On November 22, Tata Technologies’ highly competitive initial public offering (IPO) opens for subscription.
Analysts predict that the market for outsourced ER&D will grow rapidly in the future and that investors might benefit from its price range.
Despite being a comprehensive offer for sale, brokerages anticipate the company will see strong future earnings growth.
Along with four other issues, Tata Technologies’ initial public offering (IPO) is now accepting subscriptions. Analysts are supporting the ₹3,042 crore issuance because of its prospects, business strategy, and most importantly, pricing, even if investment bankers are confident in the “high-quality business” from the House of Tatas. With predictions of 70% listing returns, the grey market is also more enthusiastic than it has ever been.
Manufacturing organizations might benefit from product development and digital solutions provided by the engineering research and development (R&D) company. As per an Emkay article, the company specializes in body engineering and product and manufacture engineering within the mechanical domain. Additionally, it is expanding its capabilities in the software and embedded engineering segments.
It was projected that the global outsourced ER&D market would reach a value of $105–110 billion by 2022. Furthermore, it is anticipated that between 2022 and 2026, the market for digital engineering would expand at a compound annual growth rate (CAGR) of 16%.
Auto to EV to aviation:
The automotive industry is the primary source of revenue for the Tata Motors division. However, the manufacturing vertical can also make advantage of its turnkey solutions. Its target market is aviation, where there is a $9 billion annual market for outsourced ER&D.
According to a research by IDBI Capital, “Apart from the automotive sector, it will be a key beneficiary of tailwinds in aerospace led by capacity expansion plans of aircraft manufacturers and MRO (Maintenance, Repair, and Overhaul) activities.”
Another issue that needs attention is the expanding market for electric vehicles. The portfolio is varied, ranging from new-age electric vehicles to established OEMs, according to Prashanth Tapse, senior VP of research at Mehta Equities.
“We believe that business model outsourcing will be highly sought after in the future for engineering services and digital transformation to global manufacturing clients, assisting clients in the conception, design, development, and delivery of better products,” continues Tapse.
About 80% of its income comes from services, but it also makes 11% from its products division, which consists of reselling software developed by third parties. Additionally, it generates 9% of its income from an education vertical in which it offers “phygital” solutions for manufacturing skills.
Slower than peers, but better:
Its revenue and profit after tax climbed at a compound annual growth rate (CAGR) of 36% and 62%, respectively, in the last three fiscal years, from FY21 to FY23. According to analysts, the growth is a little slower than that of its competitors in the industry, including LTTS, Tata Elxsi, and KPIT Cummins.
“Tata Tech’s growth trajectory over the fiscal years FY16–23 is still slower than that of its peers, although it has improved over the past three years due to traction in specific accounts. The company’s short-term performance may be impacted by weakness in a major client in H1FY24 as a result of the significant full-vehicle development projects nearing conclusion, according to an Emkay research.
The corporation acknowledged that it is largely dependent on its top five clients in its risk factors in the RHP. This also applies to its main customers, Jaguar Land Rover and its parent company Tata Motors.
|Revenue from operations||₹4,414 crore||₹3,529 crore||₹2,380.9 crore|
|Net profit||₹624 crore||₹436.9 crore||₹239 crore|
Emkay also says in a brief note that their appraisals fairly address all of the aforementioned concerns. For the issue, a price range of ₹475–500 has been established. At the top of the range, Tata Tech is valued at approximately 32 times its earnings per share for FY23. KPIT is at 110x, Tata Elxsi is at 69x, and LTTS is at 40x.
According to the majority of brokerage reports, the company has given its IPO investors anything. Due to the group’s legacy, investors are eager to own the share even with the 100% OFS offer. We fervently support the company’s favorable long-term prospects. We advise it with significant listing gain because of investor-friendly pricing and ample room for growth, according to Tapse.
While Ventura claims to have strong potential for earnings development, IDBI Capital has also stated that it expects strong earnings growth in the future.
“We anticipate strong financial performance from TTECH in the upcoming years, given the gradual recovery of the global economy, rising manufacturing capex, and shift in manufacturing from US/Europe/China to India due to cost inflation and China+1 strategy,” the Ventura research stated.