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Tata Technologies (TATATECH IN; BUY) announced a JV with the BMW group. The JV entails building a software hub with 1,000+ resources offering automotive software and digital engineering services for the BMW group. Our back of the envelop calculation indicates the JV, at steady state, could add 4-5% to our current earnings estimates. Near-term earnings upside aside, the implications of the deal seem far reaching to us. It allays concerns that TATATECH’s parentage is a hurdle in getting business from traditional OEMs. Further, an automotive software partnership with BMW establishes TATATECH’s credentials in software ER&D, augmenting its full vehicle engineering proposition, thus expanding addressable spend. It is also an important marker in TATATECH’s efforts to diversify its revenue mix from anchor clients. Importantly, the JV corroborates the argument that rising software complexity and multiple constraints facing OEMs can trigger multi-year offshoring wave. The trend, though still early, seems undeniable. TATATECH is well positioned to ride it. BUY

* The Deal: The BMW group, as part of its efforts to expand software coding capabilities across global IT hubs, signed an agreement to form a JV with TATATECH. The JV aims to establish automotive software and IT development hub in Pune, Bangalore and Chennai. In automotive software, the focus of the JV will be on automated driving, infotainment, and digital services. In business IT, the JV will emphasise on digitalisation and automation of product development, production and sales. Tata Technologies will contribute 100 resources to the JV at inception. This is expected to grow swiftly to 1,000+ resources over the next few years.

* The significance: A deal with leading European OEMs in automotive software domain ticks many boxes for TATATECH. One, it addresses investor concerns that TATATECH’s parentage (i.e subsidiary JLR) prevents it to win traditional global automotive clients. Two, it demonstrates TATATECH’s improving software ER&D capabilities, contrary to the perception that it has predominantly mechanical ER&D skill-sets. Three, it should alleviate concerns around client concentration and offset of Vinfast ramp-down. Importantly, it strengthens our overarching thesis that growing software complexity and multiple constratins facing OEMs will likely trigger an offshoring wave in auto ER&D. TATATECH’s full vehicle EV/ICE proposition combined with string of recent partnerships – Intel, Arm, Agratas and BMW – put it in an enviable position to capture this burgeoning opportunity.

* The impact: Our back of the envelop calculation suggests the JV, at steady state, could add 4-5% to our current earnings estimates. That said, we have not built this yet as we await more details around ramp timelines and potential steady state resource count. The BMW group has been building a network of global technology partners since 2016. TATATECH’s inclusion in that network is a significant positive and should offer the company a marquee referenceable client to win more accounts/cross-sell to existing ones. At 45x FY26E PER, the valuation is now at par with KPIT/ELXSI (47x/44x). With capabilities now spanning the entire spectrum of OEMs’ ER&D spend, comparable valuations are justified, in our view. We reiterate BUY with an unchanged TP of INR 1,370.

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