IPO Analysis: Tata Technologies Ltd.

IPO Analysis of Tata Technologies Ltd.

Tata Technologies Limited (“Tata Technologies”) was incorporated on August 22, 1994. Promoted by Tata Motors Ltd (“TML”), Tata Technologies is a leading global engineering services company offering product development and digital solutions including turnkey solutions to global OEMs and their Tier-1 suppliers. The company has deep domain expertise in the automotive industry and leverage this expertise to serve their clients in adjacent industries, such as in aerospace and transportation and construction heavy machinery. The company was incorporated as ‘Cor

e Software Systems Private Limited’ on August 22, 1994 and, subsequently, their name changed to ‘Tata Technologies Limited’ in 2001. In 2005, they expanded through the acquisition of INCAT International plc, a global product solutions and services provider serving the automotive and aerospace industries worldwide. Post-merger integration, they began their capabilities incubation phase, building strategic partnerships with Anchor Clients and expanding to non-Anchor Client accounts. In 2013, they acquired Cambric Corporation, adding Romanian delivery centres to their portfolio and expanding their industrial machinery engineering capabilities. In 2017, they acquired Escenda Engineering AB in Sweden, further expanding their global footprint. During the diversification phase, they have expanded their client base, building processes  for acquiring and engaging with new clients and showcasing their capabilities as a global engineering services provider. Currently, they have 1 direct subsidiary and 10 indirect subsidiaries.

Industry Research:

ER&D services is defined as the set of services offered to enterprises on activities which involve the process of designing and developing a device, equipment, assembly, platform, or application such that it may be produced as a product for sale through software development or a manufacturing process. The ER&D services are broadly broken down into software, embedded, and mechanical engineering services. Players in the ER&D services industry typically focus on the design, development, testing, rollout, and maintenance aspects of the product and process development chain, and not on mass manufacturing. The ER&D services market is comprised of product engineering services and process engineering services. Product engineering services most commonly address the product development lifecycle for companies, while process engineering services involve services to assist in the production of facilities and processes that produce value-added outputs and components through plant design engineering, manufacturing engineering, industrial engineering, and process control systems.

In 2022, ER&D spending continued its upward trend, marking another significant year of steady growth. Enterprises, committed to sustaining innovation while funding it through cost optimization and productivity improvements, have maintained their focus on future-proofing and transformation, with an intensified emphasis on digital engineering. The engineering services and technology solutions industries are marked by rapid technological changes, evolving industry standards, shifting client preferences, and the introduction of new products and services. Currently, global ER&D spending is estimated at $1,811 billion (₹1,48,676 billion). The current macro environment presents a complex landscape, with inflation peaking in certain countries and persistent concerns about ongoing global recessionary pressures, alongside sustainability and energy challenges. However, as companies strive for strategic endurance, there is a renewed focus on investments in innovation, and ER&D spending isexpected to remain resilient, continuing its steady growth trajectory. Out of the $1,811 billion (₹1,48,676 billion) ER&D market in 2022, $810 billion (₹66,498 billion) was attributed to digital engineering spending. This mainly comprised of spending on new-age technologies like the Internet of Things (“IoT”), blockchain, 5G, augmented reality, virtual reality, cloud engineering, digital thread initiatives, advanced analytics, embedded engineering and generative artificial intelligence (“AI”), among others. Additionally, digital engineering spending is expected to grow at a compound annual growth rate (“CAGR”) of approximately 16% from 2022 to 2026.

Indian ESPs are defined as Indian heritage players and do not include global players with Indian centers. They account for almost a fourth of the overall outsourced ER&D spend, while more than 85% of the top 50 R&D spenders have a GCC presence in India. With a talent pool that adds 2.3 million science, technology, engineering, and mathematics (“STEM”) graduates annually, India’s software engineering maturity and abundant digital engineering talent are drawing enterprises to outsource end-to-end product/platform development to the region. India has emerged as a favorable destination for outsourced ER&D spend by global enterprises due to its large talent pool, innovation ecosystem, affordable costs, maturing in-house R&D centers landscape and geopolitical support. Indian ESPs have been growing faster than their Western European and North American counterparts owing to their ability to leverage the demographic advantage in India. The country’s robust talent pool offers supply-side options to create robust talent chains across traditional as well as digital areas. The Indian ESP market is expected to grow at a CAGR of 14-17% (second only to Eastern Europe which has YOY rate of 18-20%) and accounted for $25 billion (₹2,052 billion), equating to nearly one- fourth of the overall outsourced ER&D spend of $105-110 billion (₹8,620-9,031 billion) in 2022. 

