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Aiming for double-digit growth in FY27

Tata Technologies’ (TATATECH IN) Q3 revenue was aided by non-auto services, while margins were impacted by wage hike and a cybersecurity incident at JLR. The company is aiming for sequential growth of 10% in Q4 in the services segment, led by normalization of revenues at JLR, integration of ES-TEC numbers and continued growth in non-auto services revenues, which should not be challenging in our view. TATATECH is aiming for normalization of margin in Q4 and margin may revert to Q2 level of 16%. We maintain our view that in the medium term, due to planned scaling down of product investments by its anchor clients, JLR and Tata Motors, auto services revenue may come under pressure. We retain Sell with a lower TP of INR 490 on 22x FY28E P/E.

Growth driven by non-auto portfolio: TATATECH reported 1.2% QoQ revenue growth in USD terms and 2.3% QoQ in CC terms, while revenue declined 2.0% YoY in USD, down 1.5% YoY CC, in Q3. In terms of INR, revenue grew 3.2% QoQ and 3.7% YoY, led by INR depreciation. Verticalwise, growth was led by the services segment (78% of overall revenue), up 2.6% QoQ USD (+1% QoQ CC organic growth), supported by earlier deal wins and 10% QoQ growth in aerospace and 19% QoQ growth in Industrial Heavy Machinery (IHM). The Technology Solutions segment declined 3.4% QoQ as a 30% QoQ rise in the products business, mainly due to year?end PLM software renewals, was more than offset by 22% QoQ decline in the education business, reflecting temporary softness in demand and elongated decision cycles, which the management expects to recoup as the pipeline remains healthy.

EBITDA margin down 160bps QoQ: EBITDA margin stood at 14.1% in Q3, impacted by annual wage revisions and a temporary revenue shortfall at a large client following a cybersecurity incident. TATATECH deliberately retained its delivery capacity to support future growth. The company recorded INR 1,398.7mn charge from the impact of new Labor Codes and INR 239.9mn of costs related to ES-Tec integration. With these headwinds largely behind and revenue momentum accelerating, TATATECH expects EBITDA margin in Q4 to recover and exceed Q2 run rate of 16.4%. LTM attrition expanded 70bps to 15.8%, while headcount rose by 178 to 12.6K.

Retain Sell with a lower TP of INR 490: We raise our USD revenue estimates for FY27E-28E by 1.0%-4% on integration of ES-TEC as well as strong growth in non-auto services revenues. The mix of non-auto services revenues (catering to ER&D need of Aerospace and Industrial heavy machinery clients) has increased from 9% to 15% and this segment has been growing at 5%+ CQGR in the past few quarters. This with ES-TEC acquisition (TATATECH is entering into VW ER&D as one of the outsourcing ER&D partners) has helped pare dependency on anchor clients, TML and JLR. However, as per our view, the contribution of anchor clients is still ~50% and this segment may continue to be weak. We thus retain Sell with a lower TP of INR 490 from INR 515, based on 22x (unchanged) FY28E P/E. Recovery in anchor client spend and higher-than-expected contribution from BMW JV are key risks to our call.

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