This multibagger Tata Group stock corrects 25% from its all-time high; should you buy?

06/05/2024

Shares of Tata Technologies, the latest debutant from the Tata Group, has tumbled as much as 25 per cent from its all-time high at Rs 1,400 hit in November 2023. The tech-enabled solutions provider dropped as much as 5 per cent trading during the session on Monday after the company reported a muted set of numbers in the March 2024 quarter.

Tata Technologies reported a 27.39 per cent year-on-year (YoY) fall in the consolidated net profit at Rs 157.24 crore for the quarter that ended on March 31, 2024 (Q4FY24). The company had reported a net profit of Rs 216.56 crore during the same period last year (Q4FY23).

The Tata Group firm’s revenue from operations fell 7.22 per cent YOY to Rs 1,301.05 crore in Q4, compared to Rs 1,402.39 crore reported in the year period. Ebit margin for the quarter came in at 16.2 per cent, the same as the December quarter but higher than 15.5 per cent in the same quarter last year.

Shares of Tata Technologies tumbled as much as 5 per cent to Rs 1,032.95 during the Monday’s trading session as the company commanded a total market capitalization of little more than 42,000 crore. The scrip had settled at Rs 1,085.90 in the previous trading session on Friday.

Tata Tech reported revenues and margins in line with estimates. Revenue growth was primarily driven by the lumpy education business. Ramp-down of the Vinfast account impacted services segment revenues but was offset by strong growth in anchor clients, said Kotak Institutional Equities.

“Tata Tech has higher exposure to mechanical engineering services and is building muscle in embedded software. We broadly maintain EPS estimates. Expensive valuations keep us cautious,” Kotak added while retaining ‘sell’ rating on the stock with unchanged DCF-based fair value of Rs 700, implying a multiple of 27 times June 2026E earnings

Tata Technologies highlighted that the anticipated ramp down within VinFast, a key customer, led to a decline in services revenue during the quarter. It expects to see further run-off from VinFast in the June quarter as well. On the other hand, Tata Technologies announced an interim dividend of Rs 10.05 per share.

Tata Tech’s revenue growth met expectations. The growth construct was on expected lines as well. Services Ramp down in Vinfast dragged Services, as anticipated. ExVinfast however, service growth was an impressive 30 per cent YoY for FY24. Importantly, this growth was broad-based across anchor/non-anchor clients, said JM Financial in its note.

“We build 11 per cent services USD revenue growth in FY25, lower than before on residual Vinfast decline in 1Q. We now expect flat margins in FY25 driving 1-2 per cent cuts to our FY25-26E EPS. Our target price rolls forward to Rs 1,410. Tata Tech has more growth engines now than a few years back. That should help sustain the underlying momentum, supporting multiples,” it said.

For the entire financial year, Tata Tech reported a 8.86 per cent YoY rise in the net profit at Rs 679.37 crore, compared to Rs 624.03 crore reported at the end of FY23. The company’s revenue from operations for FY24 grew 15.92 per cent YOY at Rs 5,117.20 crore, compared to Rs 4,414.18 crore in the previous financial year.

Among the global brokerages, BofA has maintained a buy rating on the stock with a target price of Rs 1,250 as the brokerage believes that growth will reaccelerate in FY25 and tailwinds in ER&D will also drive stock returns along with FY25 prospects for the stock.

On the other hand, JP Morgan has an underweight rating on the stock with a target price of Rs 800. It said that margins were in line and revenue beat the estimate but weak exit will be a challenge for the company for FY25 growth. The brokerage believes that margins will be maintained in FY25.

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