Tata Technologies IPO Note by Sanjeedeep Mishra

 

Tata Technologies Limited (TTL/TTECH) is a prominent global engineering services company with a strong focus on product development and digital solutions. With over two decades of experience, TTL specializes in serving global original equipment manufacturers (OEMs) and their tier 1 suppliers, primarily in the automotive industry. TTL leverages its deep domain expertise in automotive to extend its services to adjacent industries such as aerospace and transportation and construction heavy machinery (TCHM).

TTL is a pure-play manufacturing-focused Engineering Research and Development (ER&D) company, primarily centered on the automotive industry. Engaged with seven of the top 10 automotive ER&D spenders and five of the top 10 new energy ER&D spenders in 2022. Automotive revenue constitutes a significant portion of its Services segment revenue.

TTL is a subsidiary of Tata Motors Limited (TML), benefiting from long-term relationships with both TML and Jaguar Land Rover (JLR). Long-standing engagements with TML and JLR (Anchor Clients) have facilitated the development of skills and capabilities, enabling TTL to pursue opportunities beyond the Tata Group.

Issue Size (Amt) INR 3,043 cr

Issue Size (Shares) 60,850,278

QIB Share (%) ≤ 50%

Non-Inst Share (%) ≥ 15%

Retail Share (%) ≥ 35%

Business Lines

1.      Services:

Primary business line focused on providing outsourced engineering services and digital transformation services to global manufacturing clients. Aims to assist clients in conceiving, designing, developing, and delivering better products.

2.      Technology Solutions:

Complementary offerings include Products and Education businesses under Technology Solutions. Products business involves reselling third-party software applications, with a focus on product lifecycle management (PLM) software and solutions. Education business provides "phygital" education solutions in manufacturing skills, offering upskilling and reskilling in the latest engineering and manufacturing technologies.

Competitive Strength

1.      Deep Expertise in the Automotive Industry: The company possesses comprehensive expertise in the automotive industry, covering a wide range of services. They address both product development and enterprise optimization needs, indicating a holistic approach to their services. This deep industry knowledge positions them well to understand and meet the specific requirements of traditional OEMs (Original Equipment Manufacturers) and new energy vehicle companies.

2.      Differentiated Capabilities in Electric Vehicles (EVs): The company has specific and differentiated capabilities in the rapidly growing market of electric vehicles (EVs). Their end-to-end solutions for EV development, manufacturing, and after-sales services suggest a full-service approach to supporting clients in the EV space. Balancing cost, quality, and timelines indicates a strategic focus on delivering competitive EVs efficiently.

3.      Marquee Set of Clients: The company has a strong client base that includes Anchor Clients, traditional OEMs, and new energy vehicle companies. This diversified client portfolio provides a balanced mix of stability and growth. Revenue stability comes from Anchor Clients and traditional OEMs, while significant growth opportunities are present with new energy vehicle companies, aligning with the evolving trends in the automotive industry.

4.      Global Delivery Model: The company's global delivery model is a key strength, enabling intimate client engagement and scalability. With a workforce of over 12,451 employees serving from 19 global delivery centers in Asia Pacific, Europe, and North America, they have a wide geographical reach. The globally distributed execution model strikes a balance between onshore client proximity and offshore efficiency, leveraging a low-cost offshore delivery model in India and Romania.

Financial Performance:

Over FY21-23, TTECH’s revenue, EBITDA and net profit grew at a CAGR of 36.2%, 45.9% and 61.5% to INR 4,414 cr, INR 807 cr and INR 624 cr, respectively, while EBITDA and net margins improved by 240bps (to 18.6%) and 409bps (to 14.1%), respectively. Return ratios – RoE and RoIC improved by 971bps (to 20.9%) and 308bps (to 36.3%) in FY23.

Industry Overview

The Global ER&D spending in 2022 reached an estimated $1,811 billion (Rs 1,48,676 billion), showcasing steady growth. Digital engineering accounted for a significant portion, totaling $810 billion (Rs 66,498 billion). This included investments in IoT, blockchain, 5G, AR/VR, cloud engineering, digital thread initiatives, advanced analytics, embedded engineering, and AI/ML. Digital engineering spend is projected to grow at a Compound Annual Growth Rate (CAGR) of approximately 16% from 2022 to 2026.

North America holds the highest share of global ER&D spend and is expected to experience rapid growth, driven by the prevalence of software and internet firms in the region.

The Asia-Pacific (APAC) region, fueled by increased ER&D spending by South-East Asian enterprises and substantial digital engineering investments from hi-tech enterprises, is anticipated to surpass Western Europe in ER&D spending.

China contributes over a tenth of global ER&D spending, with a focus on automotive, semiconductor, telecom, and software/internet industries. It is also the largest market for battery electric vehicles (BEVs).

Opportunity of ER&D Services in India:

1.      Significance: Indian Engineering Service Providers (ESPs) are crucial players in the ER&D services industry, representing Indian heritage firms without including global players with Indian centers. They contribute significantly, constituting nearly a quarter of the overall outsourced ER&D spend.

2.      Factors Driving India's Appeal: India has emerged as a preferred destination for outsourced ER&D spending by global enterprises. This preference is attributed to several factors like large talent pool, innovation ecosystem, affordable costs, maturing in-house R&D centers and geopolitical support.

3.      Growth of Indian ESPs: Indian ESPs have exhibited faster growth compared to their counterparts in Western Europe and North America. This growth is attributed to their ability to leverage India's demographic advantage, tapping into a young and skilled workforce.

4.      Market Projection: The Indian ESP market is anticipated to continue its growth momentum, with a projected Compound Annual Growth Rate (CAGR) of 14-17%, making it the second-highest growth rate globally, following Eastern Europe with a CAGR of 18-20%. In 2022, the Indian ESP market accounted for $25 billion (Rs 2,052 billion), constituting almost one-fourth of the overall outsourced ER&D spend, which totaled $105-110 billion (Rs 8,620-9,031 billion).

Day 1 of the IPO

The price range for the IPO has been set between ₹475 and ₹500 per equity share with a face value of ₹2. At the higher end of this range, the IPO is anticipated to generate ₹3,042.51 crore. This IPO is structured as an Offer For Sale (OFS) involving the sale of up to 60,850,278 equity shares.

The subscription status of the IPO stands at 6.54 times. Within this, the retail individual investors' segment has been oversubscribed 5.43 times, the portion for Non-Institutional Investors (NII) is oversubscribed 11.69 times, and the Qualified Institutional Buyers (QIB) portion has been subscribed 4.08 times.