In May, the Indian market reversed its upward trend of three consecutive months, experiencing a downturn. This shift is attributed to several factors, including rising US bond yields, continued foreign investor outflows, and investor apprehension over global uncertainties amidst the Lok Sabha elections.
Amid the uncertainties domestic brokerage house ICICI Securities is bullish on two Tata Group stocks – Tata Technologies, and Tata Power.
Tata Tech: The brokerage has initiated coverage on the recently listed Tata Tech with a ‘buy’ call and a target price of ₹1,330, implying an almost 27 percent upside.
After a bumper debut, the Tata Tech stock has been on a downward trend. The stock gained 162.85 percent from its issue price of ₹500 to close at ₹1,314.25 on its listing day. Currently, the stock is over 20 percent below its listing day closing price. Just in 2024 YTD, the stock has lost over 11 percent.
According to the brokerage, Tata Tech is well-positioned in the rapidly growing auto-engineering, research & development (ER&D) segment, which is outpacing traditional IT services. Structural drivers, such as increasing digital engineering penetration and India’s favorable position as an outsourcing destination, bolster Tata Tech’s growth prospects, it said.
Despite a client-specific ramp-down challenge, ICICI Securities views this as temporary, expecting 13%/18% revenue growth and 16%/23% EPS growth in FY25E/26E, with a return on equity (RoE) of 23-25%. The Tata Group lineage enhances Tata Tech’s advantages, especially in the aviation sub-segment.
The report also noted that ER&D services, Tata Tech’s mainstay, are growing faster than the broader IT services industry, with NASSCOM estimating an 8-9% CAGR for ER&D between 2023 and 2030. Tata Tech, with 86% of its revenue from the automotive sector and a growing presence in aviation, posted a 30% YoY USD revenue growth in FY24, outpacing tier-1 IT services players. However, risks include under-penetration in Europe and the need for other verticals to compensate for the VinFast ramp-down, cautioned the brokerage.
Tata Power: For the power stock, the brokerage has resumed coverage with a ‘buy’ call and a target price of ₹490, implying a 12.5 percent upside. The stock has already given multibagger returns in the last 1 year, surging over 109 percent. Meanwhile, it has gained over 31 percent in 2024 YTD.
The brokerage pointed out that Tata Power is establishing a leading renewable energy (RE) platform, combining both asset-light and asset-heavy businesses. The company has developed 10GW of renewable assets, a 4GW solar manufacturing capacity, a solar EPC arm, and a rooftop solar division. Additionally, it is developing two pumped storage systems and holds a first-mover advantage in the electric vehicle charging market, it stated.
Among ICICI’s coverage, Tata Power stands out as the most comprehensive RE platform. The company aims to double its RE capacity in the next two years and is nearing the commissioning of 4GW of cell and module capacity, holding a 13% market share in the rooftop solar market. Furthermore, Tata Power is one of the largest private electricity distribution companies in India and is expanding its transmission business with recent bid wins, it added.
“Tata Power is operating 4.5GW of RE assets with EBITDA of ₹3000 crore. Over the last two years, it has increased its under-construction portfolio to 5.5 GW. We estimate EBITDA from RE assets to grow to ₹6000 crore over the next three years,” noted ICICI.
ICICI Securities maintains a positive outlook on both Tata Technologies and Tata Power, highlighting their strong growth prospects and strategic positioning in their respective industries.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.
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Published: 17 May 2024, 04:13 PM IST
