Tata Tech IPO in Spotlight: Is it worth buying?

Analysis of Tata Tech. IPO: Everything you need to know

Recently Tata Tech IPO has created a buzz among the investors as being launched by renowned TATA Group after about two decades. Issue Price or Offer Price for Tata Tech IPO was Rs 500/equity share with Face Value of Rs2/share. Allotment date for Tata Tech IPO was 28th November 2023, while its listing date was 30th November 2023. As per its reputation Tata tech doubled investors money as it was listed at 140% premium over IPO price and stock started trading at Rs 1200, while issue price was Rs 500. Here, I have presented analysis of the IPO which an investor must know to take a wise decision.

Table of Contents

Business of Tata Tech:

Tata tech is in Engineering Research & Development (ER & D) Services for Automotive, Aerospace & consumer durables.

Comparison of Tata Tech with other TATA companies:

A clear comparison among TCS, Tata ELXSI and Tata Tech is presented in following table:

Category

TCS

Tata ELXSI

Tata Tech

Focus Area

Comprehensive IT Solutions

Product Design

Engineering Research & Development

Clients

Banks, Manufacturing organizations etc.

Auto EV companies

Automotive, Aerospace & consumer durables

Revenue

Rs 225458 Cr

(Mar 2023)

Rs 3145 Cr

(Mar 2023)

Rs 4414 Cr

(Mar 2023)

No of Employees

614,795

More than 11,000

More than 11,000

Parent

Tata Sons

Tata Group

Tata Motors

Headquarters

Mumbai

Bengaluru

Pune

Tata Tech IPO:

IPO i.e. Initial Public Offering is brought by companies to raise money, either required for growth and expansion of company or to provide an exit option to some of existing investors of the company by transferring equity of existing investors to public.

IPO brought by companies to raise money required for growth and expansion of company is called Fresh Issue.

IPO brought by companies to provide an exit option to some of existing investors of the company by transferring equity of existing investors to public is called OFS or Offer for Sale.

Motive of Tata Tech IPO is to provide an exit option to some of existing investors of the company by transferring equity of existing investors to public i.e. OFS or Offer for Sale.

Out of this OFS retail shares are around 30.33% and QIB (Qualified institutional Buyers) are around 43.33% of the IPO size.

Tata Tech IPO is being brought at this time due to positive trends in Tata stocks such as Tata Motors etc. and it is considered that whenever stock price of parent company goes up, it’s subsidiary, also performs well.

Further, positive trends in overall economy due to probability of decrease in interest rates in future is also one of the reasons behind bringing this IPO now.

After IPO, Tata Tech will have access to secondary capital also if required in future. Capitals are of two types Primary and Secondary. Primary capital is the capital which is owned by VCs (Venture Capitalists), Angel investors and other big investors. Access of primary capital to the company is not easy as company has to communicate with these big investors before utilizing the money. Secondary capital is shares which are traded in stock market and company can easily utilize it whenever it requires the fund by selling shares and further company can buy these shares whenever it has surplus funds.

Due to high interest rates it’s difficult to raise the funds through debts and market is a good option to raise the funds in this environment.

Brief Overview of Financials of Tata Tech:

Some key financials of the company are listed in following table:

Particulars

FY21

FY22

FY23

Sales Growth

—-

47.52%

25.81%

ROE

11.16%

19.16%

20.87%

So even though its growth rate decreased over the year, ROE is increasing.

Detailed financials of Tata Tech may be checked by clicking on following link:

https://www.screener.in/company/id/1284568/consolidated/

Risks with Tata Tech:

Almost 65% of its revenue comes from Europe and USA and any slow down in Europe and USA may impact the business of Tata Tech negatively. Its growth is dependent on the growth of Engineering Research & Development (ER & D) domain in the world and any slowdown in Engineering Research & Development (ER & D) domain may slowdown its growth. Overall growth rate i.e. CAGR of ER & D sector is about 10-15% which is a moderate growth rate but may be considered on reasonable valuations.  

Moat of Tata Tech:

Although dependence on Europe and USA may be considered as risk, but simultaneously it’s an advantage as well due to higher pace of manufacturing in Europe and USA than Asia so far.

Grey Market:

To understand Grey Market, we should first understand White Market & Black Market.

White Market is a market where activities are allowed and legal such as Share market or Secondary Market. 

