BMW Alliance Opens Tata Technologies To Global Clients, Says JPMorgan
The joint venture 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 Chennai.
The joint venture between Tata Technologies Ltd. and BMW will reduce the dependence on anchor clients Tata Motors and JLR and increase client connections with other global OEMs, according to JPMorgan.
The recently listed Tata Group company has tied up with Bayerische Motoren Werke AG to deliver software-defined vehicle solutions, automated driving, infotainment and digital services.
JPMorgan remains 'underweight' on the company, citing excess valuation. The brokerage has a target price of Rs 800 apiece, implying a downside of 30% from the current market price on NSE.
Tata Tech will initially incorporate the new company as its wholly owned subsidiary, in which BMW will invest to hold 50% of the post investment share capital in the JV.
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 Chennai.
Shares of Tata Tech rose as much as 4.35% to Rs 1,139.50 apiece on the NSE. It was trading 3.76% higher at Rs 1,133.10 apiece, compared to a 0.22% advance in the benchmark Nifty 50 as of 1:03 p.m.
The stock has declined 13.66% since November 2023. The total traded volume so far in the day stood at 5.8 times its 30-day average. The relative strength index was 63.63.
Out of the six analysts tracking the stock, two have a 'buy' rating and four suggest a 'sell', according to Bloomberg data. The average 12-month analyst price target implies a potential upside of 12.0%.
JPMorgan On Tata Tech
JPMorgan estimates revenues of $5 million initially from this JV, as it will start with 100 resources with a target of increasing this to 1,000 over a period of time. This estimate could lead to an eventual annual revenue opportunity of $50 million.
Given the complete offshore nature of the work, JPMorgan estimates that margins should be healthy.
This JV is a positive step in the right direction, but the analyst still needs to see a scale-up of revenues from non-anchor clients to more than $20 million that can help bring down anchor clients’ revenue concentration. JPMorgan continues to find valuations excessive, at 52 times the one-year forward P/E.
India remains an attractive location for ER&D outsourcing.
Key Risks
Winning mega deals such as Vinfast can drive upside to revenue growth.
Reducing client concentration by winning new clients or expanding wallet share with existing non-anchor clients.
Better-than expected margin expansion from stronger growth and an accelerated shift to offshore.
