Kotak Institutional Equities in a fresh note said opportunities outside pure-play ERD companies are more attractive in the near term. It maintained its 'Sell' ratings on KPIT Technologies Ltd, L&T Technology Services Ltd (LTTS), Tata Elxsi Ltd and Tata Technologies and suggested a 'Reduce' on Cyient.
Kotak said the demand in key verticals has significantly mellowed, barring a few pockets of resilience. It believes shifts in sourcing strategies of large clients could impact FY2026 revenue growth for Indian ERD players. The broking firm does not expect any significant acceleration in the growth rate, given the general demand weakness and an evolving regulatory scenario.
Among IT names, LTTS lowered its FY25 organic revenue growth outlook to 8 per cent from 8-10 per cent citing demand deterioration in automotive and moderate performance over 9MFY25. Cyient (DET) now expects a 2.7 per cent YoY revenue decline for FY25 against flat revenues earlier, implying a modest outlook in the March 2025 quarter. Tata Elxsi moderated its aspirations of double-digit YoY exit revenue growth due to moderation in growth at the top client amid industry-wide challenges. KPIT Tech maintained its outlook of 18-22 per cent revenue growth for FY2025. The slowdown at anchor clients might impact Tata Tech, Kotak said.
The brokerage suggested fair values of Rs 1,700 for Cyient, Rs 1,225 for KPIT Tech, Rs 4,750 for LTTS, Rs 5,400 for Tata Elxsi and Rs 700 for Tata Tech shares.
December 2024 was a weak quarter for Indian pure-play ERD players, the brokerage said noting that was a sharp decline in profitability across companies with a 80-330 bps YoY decline in EBIT margins across Tata Tech, LTTS, Cyient (DET) and Tata Elxsi. KPIT Tech recorded 60 bps EBIT YoY margin expansion to 17.2 per cent.
On a QoQ basis, Tata Tech, Cyient (DET) and Tata Elxsi reported a 40-160 bps EBIT margin decline. A wage hike impacted Tata Tech margins during the quarter. KPIT Tech reported a 20 bps margin improvement sequentially on tight cost controls while LTTS reported 80 bps margin expansion sequentially despite a 2-month impact of wage hike.
On the revenue front, the Q3 revenue growth was moderate across Indian pure-play ERD service providers, with LTTS and Cyient (DET) reporting 3.1 per cent and 2.4 per cent constant currency (CC) sequential growths.
"KPIT was better among the lot at 2 per cent QoQ growth, while Tata Tech and Tata Elxsi reported 1.1 per cent growth and flat revenues QoQ. On a YoY basis, KPIT reported a robust 17.4 per cent revenue growth, while LTTS was at 8.7 per cent and Tata Elxsi at 2 per cent. Cyient (DET) and TTL revenues declined," it said.
"Weak topline performance significantly impacted profitability across companies. LTTS’ EBIT margin has been impacted due to some shift in the revenue mix. The demand in the automotive vertical is likely to remain weak in the near term, with an uncertain recovery timeline due to a shifting industry structure," it said.
The domestic brokerage said deal closures would impact revenue growth for companies in FY2026.