The year 2025 looks set to see a recovery in ER&D spending led by easing macro uncertainties, Antique Stock Broking said in its latest note on IT sector. The brokerage maintained its 'Buy' rating on Cyient Ltd and suggested a 'Hold' on L&T Technology Services Ltd (LTTS) citing limited upside potential.
The Calendar 2024 saw pure-play ER&D stocks underperforming their IT services peers due to uncertainties around the US elections, sector slowdowns, and delay in client decision-making. Automotive clients focused on cost savings, leading to project deferrals and cancellations.
"Europe saw a slowdown in industrial and manufacturing, as clients reprioritized spend, while Hi-tech faced a downturn from macroeconomic uncertainties and supply chain disruptions. In contrast, IT services companies benefited from stronger demand, particularly in BFSI. LTTS and KPIT Technologies Ltd maintained their 8-10 per cent YoY and 18-22 per cent YoY CC growth guidance respectively, while Cyient lowered its FY25 growth guidance to flat revenue from high single-digit at the start of the quarter," Antique noted.
The brokerage said ER&D companies are currently trading at a 15 per cent premium to midcap IT stocks, down from a three-year average of 60 per cent. "With easing macro uncertainties, the ER&D sector is poised for recovery in CY25," it said.
Antique said ER&D companies saw some pick-up in revenue growth in Q2. KPIT Tech saw a healthy CC revenue growth of 4.7 per cent QoQ in Q2. For LTTS, the growth stood at 3.4 per cent. It was followed Cyient's DET segment (1.3 per cent growth) , Tata Tech (services) (0.3 per cent) and Tata Elxsi (0.2 per cent).
"In comparison, the top six IT services players reported higher CC QoQ growth of 0.6% to 3.1 per cent. The slowdown in CY24 for ER&D players was driven by a weaker demand environment, project cancellations, and deferrals. Enterprises focused on cost-cutting, operational efficiency, and insourcing. Cyient and LTTS saw weakness in their order bookings owing to slower decision-making by clients. However, they expect better deal wins in 2H," Antique said.
The brokerage said Cyient remains optimistic of a rebound in EMEA and anticipates continued strong growth across segments in New Growth Areas and an uptick in the Sustainability vertical in H2.
LTTS anticipates improved momentum in Hi-tech due to stronger demand from hyperscaler clients, while Mobility is expected to be soft in Q3 due to seasonality, with recovery in Q4, Antique said.
"While client budgets for CY25 remains uncertain, a gradual improvement is anticipated as the uncertainty surrounding the US elections clears and macroeconomic conditions stabilize. We expect diversified ER&D companies to be well-positioned to capitalize on the rebound in spending throughout 2025," it said.
Antique valued Cyient's DET business at 25 times forward multiple on FY27 earnings and assigned a target price of Rs 2,250 with a 'Buy' recommendation while it increased LTTS' PE valuation multiple to 35 times from 33 times on FY27 earnings. The broking firm increased its target on LTTS to Rs 5,800 from Rs 5,150, but maintained its 'HOLD' rating because of lack of an upside.