
• Valuation: The stock is valued at a P/E and P/B of 28.3 and 7.1 times, respectively, compared to its peers' median and average of 67.1 and 18.9 times, respectively.
  
• Overview: The rising need for next-gen technology, especially in the automotive segment (accounted for nearly 70 per cent of FY23 revenue) should drive growth. However, many of its clients are start-up companies (manufacturing new energy vehicles), with uncertainties pertaining to funding plans, creditworthiness, etc. Additionally, this issue is an offer for sale, and the company will not receive any proceeds.

About the company

Incorporated in 1994, Tata Technologies is a leading global engineering services provider, primarily catering to automotive original equipment manufacturers (OEMs). It has two revenue verticals:

• Services (80 per cent of FY23 revenue): Outsourced engineering and digital transformation services.
  
• Technology solution (20 per cent): Re-selling third-party software applications and services to educational institutions.

Strengths of Tata Technologies

• Strong clientele: Many of its clients, including Tata Motors and its subsidiaries (such as JLR), are leading players in their industries.
  
• It has maintained long-standing relationships with its clients in the services segment, with an impressive customer repeat rate of more than 97 per cent as of September 30, 2023.

Weaknesses of Tata Technologies

• Its dependence on Tata Motors: Tata Motors and its subsidiaries accounted for 55 per cent of FY23 revenue. Any downturn in Tata Motors' performance will impact the company significantly.
  
• Cyclicality: The cyclicality of the automotive industry, which accounted for 71 per cent of FY23 revenue, exposes the company to macro volatility. Additionally, as a significant portion of its revenue (65 per cent in FY23) arrives in foreign currency, exchange rate fluctuations may impact performance.

IPO questions

Company and business

• Are Tata Technologies' earnings before tax more than Rs 50 crore in the last 12 months?
  Yes. The company's trailing 12-month profit before tax is Rs 921 crore.
• Will Tata Technologies be able to scale up its business?
  Yes. The rising need for next-gen technologies should translate into higher ER&D (engineering, research & development) spending, especially in the automotive segment, and help it scale up.
• Does Tata Technologies have recognisable brands with client stickiness?
  Yes. The Tata Group's strong brand works in its favour. Moreover, it has maintained long-standing relationships with its clients in the services business, with a high customer repeat rate of over 97 per cent.
• Does the company have a credible moat?
  No. It faces significant competition from established players like L&T Technology Services and KPIT Technologies.

Management

• Do any of the company's founders still hold at least a 5 per cent stake in the company? Or do promoters hold more than a 25 per cent stake in the company?
  Yes. Promoter's stake will be 55.4 per cent post IPO.
• Do the top three managers have more than 15 years of combined leadership at Tata Technologies?
  Yes. Kevin Harris, CEO and Managing Director, has been associated with the company since 2005.
• Is the management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
  Yes. No information to suggest otherwise. However, SEBI conducted an investigation in 2018 pertaining to some leaked unpublished financial results of the company's promoter. Following the investigation, SEBI issued an administrative warning in 2020 to ensure strict compliance with the SEBI PIT regulations.
• Is the company's accounting policy stable?
  Yes. No information to suggest otherwise.
• Is Tata Technologies free of promoter pledging of its shares?
  Yes. Tata Technologies is free of promoter pledging of its shares.

Financials

• Did the company generate a current and three-year average return on equity of more than 15 per cent and a return on capital employed of more than 18 per cent?
  Yes. Its three-year average ROE and ROCE are 17 and 25 per cent, respectively. Its trailing 12-month (as of September 2023) ROE and ROCE are 27 and 32 per cent, respectively.
• Was the company's operating cash flow positive during the last three years?
  No. It reported negative operating cash flow in FY22.
• Is the company's net debt-to-equity ratio less than one?
  Yes. It is net cash positive as of September 2023.
• Is Tata Technologies free from reliance on huge working capital for day-to-day affairs?
  Yes. The company has sufficient cash and cash equivalents to fund its working capital requirements.
• Can the company run its business without relying on external funding in the next three years?
  Yes. It's a profitable business and has also generated positive cash flows in two of the last three financial years.
• Is Tata Technologies free from meaningful contingent liabilities?
  Yes. Contingent liabilities as a percentage of equity is 1.0 per cent.

Valuations

• Does the stock offer an operating earnings yield of more than 8 per cent on its enterprise value?
  No. The stock will offer a 4.1 per cent operating earnings yield on its enterprise value.
• Is the stock's price-to-earnings less than its peers' median level?
  Yes. The company is valued at a price-to-earnings ratio of 28.3 times compared to peers' median level of 67.1 times.
• Is the stock's price-to-book value less than its peers' average level?
  Yes. The company is valued at a price-to-book ratio of 7.1 times compared to peers' average level of 18.9 times.

Disclaimer: This is not a stock recommendation. Do your due diligence before investing.

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