Tata Technologies

Engineered for automotive growth

Pure-play manufacturer focused on automotive engineering R&D

Tata Technologies is a 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 endeavors to create value for its clients by helping them develop products that are safer, cleaner and improve the quality of life for their end-customers. The company has deep domain expertise in the automotive industry and leverages this expertise to serve its clients in adjacent industries, such as in aerospace and transportation and construction heavy machinery (TCHM).

Tata Technologies is a subsidiary of Tata Motors and is part of Tata group. The company as of September 30, 2023, had 19 global delivery centers spread across North America, Europe, and Asia Pacific. It had 12,451 employees, comprising 11,608 full-time employees and 843 contracted employees as on September 30,2023.

Tata Technologies has been positioned in the leadership zone by Zinnov Zones for Engineering Research & Development (ER&D) services ratings in 2023 for the seventh consecutive year. The company is also ranked first among all India-based ER&D service providers and is among the top two globally in electrification.

Tata Technologies primary business line is services, which includes providing outsourced engineering services and digital transformation services to global manufacturing clients helping them conceive, design, develop and deliver better products. The company‘s services business contributed Rs 3531.15 crore and Rs 1986.39 crore to its revenue from operations in Fiscal 2023 and the six-months period ended September 30, 2023, respectively, comprising 80.00% and 78.62% of its revenue from operations for the respective periods.

The company also complements its service offerings with products and education businesses (technology solutions). Through its products business, the company resells third-party software applications, primarily product lifecycle management (PLM) software and solutions and provides value-added services such as consulting, implementation, systems integration, and support.

Its education business provides phygital education solutions in manufacturing skills including up-skilling and re-skilling in relation to the latest engineering and manufacturing technologies to public sector institutions and private institutions and enterprises through curriculum development and competency center offerings through its proprietary iGetIT platform. In Fiscal 2023 and the six-months period ended September 30, 2023, the company‘s technology solutions business contributed Rs 883.02 crore and Rs 540.31 crore to its revenue from operations, respectively, comprising 20.00% and 21.38% of its revenue from operations for the respective periods.

The company is a pure-play manufacturing focused ER&D company, primarily focused on the automotive industry and is currently engaged with six out of the top 10 automotive ER&D spenders and four out of the 10 prominent new energy ER&D spenders in 2022. Its automotive revenue attributable to the services segment for Fiscal 2023 and the six months period ended September 30, 2023, was Rs 3131.47 crore and Rs 1745.76 crore, respectively, comprising 88.68% and 87.89% of its revenue attributable to the services segment for the respective periods. Additionally, its revenue attributable to the services segment from verticals other than automotive for Fiscal 2023 and the six-months period ended September 30, 2023, was Rs 399.69 crore and Rs 240.63 crore, respectively, comprising 11.32% and 12.11% of its revenue attributable to the services segment for the respective periods.

Incorporated in 1945, Tata Motors is India‘s largest automobile company. It is the market leader in the domestic commercial vehicle industry and one of the top three manufacturers of passenger vehicles in India. In June 2008, Tata Motors acquired Jaguar Land Rover (JLR) from Ford Motor Company for USD 2.3 billion. Following the acquisition, Tata Motors‘s business profile underwent a significant change from being a predominantly India-centric OEM to one with presence in the premium and luxury segment cars and sport utility vehicles (SUVs) across multiple markets such as UK, Europe, North America, China, and other overseas markets.

Object of the offer

The offer comprises a net offer of up to 5,27,36,909 equity shares, Tata Technologies employee reservation portion of 20,28,342 equity shares and the Tata Motors shareholders reservation portion of up to 60,85,027 equity shares.

The offer for sale by the selling shareholders comprises up to 4,62,75,000 shares by Tata Motors, up to 97,16,853 shares by Alpha TC Holdings PTE Ltd, and up to 48,58,425 shares by Tata Capital growth Fund II.

The company will not receive any proceeds from the offer and all the offer proceeds will be received by the selling shareholders, in proportion to the offered shares sold by the respective selling shareholders as part of the offer.

The offer size was cut from 9.57 crore shares to 6.09 crore shares after Tata Motors sold a 9.9% stake in Tata Technologies to investors led by private equity major TPG in October 2023.

Strengths

The company has deep expertise in the automotive industry. Its comprehensive portfolio of services for the automotive industry addresses the product development and enterprise optimization needs of traditional OEM‘s and new energy vehicle companies, together with their associated supply chains. The company helps its clients leverage digital technologies to optimize the manner to conceive, develop, manufacture, sell and service new products. Additionally, the company‘s long-standing partnership with its anchor clients, including the relationship with JLR since 2010, provides it with opportunities to cultivate skills and refine its value proposition for the automotive sector.

The company has differentiated capabilities in new age automotive trends including electric vehicles, connected and autonomous. Its end-to-end solutions for electric vehicle (EV) development, manufacturing and after-sales services are designed to help OEMs develop competitive EVs while maintaining a balance between cost, quality, and timelines.

