“Tata Technologies relies heavily on its top five clients, including Vinfast, as they contribute to 57% of the overall revenue and a significant 71% of the services revenue.”
“Over the past six months, the shares of Vinfast Auto have plummeted by more than 80%.”
Vinfast, a prominent client among Tata Technologies’ top five, has recently attracted attention due to notable fluctuations in its stock price. Alongside Jaguar Land Rover (JLR) and Tata Motors, Vinfast significantly contributes to Tata Technologies’ revenue, with approximately 57% of the overall revenue and 71% of the services revenue in the first half of FY24 originating from these anchor clients.
The IPO of Tata Technologies concluded recently, and a substantial portion of its revenue is tied to Vinfast, a client since 2018. However, concerns have been raised by analysts regarding Vinfast’s performance on the Nasdaq. Issues such as related party-driven electric vehicle (EV) sales, inflated valuations, and diminishing customer traction have led to these concerns.
Filings with the US Securities and Exchange Commission for the July-September quarter reveal that a significant majority of Vinfast’s EV sales in the nine months ending September 2023 were to related parties or affiliates of its parent company. This trend raises doubts about Vinfast’s ability to establish a robust market presence.
Data also indicates that over half of Vinfast’s EV sales this year were to a related party, underscoring limited market demand for the company’s models. Specifically, out of the 11,300 vehicles sold in the first half of the year, 7,100 were sold to Green and Smart Mobility (GSM), a Vietnamese taxi company controlled by Vinfast’s parent company, Vingroup, according to a report by Barron’s.
Net loss concerns
During the September quarter, Vinfast demonstrated robust financial performance with revenue more than doubling, driven by a substantial increase in vehicle sales and deliveries. Vehicle sales reached $319.5 million, nearly tripling from the previous year’s quarter, and deliveries surged to over 10,000 from just 153 in the same quarter last year. Despite these impressive sales figures, the company’s net loss widened by almost 34% to $623 million, compared to $466 million in the corresponding quarter last year, primarily due to escalating expenses.
The founder of the auto company, Pham Nhat Vuong, reportedly shared with investors at the annual general meeting in May that Vinfast anticipates breaking even by the end of 2024. This expectation suggests the company is working towards achieving a financial equilibrium where its revenues match or exceed its expenses, signaling a significant milestone in its business plan.
Wild share price swings, frothy valuations
Established in 2017 by Vingroup, one of Vietnam’s largest private conglomerates, Vinfast holds the distinction of being the first Vietnamese car brand to venture into global markets and the pioneer in producing electric vehicles (EVs), including cars and scooters. The company achieved historic significance with its rapid ascent in stock price following its dynamic listing earlier this year.
Vinfast took a unique path to go public by merging with a shell company, an alternative route to entering the stock market. The stock price has experienced remarkable fluctuations since listing, reminiscent of the volatility often observed among startups that take a similar public listing approach. As of the latest close, Vinfast shares were valued at $6.56, significantly below the all-time high of $93 apiece.
Remarkably, despite selling just 24,000 cars in the previous year, Vinfast’s valuation reached a pinnacle in September, momentarily placing it among the world’s most valuable automakers. This valuation surpassed well-established competitors such as Volkswagen, Ford, and General Motors (GM), even though these industry giants boast sales in the millions. Vinfast’s brief surge in valuation highlighted the market’s enthusiasm for the company, despite its relatively short history and modest sales figures compared to traditional automotive leaders.
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At its peak, VinFast’s shares briefly conferred a staggering valuation of $200 billion upon the six-year-old business. This valuation, twice the combined value of industry giants Ford and General Motors, occurred even as the company was in the early stages of scaling up its production.
However, in the last six months, VinFast Auto shares have experienced a substantial decline, plummeting more than 80%. The limited availability of shares for trading has exposed the stock to erratic fluctuations. The current share price is below the $22 listing price, resulting in a market value for the company of approximately $15.46 billion.
Arun George, an analyst at independent investment research network SmartKarma, advises investors to avoid VinFast. He points to concerns related to related party-driven electric vehicle (EV) sales, declining customer traction, operating losses, cash burn, equity raise overhang, and what he describes as a frothy valuation. These factors collectively contribute to a cautious stance on VinFast’s investment prospects.
Tata Technologies IPO
Tata Technologies faces a significant dependency on its top five clients, which includes Vinfast. Any decline in the financial health of these clients poses a potential risk to Tata Technologies, potentially leading to a substantial loss of revenue for the Tata Group firm. Despite these concerns, the initial public offering (IPO) of Tata Technologies was well-received by investors.
Notably, it marked the first IPO from the Tata Group in two decades. The IPO received an overwhelming response, being oversubscribed 69.43 times. Investors showed strong interest, with bids totaling Rs 1.56 lakh crore for an issue size of Rs 2,200 crore, excluding the anchor portion. This enthusiastic response from the market indicates a positive reception to Tata Technologies’ public offering, despite the acknowledged risks associated with client concentration.
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Various brokerages have assigned a ‘Subscribe’ rating to Tata Technologies’ IPO, reflecting a positive outlook. One of the contributing factors to this recommendation is that Tata Technologies is viewed as a cash-generating company. At the end of FY23, the company had a cash reserve of $150 million, which is considered a favorable financial position.
Analysts have estimated the post-issue market capitalization of Tata Technologies to be in the range of Rs 19,200 crore to Rs 20,250 crore. This estimation provides investors with a potential valuation range for the company after the IPO, taking into account various factors such as financial performance, growth prospects, and market conditions.
Overall, the ‘Subscribe’ rating and the positive assessments from brokerages suggest that investors are optimistic about Tata Technologies’ prospects, acknowledging its cash generation capability and the potential for market capitalization growth post the IPO.
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