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Growing deal velocity, but all positives are priced in

TATA TECH reported a mixed Q2FY27 performance, with rev. growth of 1.9% QoQ CC in line with our est., while EBITDA margin missed our est. by 70bps QoQ. Margins were impacted by an ~100bps headwind from annual wage hikes, alongside higher subcon costs and investments towards large deal ramp-ups. Deal wins remained healthy, with five large wins in Q2, including a USD138 mn full-vehicle engineering program for a leading European luxury OEM, marking the 2 nd consecutive quarter of USD 100 mn+ deal wins. Services delivered strong growth despite continued weakness at ES-Tec, aided by continued strength in organic Auto (grew ~7.5% QoQ) and Aero segment. Management reiterated its aspiration for strong double-digit consol. rev. growth in FY27, aided by ongoing program ramp-ups and healthy pipeline conversion, while ESTec weakness is likely to persist in the near term before stabilising in early FY28. We expect the Tenneco deal to reach its full potential in Q3, while the ramp-up of the USD 138 mn auto OEM deal from Q4 should support revenue growth in H2FY27. We are factoring in the large deal ramp up and raise our FY27E/FY28E rev. growth est. to 21.7%/13.0% CC (from 19.6%/9.3% earlier). However, we lower our reported EBITDA margin estimates for FY27E/FY28E/FY29E to 16.6%/17.4%/17.8% (from 17.0%/18.0%/18.5% earlier), factoring in higher subcontracting costs and investments associated with program ramp-ups. We raise our target P/E multiple to 26x (earlier 24x) to Sept. 28 EPS to arrive at a revised TP of INR 670 (earlier INR 630) due to growing large deal velocity and steady revenue conversion. The stock is currently trading at 28x & 24x of FY28E & FY29E earnings leaving no potential upside. Maintain REDUCE.

Revenue:

Tata Tech reported consolidated revenue of USD 178 mn, up 1.4% QoQ (1.9% QoQ CC). The Services segment reported 4.3% QoQ CC growth, and within Services, auto sub-segment and non-auto sub-segment grew by 2.6% & 9.3% QoQ respectively. Tech. Solutions business declined by 7.2% QoQ, primarily due to the timing of revenue recognition in education business and the change in accounting treatment for certain OEM-hosted SaaS license within the product business

Operating Margin:

EBIT margin came at 12.9%, down 40 bps QoQ and lower than our estimate of 13.6%, on account of a 100bps of headwind from annual wage hikes and increased subcontracting costs due to deal ramp ups.

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