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Making the right moves

Tata Technologies’ (TATATECH IN) 3QFY24 performance tracked expectations. Consol. revenues grew by 1.9% QoQ in cc terms. Services (78% of rev.) was soft (-0.5% cc QoQ) – led by seasonality and anticipated ramp-down in Vinfast ( a top-3 account). Usual year-end spike in Product segment pushed up Technology Solutions revenues (+4.5% QoQ), making up for a soft Services. Operational efficiency and lower sub-con drove 140bps QoQ expansion in EBITDA margin. Management expects Vinfast to bottom out in Q4FY24. Besides, strong deal win in Q3 and ramp-up in Airbus position the company well for growth acceleration in FY25. As we noted in our recent initiation (Charged up for a long-range, 8 Jan 2024), TATATECH is a strong play on the electrification opportunity in the automotive sector. Its recent partnerships with chip makers Intel and ARM suggest it is expanding its capabilities (and TAM) to address SDV opportunity as well. That bodes well for long term growth. Management’s aspiration to drive 200-250bps margin expansion over the medium term means earnings growth could be higher. These should help sustain its current valuations. We continue to value the stock at 60x 24-M fwd EPS. Our TP rolls forward to INR 1,370. BUY.

3QFY24 - on expected line: Consol. revenues grew by 1.9% QoQ in cc terms net of - 0.5%/+4.5% QoQ growth in Services/Technologies Solutions segment. Services revenues were impacted by holidays and anticipated ramp-down in Vinfast. Technology Solutions, on the other hand, was aided by year-end pick up in Product segment (reselling business). EBIT margin expanded by 140bps QoQ aided by higher offshoring (+150bps) and lower sub-con (-260bps QoQ). PAT came in at INR 1.7bn (+6% QoQ).

Upbeat outlook: TATATECH’s headcount has increased by 8% from FY23-end despite ongoing ramp-down in Vinfast. This indicates that the company has been able to redeploy resources and back-fill Vinfast revenues. Strong demand from anchor clients (TAMO + JLR) and other EV programs are helping. Vinfast’s decline will be complete in Q4 as the project transitions from development to launch support, paving the way for sequential growth acceleration from 1QFY25. 5 large deal wins, including one USD 50mn+ and a USD 25mn deal, lend further visibility. Management also indicated that Aerospace, led by Airbus, should provide further impetus to FY25 growth.

Deal wins and partnerships point to TATATECH’s full range offerings: On one hand, TATATECH won a USD 50mn vendor consolidation deal. On the other hand, it entered into partnership with global chip maker ARM and Intel to support OEMs’ SDV programs. Its partnership with Agratas – Tata Group’s global battery business – adds upstream capabilities to its portfolio. The USD 25mn deal with European Aerospace OEM reflects its growing strength in the Aero vertical. In the current constraints driven outsourcing wave, TATATECH’s expanded capabilities position it favourably to gain share, in our view.

Estimates largely unchanged; maintain BUY: Our FY24-26E EPS changes are limited to 0- 2%. Long growth run-way and 200-250bps margin expansion scope lend visibility to EPS growth trajectory. That should sustain valuations. We reiterate BUY with INR 1,370 TP.

Key Highlights from the call

Outlook: Despite near term headwinds due to ramp down in Vinfast project, Management remains confident of string growth in FY25. Management expects tapered growth in Q4 in vinfast account. Management aims for a 200-250 bps margin expansion

Top Accounts: Tata Motors: Implemented a smart manufacturing solution for the recently acquired Salon, this involved designing and integrating ERP, PLM, MES, and IoT systems. This integration has allowed Tata Motors to increase its annual production capacity by 300,000 units. Land Rover: contributed to their digital transformation program by deploying software for efficiency improvement. Vinfast: focus is shifting from product development to car manufacturing and sales. The development of two electric vehicles outsourced to TTL is in transition to the launch support stage. There was a notable drop in Q3 revenues, and further reductions are expected in the current quarter.

Key partnerships: TTL has partnered with Intel to use Intel's new software-defined vehicle system-on-chip family of products for building software platforms. Collaborating with Intel, TTL aims to develop a joint go to market strategy for introducing high-performance system-on-chip based vehicle solutions to its customers in Asia Pacific, with a specific focus on Southeast Asia and, more prominently, China, where there is a strong demand for such technology. Tata Tech has partnered with Arm, a British semiconductor company owned by SoftBank. TTL has recently worked with ARM on software-defined vehicle solutions using the SOAFEE framework. TTL will be supporting Agratas to design, develop, and manufacture sustainable battery solutions for the global mobility market. The partnership will involve various engagements, focusing on battery pack design, the industrialization of planned giga factories in India and the UK, and implementing a digital thread for tracking products and digital assets throughout the lifecycle. This strengthens TTL’s capabilities in the electric vehicle segment while expanding its service lines, especially in software-defined everything, cyber-security, and autonomy.

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CIN Number : L67120MH1986PLC038784