Black Market is a market which is not allowed by law i.e. illegal example of which was witnessed in Covid 19 where medicines were sold about 10 times higher than their normal market price.

Grey Market comes in between white and black markets which is neither legal nor illegal but not defined by laws or laws are not clear on that.

In IPO Grey Market, shares are traded but SEBI regulations are not applicable on that as SEBI regulations are only applicable after listing of IPO on stock exchange and not applicable before listing. Therefore, this is an unregulated market and hence called Grey Market. Grey Market is unofficial, don’t have written contracts and facilitated by oral agreements. Grey market is operated by some dealers who act as bridge between buyers and sellers and gets commission and makes sure that buyers and sellers complete their transactions. In Grey Market, trades are done in bulk or lots.

In Grey Market Oral Commitment and words are very important and play a vital role as the Grey Market is completely dependent on oral commitments and words.

Grey Market is very volatile as the prices in Grey Market may be increased just by small buying.

Grey Market works for about 10-12 days, after declaration of Issue Price of IPO till the listing of IPO.

In Grey Market buying and selling of IPO applications as well as allotted shares is performed.

People trade in Grey Market to make money by difference between Grey Market Price and listing price. If there are some people who anticipate the price rise of the IPO above issue price, after listing then they tend to buy the IPO above its issue price by paying some extra money over issue price, called Grey Market Premium and after listing they earn profit/loss by the difference of Grey Market Price and Listing Price.  This can be easily understood with the help of following example:

If IPO is issued on the issue price of Rs 100 then in case of absence of Grey Market if it is listed on Rs 150 then investors will earn profit of Rs 50 straight away. In case of Grey Market, suppose there are some people who are expecting that the IPO price will hit Rs 150 or above after listing, then they may buy the IPO before listing above issue price from its subscribers by paying some extra money over issue price, called Grey Market Premium (in following example Rs 20 is Grey Market Premium as stock is traded at Rs 120 in Grey Market i.e. Rs 20 above its issue price which is Rs 100). Now if stock hits Rs 150 then Grey Market investors will get Rs 30 as profit straight away.

IPO Issue Price

Grey Market Premium

Grey Market Price

Listing Price

Profit

Rs 100

In absence of Grey Market

In absence of Grey Market

Rs 150

Rs 50

Rs 100

Rs 20

Rs 120

Rs 150

Rs 30

In Grey Market buyer may buy applications of IPO in lot on a price called Kostak Rate, from applicants (sellers) even before the allotment of shares, to increase the probability of getting maximum lots, and even if sellers of application don’t get allotment, then also sellers of application don’t need to pay back the Kostak Rate to the buyer. After allotment of shares, sellers of application, transfer shares to the Demat Accounts of buyer. Kostak Rates are quoted per lot while GMP i.e. Grey Market Premium is quoted per share.

Similarly, if buyer wants to give money to sellers of applications only when shares are allotted to sellers, then it is called Subject to Sauda or SS (unlike Kostak Rate where allotment of shares to the sellers of application doesn’t matter and sellers of application don’t need to pay back the money in case shares are not allotted to them.) Usually Subject to Sauda are quoted at higher price than Kostak Rate. Subject to Sauda or SS rates are also quoted per lot.

Grey Market is unregulated, agreements are oral, not written and one can’t reach SEBI in case of any dispute.

Grey Market premium price is also not reliable and based on quotes of dealers only as it is not traded live. It is not dependent completely on true market forces such as demand and supply.

A good grey market premium triggers positive sentiment for the stock and considered as driving factor for listing gain and hence it is useful for investors to track the Grey Market Premium i.e. GMP.

Although Grey Market premium is an indicator only and doesn’t tell anything about fundamentals of the stock.

Conclusion:

So, based on above if investors with opinion of strong future growth in ER & D sector in Europe & USA may consider the stock at reasonable valuations as Tata Tech is connected with reputed Tata Group with profitable business, good ROE and growth.

Similarly, investors who are concerned with moderate sector growth of ER & D sector and are in opinion with future slowdown in Europe & USA may avoid the stock.

FAQs

Investors with opinion of strong future growth in ER & D sector in Europe & USA may consider the stock at reasonable valuations as Tata Tech is connected with reputed Tata Group with profitable business, good ROE and growth.