Eastern Europe has emerged as a hub for organizations to set up their global centers. Among the Eastern European countries, Romania has emerged as a key R&D hotspot in recent years due to its talent and innovation ecosystem, presence of global companies, and low-cost structure. While traditional engineering services were restricted to the design and manufacturing portion of the value chain, digital technologies have expanded the scope of ER&D services to almost every segment across the value chain. While platform-based architecture, computer-aided engineering/finite element method (CAE/FEM), and simulation-based analysis are key areas in the pre-manufacturing phase, ER&D services find enormous scope during manufacturing with services ranging from body and chassis design, to embedded workloads, all the way to validation and testing.

Original equipment manufacturers (such as Volkswagen, Mercedes and Toyota) are the original producers of a vehicle’s components and are at the top of the automotive supply chain pyramid, whereas Tier-1 suppliers (such as Bosch, Denso and ZF) are direct suppliers of independent parts for OEMs and aftermarket. The automotive outsourced ER&D market is pegged at $18-20 billion (₹1,478-1,642 billion) in 2022 (close to 20% of the overall outsourced ER&D spend) and is expected to grow at a faster rate than overall automotive ER&D spending during the period 2022-2026. The global share of digital technologies in automotive ER&D spend is expected to grow at a CAGR of approximately 16% from 2022 to 2026, increasing from 26% of total spend to 36% in the same period. Engineering service providers are being leveraged for silicon design, embedded software, and integration of digital technology, thus accelerating the growth opportunities for engineering services outsourcing.

With the increasing adoption of digitalization and high requirements for technology enabled skills in the automotive industry, a lack of skilled workforce is expected to drive the outsourcing opportunity to plug the growing skills gap. The challenge is that most of traditional skill set is ICE-based, and the shift towards EVs has resulted in European automakers struggling to hire talent. With supply-side constraints plaguing automakers, this is expected to translate into an opportunity with the expertise of ESPs and their ability to build scalable engineering teams crucial for automotive enterprises. As companies focus on ACES initiatives, they seek to outsource body engineering segments completely to third-party service providers. Body engineering presents the largest opportunity for ESPs, as the segments account for more than 40% of the outsourced spend. Further, hybrid and electric mobility is expected to be the fastest growing sub-segment in the outsourced market, with enterprises looking to work with ESPs with full body EV capabilities.

Traditional OEMs typically look to have an increased autonomy over the product development process for new models as it is core to the enterprise. However, once the first model is out, the propensity to outsource work to the ESP ecosystem is higher. At the same time, multiple new-age OEMs (for example - Canoo, Fisker, Li Auto, Nikola, NIO and Rivian) have collaborated with and outsourced work to ESPs for new products as they focus on reducing product development time and cost. The automotive outsourced ER&D market spend is dominated by Europe, accounting for three-fourths of the total ER&D spend for the segment. German OEMs such as Volkswagen Group, Daimler and BMW are some of the biggest outsourcers in the areas of body engineering. APAC accounts for approximately 12-15% of the automotive outsourced ER&D market spend with Japanese OEMs such as Toyota, Honda and Nissan amongst the largest outsourcers in APAC. Ford and GM are some of the top outsourcers from North America. The region accounts for around a tenth of the automotive outsourced ER&D market spend.

