TATA IPO – Investing With A Vision

“The IPO market will be once again red hot,” said Nakul, a friend of mine discussing the gory situation of the Indian primary market. “Despite bumper listings, stocks will keep soaring higher. Newly listed companies commanding a price-to-earnings multiple of over 100 times will be justified by analysts,” said another friend joining the bandwagon with Nakul.

Sitting next to my study table, I wondered what these two hooligans were discussing. The Indian primary markets are currently mired in volatility and uncertainty, casting a gloomy shadow over the IPO landscape. Unlike the exuberant period witnessed in 2020 and 2021, where many companies flocked to the market to raise funds, the current scenario paints a starkly different picture.

The once-thriving IPO market, which saw record-breaking offerings and investor enthusiasm, now grapples with apprehension and caution. The volatility has instilled a sense of trepidation among potential issuing companies, prompting them to adopt a wait-and-watch approach. But this could soon change once the Tata group comes out with any of its anticipated IPOs – Tata Technologies, Tata Play and Tata Electronics.

Of these three, Tata Technologies is the talk of the town, hands down. Even my two friends believe this IPO could be a game-changer for the primary markets and change the entire sentiment.

Let’s find out what we know so far about the highly anticipated IPO of Tata Technologies.

It’s been 18 years, but the wait is finally over! The Tata Nano, often called the "People's Car," was conceived with the vision of providing an affordable and safe mode of transportation to the masses in India. The idea originated from Ratan Tata, the former Chairman of Tata Motors.

Tata Technologies, a subsidiary of the Tata group, played a pivotal role in developing the Tata Nano. Leveraging its engineering and automotive technology expertise, Tata Technologies collaborated closely with Tata Motors to design and engineer various aspects of the car. (Tata Motors has a 74.4% stake in Tata Technologies) One of the key contributions of Tata Technologies was in the area of value engineering. The engineering team at Tata Technologies optimised the design, worked on the manufacturing processes, and chose the materials used in the Nano to ensure cost-efficiency without compromising safety and performance.

The company was involved in developing several internal parts and systems of the Nano. Not just that but Tata Technologies' involvement in the Nano project extended beyond the technical aspects. It’s a fact that out of the four engineers who were the brain behind the project, three were engineers from Tata Technologies!

Today, the company is doing a commendable job in end to end development of electric vehicles (EVs). In the past, automakers chose vertical integration to control the supply chain closely. But now, this business model is going through a major shift. Tech companies like KPIT and Tata Technologies are evolving with time and have made themselves a mandatory part of the supply chain ecosystem (no wonder every company is on its way to becoming a ‘Tech Company’).

The Details We Know

According to its draft red herring prospectus (DRHP), the Tata Group firm is seeking to sell 9.6 crore shares at an unknown price. This would arm the business with more than Rs 4,000 crore in additional balance sheet capital. If it goes ahead with the same amount and raises Rs 4,000 crore, it would give the company a valuation of Rs 20,000 crore. The issue is an offer for sale (OFS) where shareholders will offload up to 23.6% of their paid-up share capital.

The company’s unlisted shares are quoted at Rs 900-950 per share, giving it a price-to-earnings multiple of 74x. Many might consider this a little expensive, but two of its peers – Tata Elxsi and KPIT Technologies – command a PE multiple 60x.

Interestingly, before the company filed its DRPH, the unlisted shares of Tata Technologies had scaled a record peak of Rs 6,300.

In the lead-up to its IPO, the company undertook major corporate actions. Shares of the company were divided in a ratio of 1:5, where each share with a face value of Rs 10 was brought down to a face value of Rs 2. Later, the company announced a bonus issue in the ratio of 1:1. So each share was turned into 10 shares.

Media reports state that the company could launch its IPO in the first week of June 2023.

The Numbers

It’s hard to see a world where Tata Technologies is not doing at least Rs 2,500 crore in annual revenue on the low and Rs 3,000 crore on the high end. That has been the case for the past couple of years.

FY22 was the company’s best year, where it posted a growth of 47% in its topline while the bottom line grew by 74% to Rs 437 crore. As Jaguar Land Rover (JLR) is one of the major clients contributing to more than 60% of the revenues, Tata Technologies’ performance in 2020 and 2021 was subdued due to trade tensions between US and China, among other reasons. The company currently generates around 70% of its revenue from outside India.

Source: DRHP Figures in Rs million

For the nine months ending December 2022, the company reported a revenue of Rs 30,118 million, up 15.5% on a year-on-year basis, while the profit came in at Rs 4,075 million. In the next two years, the company’s revenue is expected to grow to Rs 60 billion due to increased demand for EVs. With these types of numbers, don’t be surprised if the company is able to price the IPO higher. Once it is in the public market, retail investors seeking tech exposure are likely to bid the price up even higher.

In conclusion

Overall, the setup for Tata Technologies couldn’t have been better. Electric vehicles are touted to be the next big thing and Tata Technologies is the company that works with OEMs, manufacturers and automakers to get their vehicles on the road. The company will be the first major IPO this year and we anticipate the capital flows into the publicly listed stock to be significant. This is because the public markets are generally a smart group of folks. It is hard to fool them with a story if you don’t have the supporting data and milestones. Tata Technologies has ticked off the mark when it comes to disruption, innovation and artificial intelligence.

Also, when a subsidiary of a larger corporation plans to go public through an IPO, there is often a provision to reserve a specific portion of the IPO shares for the shareholders of the parent company. This reserved category allows existing shareholders to apply for shares in the IPO and potentially benefit from the public offering.

In the case of Tata Technologies' upcoming IPO, shareholders of Tata Motors might get the opportunity to participate in the reserved category. The reserved category typically gives shareholders a higher likelihood of getting allocated shares than the general public.