Tata Tech IPO: After 2 decades a Tata group firm will test public markets

Engineering services company files DRHP; seeks to raise Rs 4,000 cr

After almost two decades, a Tata group company is all set to test the Indian public markets. Tata Motors subsidiary Tata Technologies has filed its draft red herring prospectus (DRHP) with market regulator Securities and Exchange Board of India (Sebi) for an initial public offering (IPO). Sources estimated the IPO size at around Rs 4,000 crore.

India’s IT bellwether Tata Consultancy Services (TCS) was the last Tata group firm to go public. TCS came out with its IPO in July 2004 and its shares got listed the following month.

Pune-based Tata Technologies’ proposed IPO will involve secondary sale of up to 95.7 million shares, constituting 23.6 per cent of the company. 

Promoter Tata Motors is offloading 81.1 million shares (20 per cent stake), Alpha TC Holdings will sell 9.7 million shares (2.4 per cent stake) and Tata Capital Growth Fund another 4.9 million shares (1.2 per cent stake).

The IPO will be of significance to Tata Motors, which has committed to spend $1.8 billion in the EV segment during 2022-27.

Besides funding its growth plans, the capital raised from the Tata Technologies IPO will also allow the company to lighten its debt burden. Tata Motors has struggled financially in the last few years due to losses at its Jaguar Land Rover (JLR) unit and poor financial performance of its domestic business. The company reported a net loss at consolidated basis in the last four consecutive years since 2018-19. The trend has continued in the current fiscal. Tata Motors reported consolidated net loss of Rs 3051.3 crore during the first nine-months of FY23.

A combination of poor profitability and capex at its domestic and JLR division has resulted in a significant rise in Tata Motors’ indebtedness. The company reported consolidated gross debt of Rs 1.44 trillion at the end of September 2022 (HIFY23), up from Rs 1.06 trillion at the end of FY2018-19. The debt figure includes the borrowing of its vehicle finance unit. The company has also not paid equity dividend since 2015-16.

A partial monetisation of its equity stake in Tata Technologies will improve Tata Motors’ finances. Tata Motors has cumulatively invested Rs 224.1 crore in Tata Technologies, according to Capitaline database.

Tata Technologies, led by Warren Harris, has been providing global engineering services to global clients. These services include product development and digital services to original equipment manufacturers. Some of the key verticals which it serves are auto including EVs, aerospace, transport and construction.

The company’s revenue from operations for the nine-months period ended December 31, 2022 and December 31, 2021 was Rs 3011.79 crore and Rs 2607.3 crore, respectively. The number of employees (both full time employees and contracted personnel) at the company has grown from 8,620 as of March 31, 2020, to 11,081 as of December 31, 2022.

Tata Motors and JLR are among the top five clients for Tata Technologies. It also counts VinFast, a southeast Asian EV OEM, among its most important clients.

Tata Technologies operates in the engineering and product development space, which has been growing at a fast pace. The global ER&D (engineering, research and development) spend for 2021 was approximately $1.64 trillion and is expected to grow to approximately $2.28-2.33 trillion by 2025. The ER&D spend outsourced to third party service providers reached $85-$90 billion in 2021 and is anticipated to grow at a 10-12% CAGR between 2021 and 2025, according to a Zinnov report mentioned in the firm’s red herring prospectus.