The aerospace sector is experiencing a notable resurgence following the challenges brought about by the pandemic. With air travel gradually rebounding and global demand for aviation services increasing, aerospace companies are reinvigorating their R&D efforts. The ER&D spend for the aerospace and defense industry for the year 2022 stood at $52 billion (₹4,269 billion) and is estimated to grow by $10 billion (₹821 billion) to reach $62 billion (₹5,090 billion) in 2026. Currently the highest spend comes from Europe, accounting for nearly 48% of the overall spend, followed by North America. France is a key geography, accounting for more than 20% of the overall ER&D spend in this industry. The top 10 aerospace ER&D spenders account for more than 65% of the overall spending of the industry. The aerospace outsourced ER&D market currently stands at approximately $9-10 billion (₹739-821 billion) for 2022 with service providers being leveraged across the value chain. The outsourced ER&D opportunity for this industry is estimated to continue to grow at more than 10% over the period from 2022 to 2026.

The global TCHM ER&D spend was pegged at $43 billion (₹3,530 billion) in 2022 and is estimated to grow to $49 billion (₹4,023 billion) by 2026. The TCHM service provider outsourced ER&D market is currently pegged at $2.5-3 billion (₹205- 246 billion) and is expected to grow to $3.5-4 billion (₹287-328 billion) by 2026. Mechanical design and manufacturing engineering are the key outsourced sub segments for the TCHM industry. The TCHM industry is investing in various digital engineering initiatives to improve asset utilization and optimize performance. Key focus areas include smart factories, electrification, and connected equipment. While TCHM industry lags behind the automotive sector in innovation by 3-5 years, they have similar regulatory, engineering and technology challenges which will accelerate the demand for outsourced engineering services. Companies like John Deere and Volkswagen have announced investments in electrification, showing that the industry is following the trends in the Automotive sector. Key trends for the future of the industry include electrification, autonomous fleet, connected equipment, and reduced carbon footprint. OEMs are also looking to increase revenue and bring new products to market faster, reduce costs, improve customer experience, and rapidly scale up production and accelerate product development.

Investment Rationale:

1. Expertise in Automotive

Company’s automotive ER&D services span the entire automotive value-chain and includes concept design and styling, tear down and benchmarking (“TDBM”), vehicle architecture, body engineering, chassis engineering, virtual validation, ePowertrain, electrical and electronics, connected, manufacturing engineering, test and validation and vehicle launch. In addition to the spectrum of discrete service offerings, they also offer turnkey full vehicle development solutions for traditional internal combustion engine (“ICE”) powered vehicles, plug-in hybrids (“PHEV”) and battery electric vehicles (“BEV”) which have been developed over a period of 10 years.

Their automotive domain expertise and deep understanding of client requirements underpins the approach they take to helping their clients leverage digital technologies to optimize the manner in which they conceive, develop, manufacture, sell and service new products. Additionally, their long-standing partnership with their Anchor Clients, including the relationship with JLR since 2010, provides them with opportunities to cultivate skills and refine their value proposition for the automotive sector. Their turnkey machine development capabilities for TCHM have been derived from their full vehicle proposition and their expertise in automotive tooling design has underpinned their proposition for the aerospace maintenance, repair and operations (“MRO”) sector.

2. Differentiated capabilities in new age automotive trends – electric vehicles (“EVs”), connected and autonomous

The first step in creating EVs is a compelling vehicle concept and engineering design. Company’s end-to-end solutions for EV development, manufacturing and after-sales services are designed to help OEMs develop competitive EVs while maintaining a balance between cost, quality and timelines. Their suite of product engineering solutions including outsourced turnkey EV development, product benchmarking, electric vehicle modular platform (“eVMP”) for accelerating product development timelines and their light-weighting framework can help OEMs develop products within competitive timelines. Further, their suite of omnichannel after-sales solutions powered by the Power of 8 platforms can help OEMs engage with their EV customers early and manage the entire customer journey effectively. They have a long-standing history of developing EV capabilities since as early as 2010. In 2012, they unveiled an electric vehicle technology demonstrator (“eMO”) at the North AmericanInternational Automotive Show in Detroit.

Global automotive companies are increasing their research and development (“R&D”) investments across the broader theme of ‘ACES’ technologies – autonomous, connected, electrification and shared. The shift to alternative propulsion systems and specifically electric vehicles has enabled this transformation. Tata Technologies offers a one stop platform for automotive OEMs to meet new engineering needs across the value chain. 

