How is GMP of Tata Technologies trading ahead of price announcement

There is something ironic about the Tata Technologies GMP. All that is known about the company is the number of shares it wants to hive off as the IPO shares. Nothing else is known about the company. However, the company has seen aggressive and robust trading in the grey market for the last few days, despite having no knowledge of the size of the issue or the price band of the IPO. How is that possible? That can be done when the market takes an approximate estimate of the valuation of Tata Technologies. Incidentally, this is a focused IT based company that has been promoted by Tata Motors and it is Tata Motors that will be taking an exit through the Offer for sale (OFS) route.

Valuation estimates of Tata Technologies with limited data

As per the draft red herring prospectus filed by Tata Technologies, all that we know is the issue size in terms of number of shares. Here is how we have used the data to arrive at an indicative valuation using peer group P/E comparison.

• The total issued shares of Tata Technologies are 40,56,68,530 shares and the OFS is to the tune of 9,57,08,984 shares. In short, the OFS is equivalent to 23.59% of the outstanding shares of Tata Technologies. There will be no dilution of EPS or equity since this is an offer for sale by existing shareholders.
   

• Let us now apply the comparable P/E formula and the only company that is closely comparable to Tata Technologies is the Hyderabad based Cyient Ltd. For FY23, Cyient reported fully diluted EPS of Rs46.71 and the closing stock price as of 15th May 2023 is Rs1,272. That translates into P/E ratio of 27.23 times. This will be our benchmark.
   

• Let us turn to the earnings of Tata Technologies. For the 9 months of FY23, the net profits add up to Rs407.47 crore, which can be annualized into net profit for FY23 at Rs543.29 crore. If we apply the valuation P/E of Cyient of 27.13 times, then Tata Technologies would be roughly valued at Rs14,739 crore market cap.
   

• As we saw earlier, the issued and paid up shares of Tata Technologies are 40,56,68,530 shares. That would give a per share valuation of nearly Rs363 per share. However, being a Tata group company with an IPO coming after 19 years, we are assuming a 10% premium to valuation and peg the per share price of Tata Technologies at Rs400 per share. That means, the issue size would approximately be Rs3,828 crore via OFS.
   

• Going ahead, for our assumed GMP analysis, we will use the pricing of Rs400 per share for Tata Technologies.

GMP of Tata Technologies based on assumed price and valuation

For now, the dates of the issue are yet to be announced, so we do not have data on when it is opening but it is expected to open soon. We shall focus more on the finer aspects of GMP here.

There are 2 factors that impact the GMP. Firstly, the market conditions have a deep impact on the GMP, which includes the levels of the Nifty and Sensex as well as the general IPO market and macro conditions. Secondly, the extent of subscription for the IPO across the retail and the QIB segments also has a deep impact on the GMP as it is indicative of investor interest in the stock. Generally, strong QIB subscription is a trigger for a spike in GMP.

There is one small point to remember here. The GMP is not an official price point, just a popular informal price point. However, in most cases, it has been observed to be a good informal gauge of demand and supply for the IPO. Hence it does give a broad idea of how the listing is likely to be and how the post-listing performance of the stock would be.

GMP tends to be a good mirror of the real stock story. More than the actual price, it is the GMP trend over time that gives insights about which direction the wind is blowing. Here is a quick GMP summary for Tata Technologies Ltd for the 15 days, data is available.

In the above case, the GMP trend shows that the grey market premium has opened at around Rs72, but has since oscillated between the levels of Rs88 and Rs70 in the last 10 days and has now settled at Rs76 as on 15th May 2023. Of course, we have to await for the actual subscription numbers to flow in when the issue opens for subscription, as that would have a very significant impact on the GMP. In the past, stocks which got oversubscribed in the IPO also saw a very robust positive shift in the grey market pricing. For a start, Uniparts India Ltd has shown good traction in the grey market.

Let us be clear that Rs400 is the assumed price of the Tata Technologies IPO and we are using that as a base. If you consider the price of Tata Technologies at Rs.400 per share as the indicative price, then the likely listing price is being signalled at around Rs476 per share as of the GMP indicator on 15th May 2023. One data point to track will be the subscription update on the stock as that would chart the GMP course from here. As mentioned, the institutional QIB subscription is a key trigger for the GMP pricing.

The GMP of Rs.76 on a likely upper band pricing of Rs.400 indicates a listing premium of a healthy 19% for Tata Technologies Ltd over the listing price. That pre-supposes a listing price of approximately Rs476 per share assuming our IPO price of Rs400 based on the model looked at by us here. Of course, these are approximations, so you must keep a margin of safety. However, that would depend on the GMP sustaining over the next few days after the issue opens.

GMP (grey market price) is an important indicator, albeit informal, of likely listing price. One cannot take this price at face value However, the GMP tends to be quite dynamic and changes direction with the flow of news and events. Investors must note here that this is just an informal indication and has no official acceptance. The best thing one can do with the GMP is to observe the trend closely as that gives the best hints on listing status. Focus on the time series trend than on numbers.

Here is a quick word on the company, Tata Technologies. The company was incorporated by Tata Motors in the year 1994 and is a leading engineering services company. The company offers product development and digital solutions; which includes turnkey solutions to global original equipment manufacturers (OEMs) and their tier-1 suppliers. This has been largely helped by the deep domain expertise gained by the Tata group in the automotive industry, as well as in adjacent areas like aerospace, transportation, and heavy construction machinery. The operations of Tata Technologies are spread globally. This will be the first IPO from the Tata fold after 19 years. The last Tata group IPO was in 2004 from TCS.