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Auto Weakness Persists; Recovery Shifts to H2FY27/H1FY28

European automotive demand remains subdued, with spending cuts, project delays and slower program ramp-ups continuing to weigh on ER&D growth. Q2FY27 is forecast to remain muted, with aggregate coverage revenue expected to grow just (0.2)%–1.5% QoQ in USD. Automotive remains the key drag, particularly for KPITTECH, where European OEM spending cuts continue to result in project delays and ramp-downs. Offsetting this are relatively resilient pockets across Aerospace, Communications, Sustainability and selected non-auto verticals, supporting sequential stabilisation at CYL, LTTS and TELX

We project FY27 to remain another muted year for the ER&D sector, with industry growth estimated to be limited to (0.9) –4.5% YoY, while recovery shifted to H2FY27-H1FY28. We see the recovery increasingly as a H2FY27/H1FY28 story, with near-term growth dependent on deal conversion and a broader revival in discretionary engineering spend.

Growth Remains Muted; Diversification Cushions Auto Weakness:

Q2FY27 is projected to remain subdued for ER&D, with aggregate coverage revenue expected to grow marginally QoQ in USD terms, amid weak auto spending and elongated decision cycles. KPITTECH is likely to remain the key drag, weighed by European OEM spending cuts, project delays and slower ramp-ups. In contrast, LTTS should deliver 1.5% QoQ growth, supported by Sustainability and Mobility, while CYL (DET) is expected to remain broadly flat as Aerospace and Communications offset seasonal weakness in Energy. TELX should remain relatively stable, with Media and Transportation partly cushioning softer demand elsewhere. Overall, growth remains uneven, with diversified exposure providing greater resilience while recovery hinging on deal conversion and renewed discretionary engineering spending.

Margin Hold; Growth-led Leverage Still Elusive:

Aggregate EBITM is expected to remain broadly flat QoQ at ~22.5%, with a modest 25 bps sequential improvement despite continued internal cost-optimisation and operating-efficiency initiatives. The limited expansion reflects ongoing investments in AI capabilities and a less supportive INR depreciation tailwind Vs the preceding 2 quarters. CYL (DET), KPITTECH and LTTS are expected to deliver 20 bps, 50 bps and 10 bps QoQ improvement, respectively, while TELX margin estimated to remain broadly flat at 19.2% as wage-hike absorption offsets benefits from growth. Overall, margin recovery remains largely efficiency-led rather than revenue-led, with a sustained upcycle requiring a stronger revenue growth, higher utilisation and operating leverage to supplement cost action.

View: Recovery Visibility Subdued; Stay Selective:

Sharp correction across our ER&D coverage has meaningfully reset valuation, with stocks down 2.7–57.1% YTD. While valuation now offer greater comfort, nearterm earnings risks remain elevated as the recovery in automotive engineering spending continues to be deferred. We view the slowdown as cyclical rather than structural, with long-term growth drivers, including SDVs, AI-led engineering, semiconductor R&D and rising engineering outsourcing remaining intact. However, discretionary OEM spending is projected to stay constrained as clients prioritise cost-optimisation and capital discipline. We remain selective, favouring companies with diversified exposure, strong execution and margin resilience. A sustained rerating will require visible revenue acceleration and deal conversion, rather than further multiple expansion. LTTS and KPITTECH remain our preferred investment ideas

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