Their growing reputation in the lightweight body structure domain has strengthened their client relationships with established OEMs and has led to new client acquisitions with new energy vehicle companies across the world. They have developed a wide range of differentiated capabilities and offerings for EV projects, including EV architectures, over-the-air (“OTA”) connected services, level 2 and level 3 autonomous driver assistance systems (“ADAS”), embedded electronics, EV system design, embedded solutions, computer aided engineering (“CAE”), vehicle engineering and integration, prototype build and test and program management.

Through eVMP they help reduce vehicle development timelines by offering a scalable and flexible option for both traditional OEMs and new energy vehicle companies without a BEV platform. Their eVMP platform helps in faster compatibility checks to support multiple system selections, achieves a higher degree of uniformity, scalability and de-risking through virtual validation and allows for rapid configuration changes to client dimensions. Their eVMP platform helped accelerate the development timeline for VinFast, a Southeast Asian electric vehicle OEM. They also developed a proprietary connected vehicle cloud platform ‘TRACE’ to provide solutions across the automotive valuechain.

3. Strong digital capabilities bolstered by proprietary accelerators

Company’s suite of digital services and accelerators are designed to help OEMs and Tier-1 suppliers manage the entire digital product life cycle and engage the customer throughout the product journey. The solutions leverage their deep manufacturing domain knowledge and intimate understanding of clients. Their solutions and accelerators across new product introduction (“NPI”) increase the efficiency of automotive, TCHM and aerospace clients in introducing new products to the market. Their range of offerings span across digital product development solutions.

Digital technologies are changing the way the manufacturing sector is developing, building, and servicing products around the globe. These technologies create value by connecting machines through a ‘digital thread’ across the value chain—making it possible to generate, securely organize, and draw insights from disparate sources of data. Product lifecycle management (“PLM”), manufacturing execution systems (“MES”), and enterprise resource planning (“ERP”) solutions are the fundamental aspects of product realization. The cornerstone of any ‘Digital Thread’ is strong digital integration across the digital foundation of any manufacturing enterprise, which includes PLM, ERP, and MES.

Tata Technologies has built expertise in integration across PLM, ERP and MES solutions by developing proprietary integration accelerators. They also have experience deploying Industry 4.0 at scale with the ability to identify and deploy emerging technologies, tools, and solutions to transform the manufacturing operations of their clients.

4. Marquee set of clients across anchor accounts, traditional OEMs and new energy vehicle companies

The company has a diversified global presence across Asia Pacific, Europe and North America and partner with many of the largest manufacturing enterprises in the world. As of September 30, 2023, their clients are comprised of more than 35 traditional automotive OEMs and tier 1 suppliers and more than 12 new energy vehicle companies. Their client portfolio includes their Anchor Clients, TML and JLR, leading traditional OEMs like Airbus, McLaren, Honda, Ford, and Cooper Standard and tier 1 suppliers as well as new energy vehicle companies such as VinFast among others such as Cabin Interiors and Engineering Solutions, ST Engineering Aerospace. Their key accounts are comprised of 7 out of the Top-10 and 12 of the Top- 20 global automotive ER&D spenders and 5 out of the 10 prominent new energy ER&D spenders globally.

They actively engage on multiple projects with clients and have a high repeat rate of over 97.72%, 98.38%, 97.24% and 95.71% and across their Services business for the 6-months period ended September 30, 2023, Fiscal 2023, Fiscal 2022 and Fiscal 2021, respectively. They have developed a strong client NPS globally, achieving a NPS of 58 for the 12 months ended September 2023, 64 for the 12 months ended September 2021 and 63 for the 12 months ended September 2021.

While their deep strategic relationships with their Anchor Clients accounted for ₹ 1,421.04 crore of revenue in Fiscal 2023, (40.24% of revenue attributable to the Services segment), the revenue from non-Anchor Clients, as a percentage of revenue attributable to the Services segment, has increased from 48.60% to 59.66 % to 59.76% between Fiscal 2021, Fiscal 2022 and Fiscal 2023, respectively. They have also increased the scale of their key accounts through the cross-selling of their services offerings which has increased their client and project level profitability. In addition, between Fiscal 2021 and Fiscal 2023, their new energy vehicle company clients such as VinFast, have increased their spend with them.