Similarly, investors who are concerned with moderate sector growth of ER & D sector and are in opinion with future slowdown in Europe & USA may avoid the stock.

Tata Tech is owned by Tata Motors.

In March 2023, Tata Tech earned net profit of Rs 624 Cr, so indeed Tata Tech is profitable.

Tata Tech is a listed public limited company in private sector.

In March 2023, Tata Tch has shown good growth, Profit as well as ROE. So, its doing good as company.

In terms of Revenue of March 2023, Tata Tech is bigger than Tata Elxsi.

IPO i.e. Initial Public Offering is brought by companies to raise money, either required for growth and expansion of company or to provide an exit option to some of existing investors of the company by transferring equity of existing investors to public.

IPO brought by companies to raise money required for growth and expansion of company is called Fresh Issue.

IPO brought by companies to provide an exit option to some of existing investors of the company by transferring equity of existing investors to public is called OFS or Offer for Sale.

Motive of Tata Tech IPO is to provide an exit option to some of existing investors of the company by transferring equity of existing investors to public i.e. OFS or Offer for Sale.

Capitals are of two types Primary and Secondary. Primary capital is the capital which is owned by VCs (Venture Capitalists), Angel investors and other big investors. Access of primary capital to the company is not easy as company has to communicate with these big investors before utilizing the money. Secondary capital is shares which are traded in stock market and company can easily utilize it whenever it requires the fund by selling shares and further company can buy these shares whenever it has surplus funds.

Tata Tech IPO is being brought at this time due to positive trends in Tata stocks such as Tata Motors etc. and it is considered that whenever stock price of parent company goes up, it’s subsidiary, also performs well.

Further, positive trends in overall economy due to probability of decrease in interest rates in future is also one of the reasons behind bringing this IPO now.

Out of this OFS  retail shares are around 30.33% and QIB (Qualified institutional Buyers) are around 43.33% of the IPO size.

Grey Market comes in between white and black markets which is neither legal nor illegal but not defined by laws or laws are not clear on that.

White Market is a market where activities are allowed and legal such as Share market or Secondary Market. 

Black Market is a market which is not allowed by law i.e. illegal example of which was witnessed in Covid 19 where medicines were sold about 10 times higher than their normal market price.

Grey Market comes in between white and black markets which is neither legal nor illegal but not defined by laws or laws are not clear on that.

Grey Market works for about 10-12 days, after declaration of Issue Price of IPO till the listing of IPO.

People trade in Grey Market to make money by difference between Grey Market Price and listing price.

If there are some people who anticipate the price rise of the IPO above issue price, after listing then they tend to buy the IPO above its issue price by paying some extra money over issue price, called Grey Market Premium.

IPOs may be bought in Grey Market even before its listing through dealers.

In Grey Market buyer may buy applications of IPO in lot on a price called Kostak Rate, from applicants (sellers) even before the allotment of shares, to increase the probability of getting maximum lots, and even if sellers of application don’t get allotment, then also sellers of application don’t need to pay back the Kostak Rate to the buyer.

If buyer wants to give money to sellers of applications only when shares are allotted to sellers, then it is called Subject to Sauda or SS (unlike Kostak Rate where allotment of shares to the sellers of application doesn’t matter and sellers of application don’t need to pay back the money in case shares are not allotted to them.)

Grey Market is unregulated, agreements are oral, not written and one can’t reach SEBI in case of any dispute.Grey Market premium price is also not reliable and based on quotes of dealers only as it is not traded live. It is not dependent completely on true market forces such as demand and supply.

A good grey market premium triggers positive sentiment for the stock and considered as driving factor for listing gain and hence it is useful for investors to track the Grey Market Premium i.e. GMP.Although Grey Market premium is an indicator only and doesn’t tell anything about fundamentals of the stock.

Issue Price or Offer Price for Tata Tech IPO is Rs 500/equity share with Face Value of Rs2/share.

Allotment date for Tata Tech IPO is 28th November 2023, while its listing date is 30th November 2023.

Tata Tech was listed at Rs 1200, at listing gain of 140%, while issue price was Rs 500.

This is only for education purpose and not an investment advice and the author is not SEBI registered, so investors must consult their professional financial adviser and do their own research before making any investment of their hard-earned money in Stock Market as Stock Market is subjected to Market Risk.

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