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FY27 growth outlook intact Revenue growth on track despite softness in Germany

* Tata Technologies (TTL) reported revenue of USD178m in 2QFY27, up 1.9% QoQ in CC terms (broadly in line with our est. of 1.8% QoQ in CC). Services segment’s revenue was USD142m, up 4.3% QoQ in CC. EBIT margin was 12.9% (down 40bp QoQ), below our estimate of 13.5%. Adj. PAT dipped 5.1% QoQ, but rose 3.6% YoY to INR1,714m (below our est. of INR2,004m).

* For 1HFY27, TTL’s revenue/EBIT/adj. PAT grew 31%/27.2%/4.9% YoY in INR terms. For 2HFY27, we expect its revenue/EBIT/adj. PAT to grow of 18.8%/ 42.6%/50.9% YoY.

* At ~32x 12M fwd P/E, we view TTL’s valuations as premium relative to its growth and peers; we assign a TP of INR630 and reiterate our Sell rating.

Our view: Margin expansion likely to remain gradual

* TTL reiterated its expectation of strong double-digit consolidated revenue growth in FY27, supported by 1HFY27 performance, ongoing program rampups and pipeline conversion. Services revenue grew 4.3% QoQ in CC terms, with Automotive and Non-automotive both growing 7.5% QoQ in USD terms, excluding ESTEC. The ramp-up of recently secured large engagements is expected to support growth in 2HFY27. We are building in 13.9% organic YoY CC growth for FY27.

* Margins are likely to improve sequentially, with operating leverage partly offset by investments: EBIT margin was down QoQ by ~40bps in 2QFY27, as ~100bp headwind from the annual salary increments was absorbed through operational efficiencies and business mix. Sequential margin improvement in 2HFY27 will be supported by program ramp-ups and productivity initiatives.

* However, subcontracting costs, higher depreciation and lease-related interest costs following the Pune office investment, and continued spending on talent and AI capabilities could moderate the pace of expansion. We maintain our 14%/15% EBIT margin estimates for FY27/FY28.

* Large deal wins reinforce the shift towards full-vehicle engineering programs: Five large deals were secured in 2QFY27, including a USD138m full-vehicle engineering program for a European luxury automotive OEM, covering two vehicle programs over ~2.5 years. The program has begun ramping up and is expected to contribute from 2HFY27, with further benefits extending into FY28.

* Germany remained soft, but the shift in OEM R&D spending could benefit Indian engineering partners: Demand at ESTEC remains subdued, particularly from its largest German customer, with some additional softness expected in 3QFY27. The near-term weakness is linked to restructuring and cost-optimization measures among German OEMs. However, we believe the gradual globalization of R&D spending beyond Germany will create opportunities for TTL.

* Aerospace is being developed as a second growth engine, supported by the Airbus relationship and demand for engineering capacity. In Technology Solutions, revenue declined 6.6% QoQ INR, partly due to a change in the recognition of certain OEM-hosted licenses, which reduced quarterly revenue by INR126m. Excluding this impact, consolidated revenue growth would have been 2.8% QoQ INR vs. the reported 2.1%. The product business is expected to benefit from seasonal demand in 3QFY27, while the education business may remain under pressure due to delays in infrastructure readiness at certain customer sites.

Valuations and changes to our estimates

* TTL’s revenue CAGR is expected to be ~12.5% in USD terms over FY26-28. We keep our estimates largely unchanged.

* Its EBITDA margin is likely to improve gradually through FY27, supported by operating leverage, business mix, program ramp-ups and productivity initiatives. However, margin expansion will be limited due to higher subcontracting costs to support global ramp-ups, higher lease and interest costs owing to the new Pune office and continued investments in AI and capabilities. The 18% and 20% EBITDA margin levels remain TTL’s stated long-term aspirations rather than near-term guidance, and we model 17.1%/18% EBITDA margins for FY27/FY28.

* At ~32x FY28E P/E, we believe the current valuation already reflects the strong double-digit growth guidance and continued margin expansion. While execution has been better over the last three quarters, TTL trades at a ~90% premium to KPIT (17x FY28E P/E) and ~31% premium to Tata Elxsi (24x FY28E P/E). We therefore believe the premium valuation leaves limited room for error. We reiterate our Sell rating with a TP of INR630 based on 26x FY28E EPS.

Valuation and view

* TTL’s revenue CAGR is expected to be ~12.5% in USD terms over FY26-28. We keep our estimates largely unchanged.

* Its EBITDA margin is likely to improve gradually through FY27, supported by operating leverage, business mix, program ramp-ups and productivity initiatives. However, margin expansion will be limited due to higher subcontracting costs to support global ramp-ups, higher lease and interest costs owing to the new Pune office and continued investments in AI and capabilities. The 18% and 20% EBITDA margin levels remain TTL’s stated long-term aspirations rather than near-term guidance, and we model 17.1%/18% EBITDA margins for FY27/FY28.

* At ~32x FY28E P/E, we believe the current valuation already reflects the strong double-digit growth guidance and continued margin expansion. While execution has been better over the last three quarters, TTL trades at a ~90% premium to KPIT (17x FY28E P/E) and ~31% premium to Tata Elxsi (24x FY28E P/E). We therefore believe the premium valuation leaves limited room for error. We reiterate our Sell rating with a TP of INR630 based on 26x FY28E EPS.

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