5. Proprietary e-learning platform leveraging the manufacturing domain knowledge to tap into the large upskilling and reskilling market

Company’s digital and technology capabilities and long-standing manufacturing expertise coupled with their many years of experience of providing skills training, initially through teacher led classroom training and subsequently through their proprietary iGetIT platform, has positioned them to help address the growing engineering upskilling needs.

They leveraged their manufacturing expertise and their iGetIT platform to impart industry-oriented, job-specific skills for reskilling engineers and technicians. The platform has over 25,000 hands-on exercises and over 2,000 courses across various skill sets, including design thinking and multiple computer aided design (“CAD”) software. Their iGetIT platform is used by enterprise clients as well as public sector institutions in India to train engineering, polytechnic and industrial training institute (“ITI”) students. They have partnered with 4 state universities and 6 private universities along with over 150 private enterprises that use their iGetIT platform, as of September 30, 2023. Their library of digital engineering and manufacturing training programs and competency centre labs enable organizations to onboard employees through personalized programs and upskill and reskill employees based on skills gaps.

Their partnerships in India have recently extended beyond their iGetIT offering to the development of an entire “phygital” proposition. They have recently signed a Memorandum of Agreement (“MoA”) with a State Government for a period of 10 years to upgrade and modernize 150 ITIs across such state and signed a memorandum of agreement with a State Government for a period of 10 years to upgrade 36 ITIs to meet Industry 4.0 demands. They have also collaborated with another State Government to establish a center for invention, innovation, incubation and training (“CIIIT”) to facilitate upskilling in areas related to advanced technologies. In addition, they have upgraded 221 government ITIs and are in process of upgrading 417 more in over the next 2 years across states in India. As of September 30, 2023, they have entered into engagements with 6 State Governments to transform their ITIs into centers of excellence (“CoEs”) as part of their initiatives to improve employability of youth.

6. Well-recognized brand with experienced Promoter, board of directors and management team

The company benefits from the strong track record, reputation, and experience of their Promoter, TML, which is part of the Tata Group. The Tata Group is one of the leading business conglomerates in India, with a heritage of over 100 years, comprising of more than 28 equity listed companies across multiple verticals such as technology, steel and automotives. The Tata Group was recognized as the most valuable Indian brand in 2022 in the Brand Finance India-100, 2022 report.

Their promoter is one of the leading global automobile manufacturers in the world, providing integrated and smart e-mobility solutions to customers in over 125 countries. With an employee base of over 81,800 as of March 31, 2023, their promoter’s manufacturing facilities are located across India, the United Kingdom, and South Korea. Their promoter is the only OEM in India that offers an extensive range of mobility solutions, covering cars, utility vehicles, trucks, and buses. Their Promoter has a strong global network of 90 subsidiaries, equity-accounted associates, and joint ventures, including JLR in the United Kingdom and Tata Daewoo in South Korea. A broad portfolio of automotive products is offered by the promoter, ranging from sub-1 ton to 55-ton gross vehicle weight trucks (including pickup trucks) to small, medium, and large buses and coaches to passenger cars, premium luxury cars and SUVs.

The company is well positioned to benefit from the Tata group’s business priorities to increase investment in EVs, aerospace and defense. The ‘One Tata’ philosophy further benefits group companies with focus on utilizing scale, simplification, and synergies between Tata group companies. In addition to benefiting from the high standards of corporate governance and brand value associated with the Tata Group, they also have the opportunity to leverage and benefit from the Tata Groups’ global network for exploring potential business opportunities and acquiring direct access to senior decision makers at potential end clients.

Management Profile:

Savitha Balachandran is the Chief Financial Officer of the company. She joined the company on July 1, 2020. She is responsible for global finance and procurement in the company. Prior to joining the company, she was associated with the company promoter, Tata Motors Ltd.

