Broker’s call: Tata Technologies (Buy)

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Target: ₹1,370

CMP: ₹1,134.10

Tata Technologies announced a joint venture with the BMW group. The JV entails building a software hub with 1,000+ resources offering automotive software and digital engineering services for the BMW group. Our back of the envelop calculation indicates the JV, at steady state, could add 4-5 per cent to our current earnings estimates.

Near-term earnings upside aside, the implications of the deal seem far reaching to us. It allays concerns that Tata Tech’s parentage is a hurdle in getting business from traditional OEMs. Further, an automotive software partnership with BMW establishes Tata Tech’s credentials in software ER&D, augmenting its full vehicle engineering proposition, thus expanding addressable spend.

It is also an important marker in TATATECH’s efforts to diversify its revenue mix from anchor clients. Importantly, the JV corroborates the argument that rising software complexity and multiple constraints facing OEMs can trigger multi-year offshoring wave. The trend, though still early, seems undeniable.

With capabilities now spanning the entire spectrum of OEMs’ ER&D spend, comparable valuations are justified, in our view.  Tata Tech is well positioned to ride it.