The Tata Premium? Tata Tech IPO 20% Costlier Than Stake Sale A Month Ago

Tata Technologies Ltd. wants you to pay up to Rs 500 for a share that was sold for Rs 401.8 barely a month ago. What gives?

The initial public offering of Tata Motors Ltd.'s engineering, research & development subsidiary—a first from the Tata stable in nearly two decades—is a pure offer for sale of 6.08 crore shares in a price band of Rs 475–500 apiece. The promoter and investors Alpha TC Holdings Pte. and Tata Capital Growth Fund I are offloading 11.41%, 2.40% and 1.20% stakes, respectively.

At the upper end of the price band, the Pune-based company will end up raising Rs 3,042.51 crore at a post-issue implied market capitalisation of Rs 20,283 crore.

But exactly a month ago, Tata Motors sold 9.99% of its stake in Tata Technologies to TPG Rise Climate SF Pte and Ratan Tata Endowment Foundation at Rs 401.8 apiece to raise as much Rs 1,613.7 crore. The transaction, which saw as many as 4.01 crore shares change hands, pegged Tata Technologies' valuation at Rs 16,300 crore or around $2 billion.

TPG Rise is also an investor in Tata Motors' electric mobility unit.

Tata Motors is offloading 8.1 crore shares in all, including pre-IPO placement to TPG. That is equivalent to 21% stake, including 4.62 crore shares or 11.41% in the IPO.

“I think the transaction was between a willing buyer and a willing seller," Warren Harris, chief executive officer of Tata Technologies, said during a media interaction on Thursday. "In terms of the IPO, I don't think it (the TPG deal) has any influence on the plans that we've had for an extended period."

A detailed questionnaire was sent to Tata Technologies on the pricing strategy for the IPO. This story will be updated as and when the company responds.

The Tata Technologies stock—despite the implied premium—will still be cheapest among peers upon listing.

Considering the IPO price band of Rs 475–500 and diluted earnings per share of Rs 15.37, Tata Technologies enjoyed a price-to-earnings ratio of 32.5–30.8 times in the fiscal ended March 31. Rival KPIT Technologies Ltd. is the priciest stock in the Indian ER&D space with a P/E ratio of 80.31, followed by Bombay House's own Tata Elxsi Ltd. at 61.55 and L&T Technology Services Ltd. at 37.47.

In the six months ended Sept. 30, Tata Technologies clocked a revenue growth of 34% to Rs 2,526.7 crore at an operational profitability of 18.6%. In comparison, KPIT earned Rs 2,296.7 crore over the same time period with a higher margin of 20.3%.

The top lines of LTTS and Tata Elxsi came in at Rs 4,687.9 crore and Rs 1,731.9 crore respectively with an operational profitability of 19.8% and 29.7%.

Harris is unperturbed by the competition, not even from in-house rivals Tata Consultancy Services Ltd. and Tata Elxsi. He rejected any risk of cannibalisation within the salt-to-software conglomerate.

"Our value proposition represents the difference that matters to the overall market," the CEO said. "We are going to be focused upon exploiting the opportunities that affords us."