IGI Logo

A stronger start to FY27 Execution improving, though the broader auto cycle has yet to turn

* Tata Technologies (TTL) reported revenue of USD175m in 1QFY27, up 4.3% QoQ in CC terms and above our estimate of 2% QoQ in CC. The Services segment’s revenue stood at USD137m, rising 4.3% QoQ in CC. EBIT margin was 13.3% (up 20bp QoQ), below our estimate of 14%. Adj. PAT rose 11.3%/6.1% QoQ/YoY to INR1,808m (below our estimate of INR1,985m).

* For 1QFY27, TTL’s revenue/EBIT/adj. PAT grew 33.8%/30.7%/6.1% YoY in INR terms. For 2QFY27, we expect revenue/EBIT/adj. PAT growth of 26.5%/28.6/21.5% YoY.

* At ~38x 12M forward P/E, we view TTL’s valuations as premium relative to its growth and peers; we assign a TP of INR600 and reiterate Sell.

Our view: Growth is improving, but valuation already reflects much of the recovery

* FY27 has started on a stronger note, but execution over the next few quarters will be key: Revenue grew 4.3% QoQ CC, supported by broadbased growth across services, non-anchor automotive accounts, and Europe. Management reiterated strong double-digit organic growth for FY27 and expects growth to accelerate in 2H as recently won large deals ramp up.

* While the demand environment remains selective, management believes its positioning in full-vehicle development and software-led engineering is helping it gain share. We believe the outlook has improved vs FY26, but execution of recent large wins will remain the key monitorable. We build in ~13% organic CC growth for FY27E.

* TTL’s growth has diverged from peers, though sustainability remains to be seen: Most ER&D peers continue to highlight cautious automotive engineering spending in Europe. TTL also acknowledged selective customer spending but believes its positioning in end-to-end vehicle development, mechanical exposure, and large turnkey programs is enabling it to capture a larger share of the spending that continues. While recent deal wins and improving non-anchor contribution support this view, it remains early to conclude whether this outperformance vs peers can be sustained over multiple quarters.

* Deal wins improve visibility, but ramp-up will be gradual: The USD100m Tenneco engagement, ramp-up of the Japanese OEM full-vehicle program, and new wins across industrial equipment and off-highway vehicles strengthen the order book. Management also indicated that the disclosed deal list is not exhaustive, with additional wins carrying into 2Q. These are multi-year programs and should support medium-term visibility, though revenue contribution is likely to build gradually through FY27.

Valuations and changes to our estimate

* Revenue growth is expected to be ~12% USD CAGR over FY26-28. We keep our estimates largely unchanged.

* EBITDA margin is expected to improve gradually through FY27, supported by operating leverage and utilization. However, near-term margins are likely to remain range-bound (~16-17%) due to wage hikes, large deal mobilization, and transition costs.

* At ~33x FY28E P/E, we believe the current valuation already reflects much of the expected recovery. While execution has improved and deal momentum has strengthened, revenue ramp-up and margin expansion are still likely to play out gradually over the next few quarters. We, therefore, believe the premium valuation leaves limited room for disappointment. We retain our TP of INR600 and reiterate Sell.

For More Research Reports : Click Here 

For More Motilal Oswal Securities Ltd Disclaimer
http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html
SEBI Registration number is INH000000412