Yet, the market has not greeted this news enthusiastically. The share price rose initially on the news but then dropped and not recovered since then. This could be due to an overall bearish sentiment that has gripped markets worldwide. Alternatively, it could be that investors have chosen to sit on their hands till the Tata Motors management shares more information about the proposal and the full purport or details of the disinvestment is available. Or, as a third option, investors do not perhaps view the disinvestment as value accretive to the company. We will get to that shortly.
On face value, though, the disinvestment makes sense.
Tata Technologies was founded initially in 1989 as a business unit of Tata Motors was spun out as a separate company in 1994. The company’s main offerings lie across the verticals of engineering & design, smart manufacturing, and digital engineering across automotive and aviation segments. Tata Tech reported a post-tax profit of $58 million on a top-line of $473.5 million for the year ended March 2022. Tata Motors is the largest shareholder in Tata Tech with a 72.84% stake; Alpha TC Holdings controls 8.96% with the balance held by other Tata companies.
In preparation for the proposed IPO, Tata Tech has already split the face value of its shares from ₹10 each to ₹2 each, taking the total number of issued and paid-up shares from 6 crore to 30 crore. Further, the company’s board has also proposed a bonus issue in the ratio of 1:1, which will take the total number of issued and fully paid shares to 60 crore.
The grey market, which tracks valuation of unlisted shares, currently pegs the Tata Tech enterprise value at around ₹42,000-48,000 crore. Therefore, even a sale of 10% will fetch Tata Motors around ₹4,200-4,800 crore. The valuation can be expected to go up as more details of the company and the IPO emerge.
This unlocking of value is bound to provide some cash relief to parent Tata Motors. The automaker is reeling under compressed margins and a debt burden. Consequently, any opportunity to monetise its sprawling holdings across subsidiaries and associate companies will definitely come in handy. The Tata Motors annual report for FY22 reported a debt-equity ratio of 3.13 on a consolidated basis, up from 2.46 in FY21. The annual report explained the increase in the debt servicing burden as: “Since the Consolidated debt has increased by 2.8% in FY 2021-22 compared to FY 2020-21 and the Shareholders equity has been reduced due to losses for the year, the debt equity ratio is high." On a stand-alone basis, Tata Motors saw its total debt burden rise by about 7% during the same period.
The upshot: expect some more monetisation of investments and unlocking of value across the value chain in Tata Motors and other Tata Group companies. Incidentally, Tata Motors reported 86 subsidiaries (14 direct and 72 indirect), 10 associate companies, 4 joint ventures and 2 joint operations as on March 31, 2022. Ironically, even the company that is planning an IPO, Tata Tech, had 11 subsidiaries and one joint venture company listed in its FY22 annual report.
There is, in fact, an avowed move within the Tata Group to rationalise its unmanageable and undecipherable jigsaw puzzle of subsidiaries, associate companies and joint ventures. The move will not only release unrealised value but also help in enhancing efficiencies in both work processes as well as capital allocation at the enterprise level. There are other reasons to cheer the IPO news: this will be the first IPO from the House of Tatas after 2004 when Tata Consultancy Services (TCS) was launched in the public issue market. It might be recalled that TCS used to be a division within the Tata Group holding company, Tata Sons, and had to be spun out, corporatized and then sold in the IPO market.
It is therefore surprising that the Tata Tech IPO news has failed to get a rise out of the Tata Motors scrip. One reason could be the apprehension that the current slowdown in Tata Motors might also affect Tata Tech, given the umbilical ties between the two companies. The other reason could be that investors may want to hold on to their horses till the company files its draft red herring prospectus with the market regulator, which will then allow them to better understand the IPO’s overall impact, including prospective cash inflows for Tata Motors. Given the current cross-asset market volatility, that probably makes eminent sense.
