Exile ends; Tata group company – Tata Motors subsidiary – files DHRP for IPO!

What’s Buzzing

Tata Technologies, a subsidiary (74.4%) of Tata Motors, has filed a DHRP dated March 9, 2023 with Sebi for an IPO by way of an offer for sale of up to 9.57 crore shares, representing ~23.6% of its paid-up share capital. The IPO comprises an offer for sale of (a) up to 8.1 crore shares by Tata Motors, (b) up to 0.9 crore shares by Alpha TC Holdings Pte Ltd and (c) up to 0.5 crore shares by Tata Capital Growth Fund I, each representing up to 20%, 2.40% and 1.20%, respectively, of Tata Technologies paid-up share capital.

Context

Tata group is known for one of the best corporate governance practices and has been at the forefront of creating equitable growth for the ecosystem including investors. As per media sources, Tata group’s last IPO was launched in 2004 wherein bellwether IT company Tata Consultancy Services (TCS) got listed on the Indian stock exchanges and is currently the second largest company by market capitalisation listed in India. Henceforth, with DHRP filing for Tata Technologies and potential listing this calendar year, investor interest is expected to be high given it has been almost two decades since the group had its last IPO.

Our Perspective

Tata Technologies is an E&RD firm working in the domain of electrification, autonomous, connected system, etc, in the automobile, heavy industrial machinery and aerospace domain. Tata Motors’ equity stake in Tata Technologies is pegged at 74.43% as per its last annual report with total equity investment at ~Rs 224 crore. Brief financials of Tata Technologies as of FY22 include: sales of Rs 3,530 crore (up 48% YoY), EBITDA of Rs 646 crore (up 68% YoY) with corresponding EBITDA margins at ~18.3% and PAT of Rs 437 crore (up 83% YoY) with RoE at ~20% and RoCE at ~25%. On the b/s side, it has a networth of ~Rs 2,280 crore and net positive cash of ~Rs 1,400 crore. Comparing it with listed peers, its fair value on a conservative basis is arrived at ~Rs 20,000 crore with Tata Motors stake in the company valued at ~Rs 15,000 crore and potential addition of ~Rs 40/share to our target price calculation vs. minuscule value ascribed in our SoTP based valuation currently. The proceeds from OFS i.e. ~Rs 4,000 crore will also help Tata Motors reduce debt on its balance sheet and gels well under the broader vision of going net automotive debt free over the next few years. With China reopening and worst of the chip supply side issues behind us, Tata Motors is well poised to report better financials and create wealth for investors, going forward.