Tata Technologies sets smartly low bar for IPO

KPIT Technologies

17/11/2023 02:26

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are his own.)
    By Pranav Kiran
       BENGALURU, Nov 17 (Reuters Breakingviews) - Slowly does
it. Unlike many Indian drivers, Tata is not putting its pedal to
the metal with the listing of Tata Technologies. The engineering
firm, which serves the electric-vehicle industry, is priced well
below its peers. That makes sense given the company’s dependence
on a handful of clients, Indian stocks’ expensive valuations and
a cooling in demand for EVs. 
    For its first initial public offering in nearly two decades,
the salt-to-software conglomerate Tata group is taking a
cautious approach. The listing of Tata Technologies, which will
enable existing owners to sell their shares at a price valuing
the company at $2.4 billion, or about 28 times its earnings for
the 2023 financial year. That’s a discount to peers like KPIT
Technologies  KPIE.NS  and Tata Elxsi  TTEX.NS , which trade at
much punchier multiples of 66 and 49 times, respectively.
    In theory, Tata could have turbocharged the listing above
the current $366 million it will fetch if its unit prices at the
top of the range. EVs are clearly the future of the road and
demand is expected to remain steady in the long run.
    Cars are also adding more gadgets and receiving
ever-increasing amounts of software. Globally, auto firms are
set to spend $515 billion in as little as five years to develop
and build battery-powered models, according to consulting firm
Zinnov. Tata Technologies counts large makers like Vietnam’s
VinFast  VFS.O  and Japan’s Honda Motor  7267.T  among its
clients. It helps them make vehicles lighter and manages the
rollout of software updates, among other things.
    Yet some caution is warranted. Tata Technologies started off
as an in-house engineering services provider for Tata Motors
 TAMO.NS , the group’s $30 billion auto business. As a result,
it’s still heavily dependent on a handful of clients. More than
60% of revenue from operations in the financial year ended in
March came from just five companies, including Tata Motors,
Jaguar Land Rover and VinFast. Widening its client base could
take time. 
    The listing also comes as electric-car makers are cutting
prices as demand cools. And the current price is already a
premium on the near $2 bln valuation Tata Technologies fetched
when private equity firm TPG picked up a 9% stake last month. 
    Finally, Indian stocks are expensive, making comparisons
with peers slightly misleading. The MSCI India Index trades at
19.7 times 12-month forward earnings, above the MSCI Emerging
Markets Index’s 11 times. 
    By picking a conservative price, Tata has increased the
chances the IPO will not sputter. 
    
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    CONTEXT NEWS 
     Tata Technologies set a price band of 475-500 rupees per
share for its initial public offering, per a term sheet and
newspaper ad on Nov. 16.
    Tata Motors and other shareholders will sell up to 60.9
million shares in the IPO, which will be open for bids from Nov.
21-24. The company will make its trading debut on Nov. 30.
    The company was in talks with Morgan Stanley Investment
Management, BlackRock and some U.S. hedge funds to invest in its
IPO at a $2.5 billion valuation, Reuters reported on Nov. 9
citing two sources with direct knowledge of the matter.

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 (Editing by Francesco Guerrera and Thomas Shum)
 ((For previous columns by the author, Reuters customers can
click on  KIRAN/ 
pranavkiran.t@thomsonreuters.com; Reuters Messaging:
pranavkiran.t@thomsonreuters.com@reuters.net))