Vikrant Gandhe is the Company Secretary and Compliance Officer of the company. He joined the company on July 16, 2018. He is responsible for global company secretarial function in the company. Prior to joining the company, he was associated with Synechron Technologies Pvt Ltd. and Tech Mahindra Ltd

Pawan Kumar Bhageria is the President (Global HR, IT, Admin and Education) of the company. He joined the company on September 18, 2012. He is responsible for delivery leadership, sales, client leadership for services and education and global human resources leadership in the company. Prior to joining the company, he was associated with General Motors Technical Centre India Pvt Ltd.

Nachiket Paranjpe is the President – Automotive Sales of the company. He joined Tata Technologies Europe Ltd, one of the Subsidiaries of the company on August 1, 2019. He is responsible for sales and client engagement at JLR. Prior to joining the company, he was associated with KPIT Technologies GmbH.

Sriram Lakshminarayanan is the President and Chief Technical Officer of the company. He joined the company on September 3, 2021. He is responsible for leading the practice organization, strategic monetization of intellectual property and assets as well as the products business. Prior to joining the company, he was associated with Complete Business Solutions (India) Ltd and IBM India Pvt Ltd.

Aloke Palsikar is the Executive Vice President and Head - Aerospace and Industrial Heavy Machinery Sales of the company. He joined the company on August 16, 2021. He is responsible for global sales for non-automotive industry verticals. Prior to joining the company, he was associated with Siemens Ltd, Larson & Toubro Infotech Ltd, Tech Mahindra Ltd and Satyam Computer Services Ltd.

Shailesh Pramod Saraph is the Executive Vice President and Global Head – Engineering, Research and Development of the company. He joined the company on April 1, 1997. He is responsible for the global delivery for engineering services across the company. Prior to joining the company, he was associated with the Promoter, Tata Motors Ltd.

Geena Binoy is the Executive Vice President and Global Head (Digital Enterprise Solutions) of the company. She joined the company on November 1, 2000. She is responsible for global delivery for digital enterprise solutions. Prior to joining the company, she was associated with the Promoter, Tata Motors Ltd.

Anjali Balagopal is the Executive Vice President and General Counsel of the company. She joined the company on July 6, 2020. She leads the legal and compliance functions of the company globally and is also responsible for intellectual property and data protection. Prior to joining the company, she was associated with Infosys Ltd and with Juris Corp.

Valuation:

At the IPO price band of Rs. 475-500/share per share, the offer is valued at 32.5x/30.9x its FY23 EPS at upper andl ower price band. The issue price is at steep discount of 69%/53% to its peers KPIT/Tata Elxsi on FY23 financials. At annualised EPS (based on H1FY24 PAT) the IPO is valued at 28.8x it FY2024E EPS. The Tata Group is coming out with an IPO after a gap of almost two decades and the IPO seems reasonably priced versus peers and offer favourable risk reward for the investors. Tata Technologies future outlook is promising given its proven track-record, established capabilities in ER&D services and focus on adjacencies of Aerospace & TCHM (transport and construction heavy machinery).

Key Risks:

1.) Material portion of revenue is derived from top 5 clients: The company derives a material portion of the revenues from its top 5 clients by revenue generated in FY2022 which include Tata Motors Limited and certain of its subsidiaries (other than JLR) and JLR. If any or all of the Top 5 clients were to suffer a deterioration of their business, cease doing business with the company or substantially reduce their dealings, revenues could decline, which may have a material adverse effect on the business, results of operations, cash flows and financial condition.

2.) Revenues highly dependent on clients concentrated in the automotive segment: An economic slowdown or factors affecting the Automative segment may have an adverse effect on their business, financial condition and results of operations. The company faces risks due to a high concentration of clients in the automotive segment.

3.) The business relies on skilled engineers and a management team: Their ability to secure new contracts and expand their services may be hindered if they struggle to hire and retain qualified personnel, potentially leading to a decline in revenue. The competition for engineering and technology professionals is significant, especially in the locations where they operate. They have invested in talent attraction and development, but there’s a risk of challenges in hiring and training skilled professionals. Losing senior executives or key personnel to competitors could result in significant losses and knowledge leakage.

Financials:

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