Tata Tech valuation zooms post IPO, but can growth keep pace?
Informist, Friday, Dec 1, 2023
By Akshata Gorde
MUMBAI – Investors' faith in the Tata brand, a decent valuation, and robust market sentiment helped Tata Technologies post the highest listing gains for any initial public offer since November 2021, but the question now is whether the company's growth can keep pace with investors' expectations, as evident in the now expensive valuation.
Shares of the engineering and digital transformation services provider listed at 1,200 rupees on Thursday, a premium of 140% to the issue price of 500 rupees. While listing gains were expected, the rise was much higher than the grey market premium of 83%, which implied listing at 915 rupees.
The Company's Shares Had Listed At 1,200 Rupees On Thursday, A Premium Of 140% To The Issue Price Of 500 Rupees.
"While a decent gain was expected, today's (Thursday) listing did exceed our expectations...hard to put a number, but Street surely expected a solid listing for Tata Technologies," one of the book-running lead managers said, asking not to be identified.
The euphoria around Tata Technologies' initial public offering – it was the first Tata group company to have gone public in nearly two decades – pushed the stock further up after listing to hit a high of 1,400 rupees, up 180% from the issue price. The stock finally closed at 1,313 rupees on Thursday, up 163% from the IPO price.
The overall market sentiment also played a role in the bumper listing, as the Nifty 50 rose to over 20100 points on Thursday amid an improving macroeconomic outlook and good corporate earnings, technical analysts said.
Almost all analysts had recommended subscribing to the IPO, betting on the company's brand name, valuations, and automotive expertise, which led to the IPO being subscribed 69.43 times. With the issue price at the higher end of the price band of 475-500 rupees apiece, Tata Technologies raised 30.43 bln rupees through an offer for sale by promoter Tata Motors and investors Alpha TC Holdings and Tata Capital Growth Fund 1.
The last time an IPO generated this kind of returns was in November 2021, when Latent View Analytics Ltd and Sigachi Industries Ltd posted listing gains of 148% and 270%, respectively.
After the spike on day one, the stock has become expensive compared to the "reasonable or cheap" value set by the company and book-running lead managers, according to several analysts. However, a few analysts consider the current valuation as fairly in line with peers such as L&T Technologies Services Ltd, KPIT Technologies Ltd, Cyient, and Tata Elxsi Ltd.
"The 500-rupee valuation was cheap compared to peers and now the valuation is fair," said Omkar Tansale, senior research analyst at Axis Securities Ltd. "Don't think people will book profit or anything and the stock won't go below 1,000 rupees," he added.
At the issue price of 500 rupees, the price-to-earnings multiple was 28 for the current financial year, assuming the company will double the 8.67 per share earnings it clocked for Apr-Sep.
At the listing price of 1,200 rupees, the PE multiple becomes 69 and at Thursday's closing price of 1,313 rupees, the PE multiple rises to 76. Both are sharply higher than the PE multiple of any company on the Nifty IT index; indeed, the highest forward PE for a company in the index is 38, for L&T Tech.
When asked whether Tata Technologies' growth will be able to justify the expensive valuation, Sumit Pokharna, vice-president of research at Kotak Securities Ltd, said, "Let's put it this way. KPIT Technologies, which is growing at a much faster pace compared to others, is also very expensive, and so we have a 'sell' rating on the stock." He also said that most growth opportunities for Tata Technologies had already been factored into the stock price.
Echoing this, Rajat Sharma, founder and chief executive officer of portfolio management services firm Sana Securities, said in a report, "As a long-term investor, if you get the allotment in the IPO, it would be safe to sell the stock and re-enter at a lower level in a few months when the frenzy around this sector settles down."
Today, shares of Tata Technologies opened higher but fell soon after to trade 6.7% lower at 1,225.25 rupees on the National Stock Exchange at 1415 IST.
The "fear of missing out" among investors might act as a temporary tailwind for the stock in the near term, but chances of cannibalisation or overlap with Tata Elxsi, and concentration of revenue from Tata Motors and Jaguar Land Rover may be concerns in the long term, several analysts said.
Tata Elxsi, also from the Tata group, is a design and technology consulting company that offers product design and engineering services across industries such as automotive, media, and communications, while Tata Technologies provides product development and digital solutions to original equipment manufacturers, resulting in a possible overlap of customers.
Another worrying factor for analysts is the high client concentration risk, with Tata Motors and Jaguar Land Rover, its "anchor clients", contributing almost 38% to the total revenue and 46% to the services segment in Apr-Sep. The company's services segment contributed nearly 79% to the total revenue for Apr-Sep.
The revenue concentration risk runs deeper than the dependence on the Tata group. As much as 57% of the company's Apr-Sep total revenue, and 71% of the services segment revenue came from only the top five clients.
However, one positive is that the engineering research and development segment has been growing at a compounded annual rate of around 12% over the past five years, and is expected to grow at 14-17% over the next decade, said Rajat Sharma of Sana Securities.
During 2022-23 (Apr-Mar), Tata Technologies' revenue rose 25% over the previous financial year, lower than the 27-38% growth registered by Tata Elxsi, Cyient, and KPIT Technologies, but higher than the 22% growth seen by L&T Tech. The growth in Tata Technologies' profit after tax was the strongest among its peers at 43%, the next best being KPIT Tech's 39%.
The company has shown improvement in the first half of the ongoing financial year ending March, with revenue growth of 34% on year at 25.26 bln rupees and a 35% increase in profit after tax at 3.52 bln rupees.
Tata Technologies, which has both services and technology solutions as business lines, had posted revenue of 41.14 bln rupees and a profit after tax of 6.24 bln rupees for 2022-23. End