Tata IPO: Why Tata Motors Shareholders, Employees Need To Watch Out For Tata Tech's Initial Public Offering

Tata Group's most-awaited initial public offering (IPO) of Tata Technologies takes one step closer to launch. Tata Tech has filed an addendum to its draft red herring prospectus (DRHP) with market regulator Sebi. And there is good news for the shareholders and employees of the Group's automobile flagship Tata Motors.

As per the addendum, Tata Tech has reserved 10% of the total IPO size for Tata Motors shareholders and employees.

The addendum added that the maximum bid amount under the Tata Motors shareholders reservation portion by eligible employees of the company's shareholders shall not exceed Rs 2 lakh.

For the bidding in the IPO, Retail Portion, Eligible Employees Bidding in the Employee Reservation Portion and Eligible TML Shareholders Bidding in the TML Shareholders Reservation Portion are entitled to Bid at the Cut-off Price. Notably, the QIBs (including the Anchor Investors) and Non-Institutional Bidders are not entitled to Bid at the Cut-off Price.

After the addendum, Tata Motors shares rallied over 1% to touch an intraday high of Rs 620.20 apiece in early trade of BSE on Thursday.

Tata Tech's IPO comprises up to 95,708,984 equity shares. Under the IPO, Tata Motors is offloading 81,133,706 shares in Tata Tech through the IPO, while other selling shareholders are Alpha TC Holdings and Tata Capital Growth Fund I will offload o 9,716,853 equity shares and 4,858,425 equity shares respectively.

Of the total size, 50% of the portion will be reserved for qualified institutional buyers (QIBs), while 15% of the size will be allocated to non-institutional investors (NIIs), and the rest of 35% will be kept for retail individual investors (RIIs).

Tata Tech will not receive any proceeds from the IPO as selling shareholders will be entitled to it. The date of the IPO, anchor investor bidding, and price bands will be known in due course.

JM Financial, Citigroup Global Markets, and BofA Securities are book-running lead managers of the IPO, while Link Intime is the registrar.

Tata Tech had first filed the draft prospectus with Sebi on March 9, 2023.

Tata Tech is a leading global engineering services company offering product development and digital solutions, including turnkey solutions, to global original equipment manufacturers ("OEMs") and their tier 1 suppliers. The company has deep domain expertise in the automotive industry and leverages this expertise to serve clients in adjacent industries, such as aerospace and transportation and construction heavy machinery ("TCHM").

In the nine months ending December 2022, Tata Tech's revenue stood at Rs 3,011.79 crore, while the top-line stood at Rs 3,529.5 crore in FY22 and Rs 2,380.91 crore in FY21. Further, profit stood at Rs 407.46 crore as of December 2022, and Rs 436.99 crore in full-year FY22 and Rs 239.17 crore in FY21.

After analysing the DRHP of Tata Tech, Anand Rathi in their research note dated September 20th said, "focusing on verticals like auto (75% of overall revenue) and aero (part of Others, 10% of revenue), Tata Tech is a mid-size ER&D services company with ~$547m revenue. It has long-term collaborations with anchor clients (Tata Motors and JLR, 40% of auto revenue) and offers turnkey vehicle-development solutions for combustion & electric powertrains. Besides, it offers manufacturing cost reduction and after-sales solutions. It has 19 delivery centres. In aero, it recently won a contract from Airbus, assuring growth ahead. EBITDA margins are 18-19%, likely to improve along with offshoring and utilisation. It has ~$124m net cash and generates a ~22% RoE (a two-year average)."

Within technology solutions (20% of revenue in FY23), the company has a product business (72% of T's revenue), including reselling software used by manufacturing companies on PLM and MES. Its education business (28% of T's revenue) focuses on reskilling corporates and government institutes, the brokerage highlighted.

Also, it mentioned that over FY21-23, revenue clocked at a 30% CAGR, leading to a 46% EBITDA CAGR, translating to a 61.5% PAT CAGR. Net cash in FY23 was Rs10,290m and RoE was 24%.

However, among the risks, the brokerage highlighted two pointers for Tata Tech -- three-fourths of the top 50 ER&D spenders have GCCs in India; and secondly, a few client contracts of Tata Tech contain benchmarking and most-favoured client provisions. Such contracts brought 6-8% to revenue in FY20-21 and 6.11% in FY22, falling to 5.47% for 9M FY23.

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