Sell Tata Technologies Ltd for the Target Rs. 570 by Motilal Oswal Financial Services Ltd
Selective recovery in 2HFY26…
…3Q pressures may temper gains before 4Q pickup
* Tata Technologies (TTL) reported revenue of USD150.9m in 2QFY26, up 4.5% QoQ in CC terms vs. our estimate of 1.5% QoQ in CC. Services segment revenue stood at USD115.6m, rising 3.0% QoQ in CC. EBIT margin was 13.4% (down 20bp QoQ), below our estimate of 14.5%. PAT was down 2.8% QoQ and up 5.1% YoY to INR1,655m (in line with our est. of INR1,640m).
* For 1HFY26, TTL’s revenue was largely flat; EBIT declined 15% YoY, while PAT grew 5% YoY in INR terms, supported by contributions from the BMW JV compared to 1HFY25. We expect revenue to grow 6.7% and EBIT/PAT to dip 7.8%/3.0% YoY in 2HFY26.
* Aerospace and industrial heavy machinery are driving sequential recovery, while growth in the automotive vertical remains early and cannot be extrapolated forward. Margins remain range-bound and near-term pressure is expected in 3Q, with a rebound likely in 4Q. Accordingly, we value TTL at 28x Jun’27E EPS to arrive at our TP of INR570. Reiterate Sell.
Our view: 2QFY26 recovery underlines mixed performance
* Sequential rebound, but 2H trajectory key: TTL delivered a sequential recovery in 2QFY26, with revenue up 4.5% CC and services up 3% CC, led by strong traction in Aerospace and Industrial Heavy Machinery. The automotive vertical also turned positive (+0.5% QoQ), reflecting early signs of stabilization. Management remains positive on 2H, though Q3 could see some moderation due to seasonal softness and JLR-related headwinds. In our view, FY26 growth should remain moderate, with a better Q4 rebound contingent on deal conversions and client normalization.
* Margins steady; near-term softness likely: EBITDA margin stood at 15.7%. Despite wage hikes for ~88% of employees, operational levers and utilization gains helped sustain profitability. We think 3Q margins may compress a bit, given slower growth and integration costs, before improving in 4Q. For FY26E, we factor in broadly flat margins YoY, with a gradual uptick in FY27E as scale benefits accrue.
* BMW JV and ES-Tec acquisition strengthen strategic depth: BMW JV scaled to 1,000 engineers, contributing ~6% of pre-tax profit and showcasing strong delivery pedigree, while the ES-Tec acquisition broadens Tata Tech’s ADAS and embedded software capabilities and deepens its European OEM access. It is expected to be margin accretive, though we believe synergy realization will be gradual through FY27.
* Overall, we maintain a cautious stance. While 2QFY26 showed sequential recovery, growth remains moderate and concentrated in aerospace and industrial heavy machinery, with automotive only marginally stabilizing. TTL’s growth recovery remains moderate and concentrated, margin gains are likely gradual, and valuations appear steep given modest near-term growth visibility.
Valuations and changes to our estimates
* TTL’s sequential rebound in 2QFY26 was driven by Aerospace and Industrial Heavy Machinery, while growth in the automotive vertical remains early and cannot be extrapolated forward, with management expecting some moderation in 3Q. Revenue growth is expected to remain subdued at ~7% USD CAGR over FY25-28. We kept our estimates largely unchanged.
* EBIT margins are largely range-bound (~14-15%), capped by high on-site mix, mechanical footprint, and limited pricing power. While the BMW JV and ES-Tec acquisition add strategic relevance, synergy realization will be gradual.
* At ~39x 12M Fwd P/E, we view TTL’s valuations as steep relative to growth and peers and assign a TP of INR570. Reiterate Sell.
Beat on revenue but miss on margins; Services revenue up 3.0% QoQ in CC
* TTL’s USD revenue came in at USD150.9m; up 4.5% QoQ in CC terms vs. our estimate of 1.5% QoQ CC growth.
* Services segment revenue stood at USD 115.6m and grew 3.0% QoQ in CC.
* Auto segment contributed 81% to revenue (vs. 83% in 1Q) and grew 1.4% QoQ.
* EBIT margin was 13.4% (down 20bp QoQ), below our estimate of 14.5%.
* PAT was down 2.8% QoQ and up 5.1% YoY to INR1,655m (in line with our estimate of INR1,640m).
* The net headcount was flat QoQ in 2QFY26; total headcount stood at 12,402. Attrition (LTM) increased 130bp QoQ to 15.1%.
Key highlights from the management commentary
* Growth was driven by strong performance in aerospace and industrial heavy machinery, which delivered 14% sequential growth in USD terms, supported by sustained demand across MRO, PLM, manufacturing engineering, and digital transformation.
* The automotive vertical also turned positive with 0.5% sequential growth, signaling early signs of stabilization.
* TTL remains optimistic about 2H FY26, expecting continued recovery across all verticals, though Q3 may see temporary moderation due to seasonal factors and customer-specific headwinds (notably the ongoing JLR IT system restoration).
* Wage hikes were rolled out for ~88% of employees, with management implementing operational levers to offset cost pressures.
* Automotive: Returned to growth after several soft quarters. Strength across anchor and non-anchor clients. Monitoring potential near-term impact from JLR’s cyberattack recovery.
* Aerospace: Continued double-digit growth, expanding in aerostructures, interiors, propulsion, and MRO systems. Strong traction with Airbus and North American clients.
* BMW JV continues to attract top automotive engineering talent and deliver high-complexity work recognized by BMW.
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