The company‘s suite of digital services and accelerators are designed to help OEMs and tier 1 suppliers manage the entire digital product life cycle and engage the customer throughout the product journey. The solutions leverage its deep manufacturing domain knowledge and intimate understanding of clients. The company‘s solutions and accelerators across new product introduction (NPI)increases the efficiency of automotive, transportation and construction heavy machinery and aerospace clients in introducing new products to the market.

The company has a diversified global presence across Asia Pacific, Europe and North America and partners with many of the largest manufacturing enterprises in the world. As of September 30, 2023, the company’s clients included more than 35 traditional automotive OEMs and tier 1 suppliers and more than 12 new energy vehicle companies. Its client portfolio includes its anchor clients, Tata Motors and JLR, leading traditional OEMs like Airbus, McLaren, Honda, Ford, and Cooper Standard and tier 1suppliers as well as new energy vehicle companies such as VinFast, among others, such as Cabin Interiors and Engineering Solutions, ST Engineering Aerospace. Its key accounts comprised seven out of the top 10 and 12 of the top 20 global automotive ER&D spenders and 5 out of the 10 prominent new energy ER&D spenders globally.

The company‘s global delivery model enables intimate client engagement and scalability. Its globally distributed execution model ensures balance between onshore client proximity and offshore efficiency which is achieved through leveraging its low-cost offshore delivery model to move a greater portion of the work offshore to India and Romania.

The company‘s digital and technology capabilities and long-standing manufacturing expertise coupled with its many years of experience of providing skills training, initially through teacher led classroom training and subsequently through its proprietary iGetIT platform has positioned it to address the growing engineering up-skilling needs.

Weaknesses

Around 40% of the company‘s total operating income comes from its top two captive customers, Tata Motors and JLR, which poses significant revenue concentration risk for the company.

Intense competition in the market for engineering services could affect the company‘s pricing and have a material adverse effect on its business and financial condition.

The company‘s revenues are highly dependent on clients concentrated in the automotive segment. An economic slowdown or factors affecting the automotive segment may have an adverse effect on the business of the company.

The company expects a significant amount of its future revenue to come from new energy vehicle companies, many of whom may be startup companies. Uncertainties about their funding plans, future product roadmaps, ability to manage growth, creditworthiness and ownership changes may adversely affect the company’s business.

More than 60% of the company‘s revenues are derived from exports. As such the company is exposed to currency fluctuation risk.

The company‘s success depends in large part upon the strength of its skilled engineering professionals and management team. If the company fails to attract, retain, train, and optimally utilize these personnel, its business may be unable to grow and may have an impact on revenues and profitability. Further, increases in wages and other employee benefit expenses for such personnel could prevent the company from sustaining its competitive advantage.

There are pending litigation‘s against the company amounting to Rs 141.3 crore.

The company may be subject to client and/or third-party claims of intellectual property infringement. The company may also be unsuccessful in protecting its intellectual property rights. Unauthorized use of its intellectual property may result in the development of technology, products or services which compete with its services.

The company recently expanded its offerings in the education business and if it is unable to achieve the anticipated returns in such new growth areas, it could have a material adverse effect on the company‘s business.

The company relies on vendors and partners for software, many of whom are single-source or limited source suppliers. Such reliance or adverse change in its relationships could harm its business by adversely affecting availability, delivery, reliability, and cost.

Valuation

For the six months ended Sep 2023, consolidated sales were up by 33.8% to Rs 2526.7 crore. The OPM declined 134 bps to 18.39%, which led to a 24.8% increase in operating profit to Rs 464.75 crore.Other income increased 170.1% to Rs 60.72 crore. Interest cost increased 17.1% to Rs 9.48 crore and depreciation increased 9.1% to Rs 49.74 crore. PBT increased by 36.6% to Rs 466.25 crore. Tax expenses increased by 39.1% to Rs 114.35 crore. Net profit stood at Rs 351.9crore as against net profit of Rs 259.06 crore in the corresponding period of the previous year.

For FY 2023, consolidated sales were up by 25.1% to Rs 4414.18 crore. OPM rose 31 bps to 18.6% which led to a 27.1% increase in operating profit to Rs 820.93 crore. Other income increased 79.8% to Rs 87.75 crore, while interest cost declined 17.9% to Rs 17.98 crore and depreciation increased 10.3% to Rs 94.55 crore. PBT increased by 35.7% to Rs 796.15 crore. Tax expenses increased by 14.8% to Rs 172.11 crore. Net profit stood at Rs 624.03 crore as against net profit of Rs 436.99 crore in FY2022.

In October 2023, Tata Motors (Holding Company) sold 9.9% (36,509,794 equity shares) equity capital in the company to TPG Rise Climate SF Pte. Ltd (9%) and Ratan Tata Endowment Foundation (0.9%) at a price of Rs 401.81 per equity share,which valued the company at Rs 16,300 crore.

At the higher price band of Rs 500, the offer is made at a P/E of 28.3 times TTM (till September2023) EPS (of Rs 17.67).

Listed industry peers of the company are KPIT Technologies, L&T Technology Services and Tata Elxsi.In comparison,KPIT Technologies trades at 82.13 times its P/ TTM EPS, L&T Technology Services trades at 37.05 times its P/TTM EPS,and Tata Elxsitrades at 69.7 times its P/TTM EPS.