Tata Technologies, a subsidiary of Tata Motors, is planning to launch its initial public offering (IPO) soon. The company provides engineering, design and business process outsourcing services to automotive manufacturers across the globe.
Tata Technologies was founded in 1989 and is headquartered in Pune, India. It has over 8,500 employees working across 23 countries. Some of its major clients include Ford, Rolls-Royce, Boeing and Airbus.
The company filed its draft red herring prospectus (DRHP) with the Securities and Exchange Board of India (SEBI) in September 2017. It aims to raise around Rs 1,400 crore through the IPO which will consist of a fresh issue of shares worth Rs 500 crore and an offer for sale of up to 43 lakh shares.
Tata Technologies IPO Details
- IPO size: Approximately Rs 1,400 crore
- Fresh issue: Rs 500 crore
- Offer for sale: Up to 43 lakh shares
- Price band: Yet to be decided
The proceeds from the fresh issue will be used for repayment of debt, supporting working capital requirements and general corporate purposes.
The book running lead managers for the IPO are Axis Capital, Citi Group, HDFC Bank and Deutsche Bank. Link Intime India has been appointed the registrar for the issue.
Company Financials
Tata Technologies has delivered strong growth in recent years. In FY17, its revenue grew by 16% to Rs 2,966 crore compared to Rs 2,655 crore in FY16. Net profit increased by 21% to Rs 274 crore from Rs 227 crore during the same period.
The company has nearly tripled its profits in the last five years. Its return on net worth stands at a healthy 30%.
The company’s high growth has been driven by rising demand for outsourced engineering services and its strong client relationships. Its acquisition of Cambric Corporation in 2014 also supported its expansion in North America.
Overall, Tata Technologies has a strong financial track record and its IPO is expected to attract significant interest from institutional and retail investors alike.
Industry Outlook
The automotive engineering services outsourcing industry is growing at a rapid pace driven by rising automobile production, increasing R&D spends and focus on core competencies by automakers. Technavio estimates the global automotive engineering services market to grow at a CAGR of 8% between 2017-2021.
India has emerged as a preferred destination for outsourced engineering services due to its large pool of skilled engineers and cost competitiveness. The country is home to leading engineering services providers like Tata Technologies, Infosys and Tech Mahindra.
Tata Technologies is well positioned to capitalize on this opportunity given its deep domain expertise, global footprint and marquee clientele. Its established presence in emerging auto markets is also a positive.
Risks and Concerns
Tata Technologies derives a significant portion of its revenues from a few key customers. For FY17, its top 5 clients accounted for 46% of revenues. The loss of any major client could impact its financial performance.
The company faces competition from larger rivals like Infosys, Wipro and global pureplay engineering services providers. Attracting and retaining talent also remains a challenge.
The company has significant debt of around Rs 700 crore which could weigh on its balance sheet. However, proceeds from the IPO are expected to reduce debt considerably.
Valuations and Recommendation
At the upper end of the price band, Tata Technologies is valued at around 18 times its FY17 earnings per share. While premium valuations are justified given its dominance in a high growth industry, they limit significant listing gains.
Nonetheless, investors with high risk appetite can Subscribe to the IPO given the company’s strengths and positive industry trends. The stock is likely to see gains in the medium to long term as the company delivers on growth.
