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Outperforming peers, but valuations capped

TATATECH reported a strong Q1 performance, with rev. growth of 4.3% QoQ CC, significantly ahead of our estimate, led by healthy growth across both Services and Tech Solutions. Services revenue grew 4.3% QoQ CC, while reported EBIT margin at 13.3% (+20bps QoQ) was largely in line with our estimate, as strong Services gross margin expansion (+120bps QoQ) was partly offset by upfront investments towards ramp up of large deals & weak Tech solutions margin. However, the growth was broadbased, with non-anchor auto accounts (+6.7% QoQ), Europe (+10.1% QoQ) and Aerospace (+6.4% QoQ), growing above consolidated growth. Continued diversification away from anchor clients (rev. contribution at 48.9%, down 150bps QoQ) coupled with sustained traction in Aerospace, further strengthens our confidence in delivering double-digit FY27E organic growth. The strong Q1 beat, robust deal wins (including the US$100mn Tenneco engagement ramp up from Q2) and multiple strategic full-vehicle and engineering programs, are sharply contrasting peers’ performance in Q1. Accordingly, we upgrade our FY27E Services revenue growth estimate to 20% CC (15.2% CC earlier), while marginally lowering FY28E growth to 9.2% CC (10% CC earlier) due to high base. On margins, Q2 will be impacted by annual wage hikes; however, the management remains confident of delivering sequential margin improvement, supported by operating leverage, improving utilization even as upfront investments towards large-deal ramp-ups continue. Hence, maintain our reported EBIT margin estimates at 14.1%/15.0% which leads to EPS upgrade of 4.8% & 5.4% for FY27E/FY28E respectively. We increase our target P/E multiple to 26x (earlier 23x) to arrive at a revised TP of INR 610 (earlier INR 510). With this growth visibility and sustaining profitability, TATATECH should outperform its peers in FY27, but all positives are already factored into the current price. Maintain SELL.

Revenue:

Tata Tech reported strong consolidated revenue of USD 175 mn, up 2.7% QoQ (4.3% QoQ CC). The Services segment reported 4.3% QoQ CC growth, and within Services, auto sub-segment and non-auto sub-segment grew 3.0% QoQ each. Tech. Solutions business grew by 1.6% QoQ, as the 9.3% QoQ improvement in Education segment was partially offset by degrowth of 2.6% QoQ in products business primarily due to seasonality.

Operating Margin:

EBIT margin came at 13.3%, up 20 bps QoQ and slightly higher than our estimate of 13.2%, reflecting a combination of business mix changes and deliberate upfront investments required to support ramp-up of large strategic wins.

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