On Thursday, Goldman Sachs (NYSE:GS) initiated coverage on Tata Technologies (TATATECH:IN) stock, assigning a sell rating with a price target of INR 900. The new price target indicates a potential downside of 12% from the stock's current level.
The decision is based on a proprietary analysis which suggests that while the overall R&D budgets of OEMs are increasing, Tata Technologies might not be well-positioned to benefit from this growth.
The analysis by Goldman Sachs points out that mechanical R&D budgets, where Tata Technologies is said to be over-indexed, are expected to grow at a compound annual growth rate (CAGR) of 5% over the next three years.
In contrast, CASE (Connected, Autonomous, Shared, Electric) software budgets, where the company is under-indexed, are predicted to grow at a much faster pace of 20% CAGR. This discrepancy could impact Tata Technologies' growth prospects.
Furthermore, the firm's strong ties to Tata Motors (NYSE:TTM) and Jaguar Land Rover (JLR), which account for 30% of its sales, could potentially limit its ability to expand its customer base among other luxury automakers. These relationships might be a hindrance when approaching JLR's competitors, who are significant spenders in auto R&D.
The report also highlights a normalization in engineering revenue from VinFast (NASDAQ:VFS), which is expected to decline from 22% and 13% of revenue in FY23 and FY24, respectively, to a low single-digit percentage by FY25. This anticipated reduction in revenue contribution from VinFast adds to the rationale behind the sell rating.
In terms of valuation, Tata Technologies is trading at a forward price-to-earnings (P/E) ratio of 50 times, which is slightly below its historical average of 51 times. However, its price/earnings to growth (PEG) ratio stands at 3.5, compared to an average of 2 for its peers. Goldman Sachs suggests that there may be more favorable entry points for the stock in the future.
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