Tata Tech IPO makes a killing on D-Street; but have investors weighed the risks too?

Dalal Street’s response to the initial public offering of Tata Technologies Ltd was a killer as the offer, which opened on Tuesday, got fully subscribed within half an hour.

As of Tuesday, the IPO was subscribed a whopping 6.5 times, with the global engineering services provider getting bids for 29.5 crore shares, against 4.5 crore shares on offer.

Analysts across the board have given a thumbs up to the IPO asking to subscribe to it or buy it post listing and have several positive reasons backing the same.

However, every business has pros as well as cons, and the stock market rulebook says investors must weigh everything before buying or selling shares.

So, while all know why Tata Technologies stock should be bought, one also needs to keep in mind the potential risks that the company may face in its business and thereby earnings growth.

Concentrated Business
Among the risks cited by the company itself in its draft prospectus and a few by the analyst community, one of them is high concentration of revenue among few clients.

Tata Technologies receives 60% of its revenue from just the top five clients. Further, it receives around 35% of its revenue just from its anchor clients, which comprise of Tata Motors and JLR, who are related parties.

Infact, Tata Tech receives around 70% of its revenue in foreign currency terms,which is subject to exchange rate fluctuation.

If one looks industry wise, then automotive revenue attributable to the services segment constitutes 88% of the total revenue for the company.

One needs to note here that the automotive industry, in general, is cyclical and can be affected by a potential economic slowdown.

New Energy Dependency
One of the other risks cited by the company in its draft prospects was its dependence on new energy vehicle companies for future revenue.

“Uncertainties about their (Start-ups) funding plans, future product roadmaps, and ability to manage growth, creditworthiness and ownership changes may adversely affect the results of operations,” the company said.

Negative Cash Flows
One other risk cited by many analysts was the negative operating cash flows of Tata Technologies. The company had negative operating cash flow during FY22 and during H1 FY24 as well.

Master Capital Services believes that Tata Technologies operates in a very competitive environment, and, therefore, risks to business, market share do persist.

Related Party Transactions
Tata Tech has entered into and may in the course of its business, continue to enter into transactions with related parties, including Tata Motors and Jaguar Land Rover.

“While it is likely that we may enter into related party transactions in the future, which will be subject to approvals…there can be no assurance that such approvals will be issued to us in a timely manner,” the company said, adding, “If we do not receive such approvals in a timely manner or at all, there can be no assurance that such transactions, individually or in the aggregate, will not have a material adverse effect on our financial condition and results of operations.”

So, while the frenzy for the Tata stock seems to be unabated, one needs to bet his/her buck thoughtfully in the stock market.

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