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Pure-play ER&D & Digital Solutions Specialist: Tata Technologies (TTL) is leading global engineering services player offering product development (80% of 1HFY24 revenue) and digital solutions (20%) including turnkey solutions to global OEMs and their Tier-1 suppliers. It is ranked 1 st among all India-based ER&D service providers & top 2 globally, in electrification. It is primarily focused on the automotive industry (70% 1HFY24 revenue).

Diversifying client base and services: TTL is diversifying clients’ base to reduce dependence on anchor clients - Tata Motors & JLR whose contribution has fallen to 36% by 1HFY24 end. It now has 35+ auto OEMs & Tier 1 suppliers and 12+ new energy vehicle companies as clients, with prominent names like McLaren, Honda, Ford, VinFast. TTL is also scaling adjacent verticals of Aerospace and Transportation & Construction Heavy Machinery to leverage Automotive expertise. It recently got empaneled by Airbus which would help tap fast growing Aerospace vertical - expected to grow at 16-17% CAGR by 2026.

Large Market Opportunity: Global ER&D spend is expected to grow at 10% CAGR to $2.7tn by 2026E with 3rd party outsourcing expected to grow faster at 14-17% for Indian players. The largest ER&D vertical - Automotive is expected to grow at 7% CAGR by 2026 to $27-29bn led by disruption in automotive industry due to autonomous, connected, electrification, and shared mobility.

Financials: TTL recorded Revenue/PAT CAGR of 36%/60% over FY21-23 with EBITDA margins improving to 18.6% (vs 16.2% in FY21), driven by strong unit economies, better utilization, & improved offshore mix. Cash conversion remains strong supported by lower working capital of 36 days. Return ratios are healthy with RoCE of 24%.

Issue Size: ?30.4bn IPO consists of OFS of 60.9mn shares by promoter Tata Motors as well as investor Alpha TC Holdings Pte. Ltd and Tata Capital Growth Fund I. The promoter holding post stake sale would reduce to 55.4%. The market cap post listing would stand at ?202.8bn.

View: We like TTL and recommend Subscribe given its niche presence, strong parentage and strategic partnership with marquee clients. This along with TTL’s focus on diversifying its offerings and clients, puts it in a sweet spot to tap huge outsourcing opportunity in ER&D space. The IPO is attractively priced at 29x 1HFY24 P/E (on annualized basis) which is at a discount to its peers. Tata Group is coming with an IPO after a gap of 19 years, catching investors fancy and hence could see listing gains as well.

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SEBI Registration number is INH000000412