Tata Tech-BMW JV is good, but not enough
Shares of Tata Technologies Ltd were in focus last week as investors cheered the company’s pact with BMW Holding BV, Netherlands. The joint venture will focus on strategic software development, automated driving, infotainment and digital services. The potential synergies and growth opportunities that this partnership can bring for Tata Technologies are seen as a positive.
Recall that Tata Technologies saw a bumper listing in November aided by an upbeat market sentiment and the Tata group brand, despite facing risks like client concentration and a heavy reliance on the automotive sector. This BMW joint venture (JV) marks a strategic shift, expected to reduce dependency on primary clients—Tata Motors Ltd and Jaguar Land Rover—and fostering expansion into global original equipment manufacturers.
But benefits would flow in gradually.
According to JM Financial Institutional Securities Ltd, this deal demonstrates Tata Technologies’ evolving software engineering research and development (ER&D) capabilities, countering the notion of its predominantly mechanical ER&D skill-sets.
Since 2016, the BMW group has been curating a network of global technology partners, and Tata Technologies’ inclusion in that network should offer the company a marquee referenceable client, potentially leveraging it to secure more business and enhance cross-selling opportunities, as per JM Financial.
The JV will primarily focus on auto ER&D solutions with centres in Pune and Bengaluru, while there will also be some work around IT solutions in the Chennai centre. The transaction is subject to approvals, and no financial details have been provided yet.
“We estimate revenues of $5 million initially from this JV as it will be starting with 100 resources with a target of increasing this to 1,000 over a period of time that we estimate could lead to eventual annual revenue opportunity of $50 million,” said a JP Morgan report. However, clarity on accounting (consolidated or share of JV in P&L) and margin profile is awaited.
Despite the JV’s promising outlook, translating optimism into sustained stock gains poses challenges.
Tata Technologies’ stock performance has wavered, with shares having failed to sustain the IPO-led optimism. On its debut—30 November 2023—the stock had soared to a high of ₹1,400 but has since settled at ₹1,101. Shares had listed at ₹1,200 apiece, a steep premium to the issue price of ₹500.
A slew of factors have played spoilsport. The IT sector has been struggling with demand concerns, hurting revenue visibility. Plus, the recent carnage in mid-cap and small-cap counters could have also hurt investor sentiment. So far in 2024, the Tata Technologies stock has fallen 5% against the 3% drop in the Nifty IT index.
As such, the upcoming March quarter (Q4FY24) results are unlikely to throw big positive surprises for the IT sector. Tata Technologies investors need to monitor the pace of deal wins. In Q3, the company witnessed robust activity, with five large deals won, including one with over $50 million in total contract value (TCV) and another one with $25 million in TCV. FY25 growth outlook of the key services segment, forming nearly 80% of revenues, will be critical. A crucial upside trigger for the stock remains diversifying its client base and scaling-up non-automotive side of the business.
On the valuation front, the stock trades at FY25 price-to-earnings multiple of 56 times, as per Bloomberg data. Peers KPIT Technologies Ltd and Tata Elxsi Ltd are trading at multiples of 53 times. Although largely in-line with peers, Tata Technologies’ multiple is not comfortable against the current backdrop. Moreover, Tata Consultancy Services Ltd, another IT company within the Tata group and a bellwether of the sector known for its diverse exposure, trades at a lower valuation multiple of 29 times.
