IT Sector Update : ERD services: Challenging times Kotak Institutional Equities
ERD services: Challenging times
FY2026 started off on a tepid note, with most companies disappointing on moderated expectations. Demand caution and macro uncertainties contributed to a subdued quarter. All companies reported sequential revenue declines; those with significant exposure to the automotive segment reported sharper cuts to revenues. The outlook for the near term remains challenging, with hopes of a meaningful recovery pushed back deeper into 2HFY26. EBIT margin declined across companies yoy despite an increased focus on cost controls. Valuations remain disconnected from on-ground demand deterioration. We maintain our cautious stance.
Another weak quarter, marginally below moderated expectations
Indian pure-play ERD services companies had a full-quarter impact of uncertainty infused by tariffs in the June 2025 quarter, leading to revenue declines across companies. TTL led with a sharp revenue decline of 7.6% c/c qoq in the services segment, impacted by project pauses at anchor clients. TELX also declined by 3.9% c/c qoq due to a muted performance in transportation and sharp declines in media and healthcare verticals. LTTS’s revenues declined 4.2% c/c qoq due to SWC seasonality and continued discounts to certain clients. At KPIT, revenues declined 3.2% due to a rampdown in large engagements in PV and CV segments and a general weakness in auto. Cyient (DET) was the better of the lot, declining by 1.5%, though this involved some revenue reclassification. The performance in US$ terms was better, aided by favorable cross-currency moves of 140-350 bps.
EBIT margin declines yoy
Tougher demand has impacted profitability across companies even as measures to control costs are in place. Companies have deferred wage hikes to offset pressure on pricing and limited operating leverage. On a sequential basis, EBIT margin declined by 40-60 bps for KPIT and Cyient (DET) and 190- 210 bps for TELX and TTL. LTTS’s profitability was broadly stable at 13.3%. On yoy basis, all companies reported EBIT margin declines—lower at KPIT and Cyient (DET), which had 30-60 bps lower margins, while TTL (210 bps), LTTS (230 bps) and TELX (820 bps) reported steeper declines.
Hopes still pinned on recovery in 2H; disappointment likely
LTTS maintained double-digit revenue growth guidance for FY2026E on the back of deal ramp-ups and recovery in mobility in the latter half of the year. Other companies with significant presence in automotive also expect some recovery in 2HFY26, aided by deal ramp-ups as the regulatory environment stabilizes. The near-term outlook remains challenging. We expect deal rampups to be more gradual and CY2026 budgets to set the tone for the extent of recovery. Higher costs, a downturn in demand and increased competitive intensity should impact the extent of revival. Further, a few OEMs have pushed back development programs due to the slower-than-expected EV adoption and need to maintain existing platforms longer with more constrained R&D budgets.
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